David Moenning's Daily State of the Markets: 06/12

Seeking Equilibrium

Good morning. At first blush, it looked the stock market did a lot of nothing yesterday. The S&P finished up 0.1% while the DJIA was flat and the NASDAQ fell a point – all on lighter than normal volume. And while it would be easy to chalk up the lackluster performance to the onset of the summer doldrums, this really wasn't the case.

With interest rates and oil prices on the rise, what traders are really doing right now is looking for an equilibrium point which reflects the new landscape of higher interest rates. Stocks did try and move up yesterday, but with the yield on the 10-year continuing to march higher, it is tough to embrace the idea of further buying.

You see, at some point, interest rates will matter to the bottom line of corporate America, which, in turn, will matter to stock prices. And it is for this reason that savvy traders make every effort to avoid "fighting the Fed" whenever possible. And while the recent increase in rates is not necessarily a death knell to the bull market, rates have reached a point where stock market returns have been negatively impacted in the past.

The real problem on the interest rate front is the fact that the recent pop higher is being triggered by overseas markets. It isn't so much that the U.SEconomy is gangbusters right now; it's that rates around the world are on the rise. Thus, rates must rise in the U.S. in order to stay competitive.

Now toss in the fact that OPEC said yesterday it has no intentions of increasing production (even if it could) during the summer driving season and it is easy to see why traders might also be a little concerned about the consumer right now.

So, with the Fed saying it is still worried about inflation and increases in both energy prices and interest rates worldwide, it is little wonder that stocks may have a hard time busting a move higher recently.

Turning to this morning, there is no economic data here in the U.S. before the bell, but we do have some additional interest rate jitters to concern ourselves with in the early going. Once again, the issue stems from the overseas markets. For example, China's CPI came in at 3.4%, which was higher than expected and the highest level in 27 months. This is obviously causing concerns that the Chinese will need to raise rates in the near future.

Next up, Japan's Wholesale Prices were also higher than expected. And with the Bank of Japan meeting this week, there is obviously some worry that the Japanese will be forced to raise rates, which would reignite worries over the now famous Carry Trade.

And finally, the CPI in the UK came in hotter than analysts had expected, which naturally brought out some hawkish comments from the Bank of England. So, with rates on the rise, stocks may continue to struggle.

Running through the rest of the pre-game indicators, the European markets are lower across the board while Asian bourses were actually a little higher. Gold futures are moving down by $4.00 to $655. In the oil pits, crude futures are moving down a dime with the latest quote at $65.87.

Interest rates are moving up again this morning with the yield on the 10-year currently trading at 5.18%, which is, once again the highest levels in a year. And finally, with about an hour before the bell, stock futures in the U.S. are looking a little weak. The Dow futures are currently off by about 34 points; the S&P's are almost 5 points underwater, while the NASDAQ looks to be about 6 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Texas Instruments (NYSE: TXN) – Reduces range of revenue guidance
Molson Coors Brewing (NYSE: TAP) – Estimates increased at Banc of America
Oracle (NASDAQ: ORCL) – Target increased at Bear Stearns
US Steel (NYSE: X) – Downgraded at Bear Stearns
JDS Uniphase (NASDAQ: JDSU) – Upgraded at Bernstein
Grupo Televisa (NYSE: TV) – Downgraded at Credit Suisse
Pier 1 Imports (NYSE: PIR) – Upgraded at Goldman Sachs
Target (NYSE: TGT) – Removed from Conviction Buy list at Goldman Sachs
Forest Oil (NYSE: FST) – Added to Conviction Buy list at Goldman Sachs
Starbucks (NASDAQ: SBUX) – Removed from Conviction Buy list at Goldman Sachs
China Telecom (NYSE: CHA) – Downgraded at Lehman Brothers
Wendy's (NYSE: WEN) – Target increased at UBS
Continental Airlines (NYSE: CAL) – Estimates reduced at UBS

Mr. Moenning holds Long positions in stocks mentioned: X, GS


Note: All earnings reports compared to Reuter's consensus estimates

** For More of David Moenning's Market Analysis, Stock Portfolios, and Trading Ideas, visit: www.TopGunsTrading.com

The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management and Co-Founder of TopGunsTrading.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM's programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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