David Moenning's Daily State of the Markets: 07/10

Expectations Creeping Up

Good morning. As the earnings parade starts to roll, we should recognize that expectations have been quietly creeping higher over the past couple of weeks. While the volume hasn\'t exactly been stellar lately, stocks have managed to move up and are now threatening to break back into all-time high territory.

As we\'ve mentioned, part of the reason behind the recent move higher is the fact that the economic data has been a bit better than expected and yet has not shown any real signs of inflation. It\'s also been positive that deals continue to get done, proving that, so far at least, the fears over liquidity for M&A deals are overblown. Both of these issues are, of course, a good thing for stocks. However, an even bigger reason for the latest move up has to do with a very quiet preannouncement period.

Every quarter, just before the earnings parade starts to roll, companies are required to let us know if they think they will \'miss\' the consensus earnings estimates. This \'preannouncement period\' is supposed to take some of the volatility out of trading around the release of the actual earnings.

Therefore, one of the ways to judge the outcome of any earnings season is to keep your eyes and ears open during this preannouncement period. If you hear lots of companies making excuses about this or that, then it\'s a pretty safe bet that the earnings season might come in on the disappointing side.
However, on the flipside, if the preannouncements are few and far between, then one can bet that companies are feeling upbeat about their quarters.

It is the latter that is occurring right now. And since we\'ve heard little in the way of negative preannouncements, the expectations for this quarter have been inching up. In response, stock prices have been moving higher in lock step with these expectations.

This isn\'t to say that there haven\'t been disappointments. For example, just yesterday, Lexmark (NYSE: LXK) sharply lowered its earnings outlook for the second quarter, which was arguably the biggest tech preannouncement to date. However, the news did not seem to hit the sector too hard as revenues are expected to be in-line with expectations. And despite the lack of positive catalysts, the market remained fairly buoyant as the Dow managed to tack on 38 points and move back to within 26 points of the Promised Land.

Turning to this morning, speaking of pre-announcements, both Home Depot and Sears Holdings have pre-announced earnings shortfalls, which is giving the bears something to talk about in the pre-market.

Running through the rest of the pre-game indicators, with the exception of Hong Kong, the foreign markets are all modestly lower across the board. Gold futures are moving up this morning by $2.60 to $665.10. In the oil pits, crude futures are moving Down a smidge with the latest quote off
$0.27 at $71.92. Interest rates are moving down this morning with the yield on the 10-year currently trading at 5.11%. And finally, with about an hour before the bell, stock futures in the U.S. are looking lower at the moment. The Dow futures are currently off by about 28 points; the S&P\'s are down about 6 points, while the NASDAQ looks to be about 10 points below fair value at the moment.

Stocks "In Play" This Morning:


Yesterday\'s Earnings After the Bell:

Alcoa (NYSE: AA) - Reported $0.81 vs. $0.82

Today\'s Earnings Before the Bell:

Pepsi Bottling Group (NYSE: PBG) - Reported $0.70 vs. $0.63

News, Upgrades/Downgrades/Brokerage Research:*
Home Depot (NYSE: HD) - Reduces full year earnings guidance
Sears Holdings (NASDAQ: SHLD) - Reduces earnings guidance
Principal Financial Group (NYSE: PFG) - Upgraded at Bernstein
DirecTV (NYSE: DTV) - Upgraded at Citi
China Telecom (NYSE: CHA) - Downgraded at Deutsche Bank
Micron Technology (NYSE: MU) - Upgraded at Jefferies
Ford (NYSE: F) - Upgraded at JP Morgan
General Motors (NYSE: GM) - Upgraded at JP Morgan
Extreme Networks (NASDAQ: EXTR) - Downgraded at Lehman Brothers
Allianz (NYSE: AZ) - Upgraded at UBS
Google (NASDAQ: GOOG) - Price target increased at UBS
Mr. Moenning holds Long positions in stocks mentioned: None

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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