David Moenning's Daily State of the Markets: 08/28
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Definitely Not Back To Normal
With the Fed having opened up the discount window and poised to cut rates within the next month, and stocks moving steadily higher over the past week, it is tempting to think that everything is back to normal. And by normal, we mean that the trend of the stock market is up, with only an occasional bout of selling to keep the bulls honest.
But, given the extent of the problem with subprime mortgages and the accompanying credit and hedge fund crises, as well as the massive amount of money involved, it is probably a good idea to stay cautious for the time being and wait for another shoe (or two) to drop. After all, we have yet to see any economic data from the period in question and we’ve gotten no inkling whatsoever as to the impact of the credit crunch on earnings.
In short, this means that while we can certainly enjoy the recent rally, we need to be on the lookout for a retest of the mid-August lows. Generally speaking, whenever the markets encounter this type of a bad-news panic, we see a big decline which is usually followed by a dead-cat bounce higher, and then another move down to scare the heck out of everyone. The bears then usually encounter some good news and run for cover, which allows for a more significant rally takes place – and this is probably were we find ourselves at this point in time.
This rally phase leads everyone to believe that the worst is over, but usually occurs on light volume (check). And then, out of nowhere, something comes along – usually within three weeks and three months of the initial plunge – that causes investors to realize that things are not back to normal and the selling resumes. This "retest" of the lows is actually healthy because it provides an opportunity for anyone still wishing to do any selling to do so. And by the time the retest is over, the sellers are exhausted and a real rally can begin.
Why do we bring up such a big-picture review of the typical corrective phase on a Tuesday? Because in short, Monday’s session didn’t really amount to much.
Stocks registered modest losses yesterday in what we’ll call a rather quiet session. The report on July existing home sales got a lot of attention because it showed the slowest rate of sales since November 2002. In addition, the report said inventories of homes on the market ballooned by 5.1% to the highest level since October 1991. However, this news isn’t exactly surprising and didn’t cause much of a stir in the markets.
The bigger news of the day was that yields on 1-day AA-rated asset-backed commercial paper fell 14 basis points to 5.75%, which was the lowest level since the Fed cut the discount rate. But, that’s about it in terms of good news in the commercial paper market as analysts are still calling longer-term commercial paper yields "sticky" at this point.
Turning to this morning, we don’t have any economic data to review before the bell. However, we will get a report on consumer confidence and the Richmond Fed report at 10:00 am eastern. In the early going, stocks are still struggling with credit issues as Moody’s reported that credit card defaults are on the rise.
Running through the rest of the pre-game indicators, the overseas markets are lower this morning. Crude futures are lower by $0.09 with the latest quote at $70.86. Interest rates are breaking to a new low so far as the 10-yr is trading with a yield of 4.56% right now. And finally, with about an hour before the bell, stock futures in the U.S. are a pointing to a lower open. The Dow futures are currently off by about 50 points; the S&Ps are down by about 7 points, and the NASDAQ looks to be about 11 points below fair value at the moment.
Stocks "In Play" This Morning:
News, Upgrades/Downgrades/Brokerage Research:
Knight Capital Group (Nasdaq: NITE) – Estimates lowered at BofA
KLA-Tencor (Nasdaq: KLAC) – Estimates lowered at BofA
Zale Corp (NYSE: ZLC) – Downgraded at Goldman Sachs
OSI Pharma (Nasdaq: OSIP) – Upgraded at Lehman
Bed Bath & Beyond (Nasdaq: BBBY) – Downgraded at Merrill Lynch
Bear Stearns (NYSE: BSC) – Downgraded at Merrill Lynch
Lehman (NYSE: LEH) – Downgraded at Merrill Lynch
Citigroup (NYSE: C) – Downgraded at Merrill Lynch
Juniper Networks (Nasdaq: JNPR) – Target increased at UBS
Mr. Moenning holds Long positions in stocks mentioned: MER, KLAC, JNPR
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.
With the Fed having opened up the discount window and poised to cut rates within the next month, and stocks moving steadily higher over the past week, it is tempting to think that everything is back to normal. And by normal, we mean that the trend of the stock market is up, with only an occasional bout of selling to keep the bulls honest.
But, given the extent of the problem with subprime mortgages and the accompanying credit and hedge fund crises, as well as the massive amount of money involved, it is probably a good idea to stay cautious for the time being and wait for another shoe (or two) to drop. After all, we have yet to see any economic data from the period in question and we’ve gotten no inkling whatsoever as to the impact of the credit crunch on earnings.
In short, this means that while we can certainly enjoy the recent rally, we need to be on the lookout for a retest of the mid-August lows. Generally speaking, whenever the markets encounter this type of a bad-news panic, we see a big decline which is usually followed by a dead-cat bounce higher, and then another move down to scare the heck out of everyone. The bears then usually encounter some good news and run for cover, which allows for a more significant rally takes place – and this is probably were we find ourselves at this point in time.
This rally phase leads everyone to believe that the worst is over, but usually occurs on light volume (check). And then, out of nowhere, something comes along – usually within three weeks and three months of the initial plunge – that causes investors to realize that things are not back to normal and the selling resumes. This "retest" of the lows is actually healthy because it provides an opportunity for anyone still wishing to do any selling to do so. And by the time the retest is over, the sellers are exhausted and a real rally can begin.
Why do we bring up such a big-picture review of the typical corrective phase on a Tuesday? Because in short, Monday’s session didn’t really amount to much.
Stocks registered modest losses yesterday in what we’ll call a rather quiet session. The report on July existing home sales got a lot of attention because it showed the slowest rate of sales since November 2002. In addition, the report said inventories of homes on the market ballooned by 5.1% to the highest level since October 1991. However, this news isn’t exactly surprising and didn’t cause much of a stir in the markets.
The bigger news of the day was that yields on 1-day AA-rated asset-backed commercial paper fell 14 basis points to 5.75%, which was the lowest level since the Fed cut the discount rate. But, that’s about it in terms of good news in the commercial paper market as analysts are still calling longer-term commercial paper yields "sticky" at this point.
Turning to this morning, we don’t have any economic data to review before the bell. However, we will get a report on consumer confidence and the Richmond Fed report at 10:00 am eastern. In the early going, stocks are still struggling with credit issues as Moody’s reported that credit card defaults are on the rise.
Running through the rest of the pre-game indicators, the overseas markets are lower this morning. Crude futures are lower by $0.09 with the latest quote at $70.86. Interest rates are breaking to a new low so far as the 10-yr is trading with a yield of 4.56% right now. And finally, with about an hour before the bell, stock futures in the U.S. are a pointing to a lower open. The Dow futures are currently off by about 50 points; the S&Ps are down by about 7 points, and the NASDAQ looks to be about 11 points below fair value at the moment.
Stocks "In Play" This Morning:
News, Upgrades/Downgrades/Brokerage Research:
Knight Capital Group (Nasdaq: NITE) – Estimates lowered at BofA
KLA-Tencor (Nasdaq: KLAC) – Estimates lowered at BofA
Zale Corp (NYSE: ZLC) – Downgraded at Goldman Sachs
OSI Pharma (Nasdaq: OSIP) – Upgraded at Lehman
Bed Bath & Beyond (Nasdaq: BBBY) – Downgraded at Merrill Lynch
Bear Stearns (NYSE: BSC) – Downgraded at Merrill Lynch
Lehman (NYSE: LEH) – Downgraded at Merrill Lynch
Citigroup (NYSE: C) – Downgraded at Merrill Lynch
Juniper Networks (Nasdaq: JNPR) – Target increased at UBS
Mr. Moenning holds Long positions in stocks mentioned: MER, KLAC, JNPR
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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