David Moenning's Daily State of the Markets: 10/02

Is That Everything?

Yesterday's nearly 200 point blast into new record territory for the Dow was driven by three things. First, the report from Citigroup, who lowered earnings estimates by 60% for the quarter and then said that things will return to normal in the fourth quarter, appeared to be the mother of all sand bags. Second, the new money that comes into the market on a monthly basis was being put to work immediately. And finally, the shorts were seen running for cover – and in a big hurry.

When Citigroup first warned that earnings were going to be negatively impacted by “dislocations” in the mortgage backed securities and credit markets, the first reaction wasn’t exactly positive. In short, traders immediately jumped to the conclusion that we haven’t seen the worst in the subprime mess and that there may be more shoes yet to drop. However, after glancing through the report, it became clear that Citi was guilty of some serious sand bagging as the company had thrown what was being termed "the kitchen sink" into their negative assumptions.

The point is that if Citigroup had thrown everything they could think of into their calculations, then the end result really wasn’t all that bad. The thinking was that traders might finally be able to get a handle on the damage caused by the credit crunch. And after reading all the way to the end of the report, the question being asked was, "Is that everything?"

The move to new highs in the Dow and the NASDAQ was also driven by some serious short covering. Just Friday, Merrill had come out with a report full of doom and gloom, which likely emboldened those who like to play the sell side. However, after the Citigroup report and the break to new highs on the Dow, the shorts began to feel the pain and headed for cover.

While it is easy to come up with excuses for why things happened the way they did or complain about the action, it is important to remember that one of the most bullish things a market can do is make new highs. And with the major indices either having erased the entire credit crisis drop, or being very close to doing so, it is awfully hard to stay on the bear bandwagon right now.

Yes, the volume wasn't stellar. And we certainly recognize that there are several indices that are not going to confirm the record close for the Dow and NASDAQ. But for now anyway, the bulls appear to have regained possession of the ball and are moving up the field.

Turning to this morning, we don't have any economic news to review before the opening bell. However, we will get some data to sift through a little later this morning.

In terms of the pre-market activity, as expected, the foreign markets are celebrating the Dow’s big gain and the idea that we may have seen the worst from the mortgage mess and the credit crunch. Alan Greenspan attempted to put a damper on the fun by suggesting that we’ve yet to see the extent of the subprime mess, but so far at least, no one seems to be listening.

Running through the rest of the pre-game indicators, as we mentioned, the overseas markets are higher across the board this morning Crude futures are down $1.05 so far with the latest quote at $79.19. Interest rates are up a little this morning with the 10-yr is trading at a yield of 4.57% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. look like they will try to open a bit higher. The Dow futures are currently ahead by about 34 points; the S&Ps are up by about a point and a half, and the NASDAQ looks to be about 2 points above fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

Prologis (NYSE: PLD) – Downgraded at BofA
SL Green Realty (NYSE: SLG) – Downgraded at BofA
Onyx Pharma (Nasdaq: ONXX) – Downgraded at Bear Stearns
Forest Labs (NYSE: FRX) – Upgraded at Citi
Biogen Idec (BIIB) – Downgraded at Credit Suisse
CBS (NYSE: CBS) – Downgraded at Deutsche Bank
Air Products (NYSE: APD) – Downgraded at Goldman Sachs
Sotheby’s (NYSE: BID) – Estimates increased at JMP Sec
UBS (NYSE: UBS) – Upgraded at JP Morgan
Humana (NYSE: HUM) – Downgraded at Merrill
Walgreen (NYSE: WAG) – Downgraded at Merrill

Mr. Moenning holds Long positions in stocks mentioned: MER, ONXX, BIIB

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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