David Moenning's Daily State of the Markets: 10/12

Business As Usual, Until...

It appeared to be business as usual on Wall Street yesterday morning as stocks were movin' on up to new record highs in the early going. Despite a rather lackluster round of chain-store sales across the board, the bulls were emboldened by the report that Wal-Mart (NYSE: WMT) had increased earnings expectations for the quarter. In short, the thinking was "as Wal-Mart goes, so goes the consumer."

Surprisingly, traders were able to ignore the report from Target (NYSE: TGT) who said that their earnings were suddenly in question as well as the reports from more than two-thirds of the nation’s retailers, who collectively said that sales came in on the punk side in September. In fact, chain store sales grew by just 1.5% over the year-ago levels, which was well below the expectations for gains in the 2% to 2.5% range. Retailers blamed the slow sales on the 8th warmest September in the last 100 years and suggested that the warm weather caused demand for fall apparel to be on the slow side.

However, at about 2:00 pm eastern, things took a turn for the worse and the day got ugly in a big hurry. Stocks headed straight down once a report hit the wires that ECB governor Weber had said higher interest rates may be needed across the pond to fight inflation. Within an hour the Dow’s triple digit gain had turned into a triple digit loss and investors were left shaking their heads.

There was also talk that another error in the S&P futures helped fuel the decline. And the fact that JP Morgan came out with negative comments on Baidu.com at just about the exact same time, definitely added fuel to what appeared to be a fire sale.

However, everybody knows that stocks have enjoyed a stellar run since mid-August and that the market had become overbought on just about every metric. So, with some volatility suddenly returning to the market, it was not surprising to see the bulls stand aside once the selling got started. The fact that stocks were moving down hard for no apparent reason (the ECB comments were not widely publicized) basically created a vacuum of buyers and the Dow dropped 250 points in about an hour.

So, should we be worried… is the rally over... is it time to take cover? In our humble opinion, given that there wasn’t any real fundamental driver for the selloff, stocks were very overbought, and some buyers did step in during the final 30 minutes, we’re going to stick with the idea that it’s probably time for a minor pullback of sorts. And while one never knows how far down stocks can go during these little pullbacks, we feel that we are not likely to enter into another corrective phase at this time.

Turning to this morning, a bid from Oracle (Nasdaq: ORCL) for BEA Systems (Nasdaq: BEAS) as well as better than expected global sales at McDonald's (NYSE: MCD) has traders in a better mood. However, we’ve got some economic data to review, so let’s get to it.

The government reported that the September Producer Price Index came in with an increase of +1.1%, which was above the estimates for a gain of +0.5%. But, when you strip out food and energy, the all-important Core Rate came in at just +0.1%, which was actually better than the consensus estimates for +0.2%.

We also learned that Retail Sales in September were better than expected at +0.6% versus expectations for +0.2%. But when you strip out autos, the number drops -0.4%, which is more in line with what we saw from yesterday’s chain store results.

Running through the rest of the pre-game indicators; the overseas markets are lower across the board this morning. Crude futures are up $0.02 so far with the latest quote at $83.10. Interest rates are up a bit this morning with the 10-yr trading at a yield of 4.68% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are looking flat. The Dow futures are currently ahead by about 6 points; the S&Ps are down by a fraction, while the NASDAQ looks to be about 4 points below fair value at the moment.

Stocks "In Play" This Morning:

Today's Earnings Before the Bell:

General Electric (GE) – Reported $0.50 vs. $0.50

News, Upgrades/Downgrades/Brokerage Research:

BEA Systems (Nasdaq: BEAS) – Receives $17 per share bid from Oracle (Nasdaq: ORCL)
Pepsi Bottling Group (NYSE: PBG) – Downgraded at BofA
Southwest Airlines (NYSE: LUV) – Downgraded at Bear Stearns
Jet Blue (Nasdaq: JBLU) – Downgraded at Bear Stearns
Alaska Air (NYSE: ALK) – Downgraded at Bear Stearns
Safeway (NYSE: SWY) – Upgraded at CIBC Capital
Telefonica (NYSE: TEF) – Upgraded at Citi
Blue Nile (Nasdaq: NILE) – Downgraded at Citi
NASDAQ Stock Market (Nasdaq: NDAQ) – Downgraded at Goldman Sachs
Knight Capital (Nasdaq: NITE) – Upgraded at Goldman Sachs
ValueClick (Nasdaq: VCLK) – Downgraded at Jefferies
Coldwater Creek (Nasdaq: CWTR) – Downgraded at Lehman, Wachovia
Petro Canada (NYSE: PCZ) – Downgraded at Merrill Lynch
Borg Warner (NYSE: BWA) – Downgraded at RW Baird
Costco Wholesale Corp (Nasdaq: COST) – Downgraded at UBS
Sprint Nextel (NYSE: S) – Upgraded at Wachovia

Mr. Moenning holds Long positions in stocks mentioned: MER

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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