David Moenning's Daily State of the Markets: 5/26

May 26, 2009 9:33 AM EDT

Things Don’t Matter Until They Do…

One of the biggest lessons I’ve learned in the stock market over the past 25 years can be summed up as follows: “Things don’t matter to the stock market until they do… and THEN they matter a lot!” While it may sound a little nutty, this is one the real keys to determining what drives the market on a daily basis.

Perhaps the best example of this concept was the great technology bubble of 1999. In late 1996, then Fed Chairman Alan Greenspan tried to warn investors that the market was getting a little frothy. And after the requisite pullback, stocks powered forward for more than three years until things finally headed south in a rather spectacular fashion.

If you were in the game at that time, you will undoubtedly remember analysts telling us with a straight fact that things like price-to-earnings, price-to-book, and heck, even price-to-cash-flow didn’t matter because it was a new era. In short, we as a community were making up reasons why the dotcom companies could go up forever. Even the venerable Jim Cramer was on board with the excess of the day as he pounded the table about buying baskets of internet companies. Never mind the fact that many companies coming public weren’t ever going to make a profit and some didn’t even have a real product. Never mind that you could buy something like 26 of the 30 companies in the Dow with the valuation of Cisco (CSCO). You see, none of this mattered… Well, until it did, of course!

So, with the stock market having run up +37% from March 10th through May 8th, the question that we’re pondering at the moment is: What is going to matter to the market – and when?

On the economic front, it is clear that traders have shifted from worrying that the sky is going to fall to the concept of blue skies ahead. So, for those of you that still insist on writing and telling me how bad the economy is right now, how many jobs we’re losing, etc., you’re missing the point.

The same concept holds true on the earnings front. I read an article this weekend from a guy who has written two books on trading but at the same time displayed a complete lack of understanding on how the earnings game is played by suggesting that traders simply overreact when a company misses the estimates. The point is that this is a game of expectations versus reality. So, if a stock has been bid up on earnings expectations and then reality doesn’t deliver, the stock tanks – it’s that simple.

But I digress. The point is that everybody in the game knows that earnings are going to stink for the next couple of quarters and that the estimates are still being “taken down.” So, forget about how bad the earnings are now compared to a year ago – look at the expectations for the future. And right now, the future looks better than the present and the past.

The real point to this morning’s missive is that “it isn’t the news, it’s how the market reacts to the news” that counts. So, IF traders start to worry about the credit rating of the good ‘ol USofA and/or IF traders begin to fret about the consequences of their President not seeming to care about such trivial matters, THEN we will need to worry about this issue. But until then, it probably doesn’t matter much – unless of course it starts to matter soon!

Turning to this morning, we don’t have any economic news to review before the bell but North Korea has gotten people’s attention again with a nuclear test and by launching a bunch of missiles. Thus, we’re likely to hear the words geopolitical risk bandied about today.

Running through the rest of the pre-game indicators, the major overseas markets are down across the board. Crude futures are moving lower with the latest quote showing oil trading off $1.00 at $60.67. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.42%, while the yield on the 3-month T-Bill is trading at 0.17%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly lower open. The Dow futures are currently off by about 20 points; the S&P’s are down about 3 points, while the NASDAQ looks to be about 12 points below fair value at the moment.

Stocks “In Play” This Morning:

Upgrades/Downgrades/Brokerage Research:

Toyota Motor (NYSE: TM) – Upgraded at BofA/Merrill


Las Vegas Sands (NYSE: LVS) –Target Cutat Bernstein
Wynn Resorts (NYSE: WYNN) – Target Cutat Bernstein
Honda Motor (NYSE: HMC) – Downgraded at Citi
Noble Energy (NYSE: NBL) – Upgraded at Credit Suisse
Occidental Petroleum (NYSE: OXY) – Upgraded at Credit Suisse
Pinnacle West (NYSE: PNW) – Upgraded at Credit Suisse
EOG Resources (NYSE: EOG) – Downgraded at Credit Suisse
Principal Financial (NYSE: PFG) – Upgraded at Friedman Billings Ramsey
Southwestern Energy (NYSE: SWN) – Upgraded at Friedman Billings Ramsey
Bank of America (NYSE: BAC) – Upgraded at Friedman Billings Ramsey
First Solar (Nasdaq: FSLR) – Downgraded at Friedman Billings Ramsey
Petrobras (NYSE: PBR) – Added to Conviction Buy list at Goldman
Qwest (NYSE: Q) – Upgraded at JP Morgan
Robert Half (NYSE: RHI) – Downgraded at Morgan Stanley
Alpha Natural Resources (NYSE: ANR) – Downgraded at Morgan Stanley
Patriot Coal (NYSE: PCX) – Downgraded at Morgan Stanley
Zions Bancorp (ZION) – Upgraded at Morgan Stanley
Apple (Nasdaq: AAPL) – Upgraded at Morgan Stanley
CSX Corp (NYSE: CSX) – Mentioned positively at UBS
Portugal Telecom (NYSE: PT) – Upgraded at UBS
Monster Worldwide (NYSE: MWW) – Downgraded at Wachovia

Long positions in stocks mentioned: JPM, AAPL, OXY


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.TopStockPortfolios.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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