David Moenning's Daily State of the Markets: Defying Logic?

If you speak with people in the bear camp these days you will likely encounter a fair amount of frustration and suggestions that the current market defies logic. After all, most bears are confounded by the market’s ability to march steadily higher as well as its inability to move lower during what would normally be corrective phases. And if you listen long enough, you will likely hear a host of reasons why stocks absolutely, positively cannot go any higher.

To which I’d like to respond: Welcome to the rebound. After the worst bear market in a generation, stocks have been discounting better days ahead on several fronts. And while our furry friends don’t want to hear it; my experience has been that once this process gets rolling, it usually doesn’t stop until it does.

It has now been more than six months since the March 9th low and the bears have produced only a few scary days since the rebound began. And in looking at the charts, we can understand the bears’ frustration. From March 9th through May 8th, the S&P soared 37% without a single stretch of even 3 straight down days. Then after a requisite pullback – which lasted a whopping 5 days – the market rallied another 7% before finally correcting a bit. After the June/July pullback, which was significant and did scare some people, stocks have enjoyed rallies of 15%, 5%, and now nearly 6% with only brief interruptions in between.

The point to this review of the market’s recent movements is that the pattern is clear; stocks rally and then encounter a brief pullback, and then rally some more. When will it end? Frankly, that’s the tricky part. The bulls could encounter difficulty at key technical points on the charts, or when valuations reach levels normally associated with something analysts like to call “fully valued,” or if the fundamentals begin to falter. But until then, anybody who has tried to short stocks recently will probably agree that it is best not to fight this tape.

The action so far this week has been a solid example of the idea that money is still coming into this market. While there really wasn’t any good news to work with on Monday, the bull camp was able to gain some traction with the news flow from Tuesday. August Retail Sales came in above expectations and while there was a “yea, but” or two that could be applied, the bottom line is the numbers were higher than the consensus across the board. The September Empire Manufacturing index was also above analyst expectations. Then the comment from Ben Bernanke that the recession has likely ended helped the bulls a fair amount. And while it wasn’t a rip-roaring affair, the gains did push all the major indices to another batch of new cycle highs.

So while stocks are once again overbought and could easily correct for almost any reason, it is probably best to stick with the bull camp for a while yet.

Turning to this morning, the Consumer Price Index for August was reported up +0.4%, which was a tenth higher the consensus for +0.3% and July’s unchanged reading. Excluding food and energy, the so-called Core CPI rose by +0.1%, this was in line with the expectations for +0.1% and July’s reading of +0.1%. And on a year-over-year basis, the CPI has fallen -1.5% while the Core has increased by 1.4%. Later this morning, we’ll get a report on Industrial Production and Capacity Utilization.

Running through the rest of the pre-game indicators, the foreign markets are mostly higher. Crude futures are moving lower with the latest quote showing oil trading off by $0.21 to $70.72. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.41%, while the yield on the 3-month T-Bill is currently at 0.08%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to another modestly higher open. The Dow futures are currently ahead by about 20 points; the S&P’s are up about 2 points, while the NASDAQ looks to be about a single point above fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Amazon.com (AMZN) – Upgraded at BofA/Merrill
BJ’s Wholesale (BJ) – Upgraded at Barclays
Alliant Energy (LNT) – Upgraded at Barclays
Synovus (SNV) – Downgraded at Citi
Choice Hotels (CHH) – Initiated buy at Citi
Starwood Hotels (HOT) – Initiated buy at Citi
LaSalle Hotel (LHO) – Initiated buy at Citi
Marriott (MAR) – Initiated buy at Citi
Mirant (MIR) – Downgraded at Citi
Warner Music (WMG) – Upgraded at Citi
Laboratory Corp (LH) – Downgraded at Credit Suisse
Digital River (DRIV) – Upgraded at Credit Suisse
Quest Diagnostics (DGX) – Upgraded at Credit Suisse
Fortune Brands (FO) – Upgraded at Goldman
Aetna (AET) – Upgraded at Goldman
Coventry Health (CVH) – Downgraded at Goldman
General Mills (GIS) – Downgraded at Goldman
Cigna (CI) – Target increased at Goldman
Health Net (HNT) – Target increased at Goldman
UnitedHealth (UNH) – Target increased at Goldman
Humana (HUM) – Target increased at Goldman
Martha Stewart (MSO) – Downgraded at JP Morgan
Omniture (OMTR) – Downgraded at JP Morgan
Sepracor (SEPR) – Downgraded at SunTrust Robinson Humphrey
Whiting Petroleum (WLL) – Downgraded at SunTrust Robinson Humphrey
Spring Nextel (S) – Downgraded at Thomas Weisel
Ann Taylor (ANN) – Target increased at UBS
PPG Industries (PPG) – Upgraded at UBS
Verizon (VZ) – Downgraded at UBS

Long positions in stocks mentioned: GS, AMZN

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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