David Moenning's Daily State of the Markets:

Are Bonds Misbehaving?

Good morning. Stocks topped off a strong week with another nice gain on Friday as the indices once again marched to new record closes. But, although the bulls received more good news in terms of economic data, M&A activity, and earnings, this time, there was a "yea, but" involved and the enthusiasm seemed to wane as the day wore on.

At first blush, it would appear that everything went the bulls' way on Friday. Our horned heroes were able to put just about all the news on their side of the ledger including a solid employment report and better than expected reports from the ISM Manufacturing data and the University of Michigan's consumer sentiment survey. Now toss in a surprisingly solid earnings report from Dell and positive world markets and one might have expected the day was to be gangbusters.

And to be fair, stocks did open higher. But unfortunately, the peak price level for the day was seen in the first hour and the magnitude of the gains was a question mark right into the close.

The problem, if you can call it one, was two-fold. First, it is tough to shake the feeling that things are going just a little too well for the bulls right now. Everybody knows that this is normally a game that involves two steps forward and then one step back. But, these days, the concept of a pullback seems to be foreign.

But the bigger issue here is the simple fact that bond yields have been soaring. For example, on May 11th, the yield on the 10-year hit an intraday low of 4.60%. But since that time, yields have been up everyday but one with the yield closing Friday's trading at 4.956%. This is not only the highest yield of the year, but also the highest level since last August.

Apparently, bond traders also see all the economic data showing that the economy is rebounding from the speed bump it hit in the first quarter. And while a pickup in the economic data is indeed a positive for the stock market, we need to keep in mind that a big part of the bull camp's thesis has to do with interest rates behaving.

So, while a 4.96% yield on the 10-year isn't reason to panic, we do need to keep an eye on interest rates going forward. And with the bears looking for any kind of reason to reintroduce investors to the concept of a correction in stock prices, the 5% level might just be what they are looking for.

Turning to this morning, stocks are a little weak in the early going. While everyone knows that the Shanghai market has absolutely nothing to do with western stocks (mostly because we can't invest there), the fact that the Shanghai index plunged another 8% overnight might be causing a little nervousness this morning.

Running through the rest of the pre-game indicators, with the exception of Hong Kong, the major foreign markets are down a bit so far. Gold futures are moving down by $0.30 to $676.60. In the oil pits, crude futures are barely moving with the latest quote at $65.02. Interest rates are moving down a smidge this morning with the yield on the 10-year currently trading at 4.94%. And finally, with about an hour before the bell, stock futures in the U.S. are looking a little weak. The Dow futures are currently off by about 20 points; the S&P's are 3 points underwater, while the NASDAQ looks to be 6 points below fair value at the moment.

Stocks "In Play" This Morning:


News, Upgrades/Downgrades/Brokerage Research:*

Abbott Labs (NYSE: ABT) - Mentioned cautiously in Barron's
General Electric (NYSE: GE) - Mentioned positively in Barron's
Flextronics (NASDAQ: FLEX) - Acquiring Solectron (SLR)
Universal Health Services (NYSE: UHS) - Upgraded at Bear Stearns
Sirius Satellite Radio (NASDAQ: SIRI) - Upgraded at Bear Stearns
Motorola (NYSE: MOT) - Upgraded at CIBC
Nike (NYSE: NKE) - Target increased at Citigroup
Wal-Mart (NYSE: WMT) - Upgraded at HSBC, JP Morgan, Morgan Stanley, UBS
National Semiconductor (NYSE: NSM) - Upgraded at JP Morgan
Moody's (NYSE: MCO) - Upgraded at Merrill Lynch
Loews Carolina Group (NYSE: CG) - Mentioned positively at UBS

Mr. Moenning holds Long positions in stocks mentioned: CG, 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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