David Moenning�s Daily State of the Markets: 05/16

And Bounce, 2, 3, 4

Long-time stock watchers know that the market has a rhythm all its own. And while it is very difficult to predict the exact timing and extent of movements, the patterns do tend to be rather cyclical. So after two surprisingly hard down days, which seemingly came out of the blue, some sort of a bounce higher was to be expected.

While yesterday�s late-day rebound didn�t exactly display the kind of oomph that defines a key-reversal day, it did come in right on queue. With commodity prices plunging for the third straight day, it began to dawn on traders that perhaps one of the primary causes of the inflation worries might be abating. And with the key trigger to the quick decline possibly in question, the bounce was on.

Another plunge in metals, a second straight day of declines in oil prices, a move down in interest rates, and a report showing a slowdown in manufacturing activity in the New York region set the stage for a modest rebound in stocks. Metals dropped on talk of reduced demand from places like China and India, which, as it happens, seems to crop up every time the complex starts to get a little overheated. And it will suffice to say that gold�s leap of 12% higher over the past month definitely qualifies it as overheated. Oil dropped on talk of an improved supply/demand picture and interest rates fell on the Empire Manufacturing report, which came in weaker than expected.

Although the bulls did finally get it done late in the day with a rebound of 48 Dow points, it was anything but easy. And while the bears knew darn well that the bulls were unlikely to stand aside for a third straight day, they did make a couple runs at lower prices. This time however, each move lower was met with some buying, which indicated that the bulls were back and that it was only a matter of time before they got their shot.

So with the dance following the usual steps right now, the obvious question is where do we go from here? We had the precipitous drop and the expected bounce, so we will now need to watch the action closely to see which team is actually in charge.

If the march toward new highs on the Dow is to return unencumbered in the near term, then we would expect to see stocks begin to move up as if nothing had happened. Sure, there is likely to be a retest lower in the next few days, but if the bulls are still in control, then they ought to make a statement pretty soon in the form of a strong up day on impressive volume.

However, if the bears feel their argument is strong, look for the rebound to last another day or two as our furry friends play the stand aside game. Assuming the bulls can get their act together and continue the rebound, it will be important to watch the volume and the leadership of the advance. Stronger volume and big bounces in the leaders lend credence to the bull case, while a weak rebound sets up another scoring opportunity for the bears.

Turning to this morning, with everyone suddenly talking inflation, the PPI/CPI reports become vital. This morning�s PPI numbers continued the trend of the headline number coming in hotter than expected while the core rate is weaker. PPI for April was reported at +0.9%, which was higher than analysts� expectations of +0.8%. However, the Core Rate, which has been the focal point for the Fed, showed a gain of just +0.1% versus expectations for +0.2%. And on a year-over-year basis, the Core Rate of inflation fell to just +1.5%, which is well within the Fed�s comfort zone.

The other news this morning came from the housing market where Housing Starts and Permits were both much weaker than anticipated. Housing Starts fell by -7.4% and Permits saw a drop of -5.4%. Neither set of numbers are indicative of a crash, but the slowdown in housing market is becoming quite evident.

Both the stock and bond market have moved slightly higher in response to this morning�s numbers, but the moves, so far at least, are well contained.

Running through the rest of the pre-game indicators, overseas are mixed with Asian market down and European markets on both sides of breakeven. Oil futures are trading up by $0.23 right now to $69.64. Gold is trying a rebound of its own this morning after dropping more than $28 yesterday. The yellow metal is quoted up $4 right this morning at $689 right now. Interest rates are moving a little lower this morning in response to the economic data, with the 2-year currently trading at 4.95% and the 10-yr is at 5.14%. And finally, with about an hour before the bell, stock futures in the U.S. are moving up a bit. The Dow futures are about currently off by 2 points, the S&Ps are higher by 1.50, and the NASDAQ is sporting a gain of +3.2.

Stocks �In Play� This Morning:
Legg Mason (LM) � Upgraded at Merrill Lynch
Home Depot (HD) � Reported $0.70 vs $0.67, Revenues $21.31B vs. $21.42
Wal-Mart (WMT) � Reported $0.63 vs. $0.61, Revenues $79.6B, vs. $80.33B
Dow Chemical (DOW) � Upgraded at JP Morgan
Sandisk (SNDK) � Upgraded at Merrill Lynch
Berkshire Hathaway � Reports new holding in GE and UPS
Cognos (COGN) � Downgraded at Piper Jaffray
Agilent Technologies (A) � Reported $0.40 vs. $0.34, Revenues $1.43B vs. $1.41
Broadcom (BRCM) � Upgraded at Needham
Brookfield Homes (BHS) � Upgraded at JMP Securities

Disclosure: Mr. Moenning and/or related companies currently hold long positions in the following stocks mentioned: MER, A

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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