David Moenning's Daily State of the Markets: 2/22

How Weak is Too Weak?

Here's a link to listen to an Audio Version of the report:

Stocks got started off on the right foot yesterday on the back of an upgrade of Cisco (CSCO) and an upside preannouncement from Research in Motion (RIMM). However, one look at the headline from the Philadelphia Fed report was all it took to put the bears in control of the day.

Although the Philly Fed indices are designed to indicate the state of the economy in just the Philadelphia area, the numbers were weak enough to cause investors to sit up and take notice. The Philly Fed General Business Conditions Index fell to a reading of -24 in February, which was well below the expectations for a reading of -10 and the lowest level since February 2001. And since that date coincides with the beginning of the last U.S. recession, it didn’t take long for the bears to start growling about the economy being too weak for even Helicopter Ben to rescue.

The report also showed that the outlook for the future soured noticeably last month. That index plummeted 22.1 points to a reading of -16.9, which was the first negative reading since February ’01, and was the worst level for the index since September 1990.

It also didn’t help yesterday that the index of Leading Economic Indicators fell for the fourth straight month and continues to be on a contraction signal. The LEI dropped another 0.1% and is now down 2.0% from its August peak, which is the biggest decline since, yep; you guessed it, the beginning of the last recession.

Finishing up on the economic front, the weekly report on initial unemployment claims showed that the 4-week average broke above 360,000 for the first time since October 2005. The problem here is that the moving average is moving dangerously close to the recession warning level of 375,000. So, while the weekly report tends to be sporadic, the level of the 4-week average is something that traders will be paying attention to.

So with the economic data coming in weaker than expected across the board, the question of the day suddenly became: Is the economy weaker than anyone expected? And then when you toss in another rise in commodity prices, the bears were heard using the word stagflation with regularity again yesterday.

However, from a technical standpoint, the decline of 143 points didn’t really change much of anything on the charts of the major indices. But, while stocks look to be in some sort of a consolidation pattern at the moment, the worry is that one bad day could take out the lows and put our furry friends back in business.

Turning to this morning, we don’t have any economic data to guide us today and so far at least, things appear to be fairly quiet in the financial markets.

Running through the rest of the pre-game indicators; the overseas markets are lower across the board this morning. Crude futures are moving higher with the latest quote up $0.20 to $98.43. Interest rates are moving down with the 10-yr trading at a yield of 3.76% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing slightly higher. The Dow futures are currently ahead of fair value by about 30 points; the S&Ps are up by 4 points, while the NASDAQ looks to be about 5 points above fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:
Chesapeake Energy (NYSE: CHK) – Reported $0.93 vs. $0.81
Express Scripts (Nasdaq: ESRX) – Reported $0.68 vs. $0.64
Intuit (Nasdaq: INTU) – Reported $0.40 vs. $0.36

Today’s Earnings Before the Bell:
NICOR (NYSE: GAS) – Reported $1.22 vs. $1.12

News, Upgrades/Downgrades/Brokerage Research:
Gilead Sciences (Nasdaq: GILD) – Downgraded at Bernstein
DirecTV (NYSE: DTV) – Upgraded at Cowen
Imclone (Nasdaq: IMCL) – Upgraded at Cowen
Arcelor Mittal (NYSE: MT) – Upgraded at Deutsche Bank
Fannie Mae (NYSE: FNM) – Downgraded at Merrill Lynch
Freddie Mac (NYSE: FRE) – Downgraded at Merrill Lynch
Best Buy (NYSE: BBY) – Downgraded at Morgan Stanley
Discover Financial (NYSE: DFS) – Upgraded at Morgan Stanley
Barrick Gold (NYSE: ABX) – Downgraded at UBS
Kinross Gold (NYSE: KGC) – Downgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: ESRX

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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