David Moenning's Daily State of the Markets:

Big Blue Buoys the Mood

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

As expected, stocks started off to the downside yesterday. There had been a lot of talk about the major indices bumping into the top of the recent trading range. So, after Monday’s impressive rally, it was beginning to look like the bears might be ready to get back to work.

At first blush, it looked like the trading range theory being espoused by the bears might become a self fulfilling prophecy. The Producer Price Index came in at more than double expectations, Consumer Confidence hit the lowest level since the beginning of the Iraq war, and the S&P/Case-Shiller report on home prices was more than a little disappointing. Now toss in oil finishing over $100 and it is safe to say that if this combination of data had hit the market a month ago, the bears would have finished the day dancing in the street.

However, as clear-cut evidence that the environment has improved a bit lately, stocks not only didn’t decline, but actually found a way to rally for a third straight day – something that only happened one other time so far this year.

There were several reasons for the rally continuation yesterday. However, IBM's (IBM) announcement that it planned to buy back $15 billion of its shares, which would add as much as $0.05 to their 2008 earnings per share, definitely buoyed the mood. While $15 Billion doesn't sound like much in the face of all the subprime writedowns these days, the move was taken as a vote of confidence about Big Blue’s outlook for the year.

It also didn’t hurt that Fed Vice-Chairman Donald Kohn sounded rather dovish in his remarks about the economy and inflation. Mr. Kohn made it clear that the Fed’s top priority at the present time is to keep the economy from going to heck in a hand basket and that the FOMC would wait until the coast was clear before returning their attention to inflation.

And while we still don't have any concrete details on the bond insurer bailout deals, the bulls also took solace from a report that private equity firms were going to get into this game. This further bolstered the idea that the financial disaster theory being proffered by the bear camp is unlikely to come to fruition.

So, while it is true that yesterday's rally did move the Dow and S&P 500 smack to the top of the range, the stock market action is beginning to have the look and feel of a market going through the bottoming process as opposed to one waiting for another decline to commence.

Turning to this morning, a larger-than expected loss for Fannie Mae (FNM) as well as some trepidation in front of Ben Bernanke's semiannual testimony before the House Financial Service Committee has stocks moving lower in the early going.

On the economic front, the government reported that sales of Durable Goods fell by -5.3% in January, which was below expectations for a decline of -4.0%. When you strip out transportation, the numbers were weak as well, showing a drop of -1.6% versus -1.3%.

Running through the rest of the pre-game indicators; the overseas markets are split by region this morning with Asian markets higher and European markets lower. Crude futures are moving down a bit with the latest quote off $0.34 to $100.54. Interest rates are moving down so far with the 10-yr trading at a yield of 3.78% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently about 70 points below fair value; the S&Ps are lower by about 9 points, while the NASDAQ also looks to be about 14 points below fair value at the moment.

Stocks "In Play" This Morning:

Today's Earnings Before the Bell:

Boyd Gaming (NYSE: BYD) – Reported $0.39 vs. $0.38
Dynegy (NYSE: DYN) – Reported -$0.08 vs. -$0.03
Fannie Mae (NYSE: FNM) – Reported -$3.79 vs. -$1.29
Lamar Advertising (Nasdaq: LAMR) – Reported $0.05 vs. $0.07
NII Holdings (Nasdaq: NIHD) – Reported $0.71 vs. $0.60
Toll Brothers (NYSE: TOL) – Reported -$0.61 vs. -$0.44

News, Upgrades/Downgrades/Brokerage Research:

Overseas Shipholding Group (NYSE: OSG) – Upgraded at Bear Stearns
Quicksilver Resources (NYSE: KWK) – Downgraded at Citi
Chesapeake Energy (NYSE: CHK) – Downgraded at Citi
EOG Resources (NYSE: EOG) – Downgraded at Citi
Tenet Healthcare (NYSE: THC) – Upgraded at Credit Suisse
Barrick Gold (NYSE: ABX) – Downgraded at Credit Suisse
Costco Wholesale (Nasdaq: COST) – Downgraded at Goldman
DR Horton (NYSE: DHI) – Initiated overweight at Lehman
Ryland Group (NYSE: RYL) – Initiated overweight at Lehman
Toll Brothers (NYSE: TOL) – Initiated overweight at Lehman
Xilinx Inc (Nasdaq: XLNX) – Upgraded at UBS

Mr. Moenning holds Long positions in stocks mentioned: ABX, KWK, COST

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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