David Moenning's Daily State of the Markets: 05/05

Now What?

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

Over the past few weeks, the key question for chart watchers has been whether or not the major indices would be able to break out of their respective trading ranges. The bears argued that it would be tough to move out of a trading range that had been intact for so long in an environment that had become so iffy. And during the first couple of tries, it looked like our furry friends might be right.

However, last week, both the S&P 500 and the NASDAQ Composite joined the Dow in breakout-land. The DJIA finished the week above 13,000 and the S&P closed the week over the key 1400 mark for the first time since the beginning of the year. Granted, the volume on the move left a little to be desired. But the breadth was there and one look at the charts makes it clear to even the skeptics that the trading range is now history.

On Friday, it appeared that the bulls might have gotten another reason to push away from the top end of the range. The government reported that the economy lost just 20,000 jobs in April, which was far better than the loss of 75,000 that had been expected. In addition, the all-important jobs report showed that the national unemployment rate actually fell 0.1% to 5%.

After the report was released, the thinking was that perhaps the worry about the state of the economy might be overdone. After all, analysts had been warning us all week that the jobs report might be bad, but that it was a rearview mirror type of indicator. So, it appeared that stocks might be set up to rally either way the report came in. If the numbers were bad, the bulls could argue that report was old news and that the environment has since improved. And if the numbers were good, well, good news is always welcome these days.

So, after the jobs data came in better than expected, it looked like the bulls were ready to party. However, after about half an hour’s time, traders began to ask the question, “Now what?” Although the trading range had been broken, it was if traders suddenly recognized that there are issues out there that might present some headwinds. So, since the major indices had rallied about 11% in the last couple of months, the rally stalled.

From a big-picture standpoint, out major market models are singing a happy song and the cycle composite says that after a brief hiccup in May, the vast majority of the year should trend higher. But, given the debt in the system, the evidence of inflation, and a soft economy, can we really expect it to be clear sailing from here? Thus, the answer to the question posed this morning might be a period of backing and filling.

Turning to this morning, we don’t have any economic news before the bell and the earnings parade is definitely starting to slow down. However, in corporate news, the big story from the weekend is Microsoft’s (MSFT) decision to walk away from their bid for Yahoo! (YHOO). Although this drama is far from over, it looks like the game has now changed. Yahoo is trading down about 20% in the pre-market while Mr. Softie is up 6%.

Running through the rest of the pre-game indicators; with both Japan and London closed, the foreign markets aren’t doing much. Crude futures are moving up again with the latest quote showing oil higher by $0.35 to $116.65. Interest rates are moving down as the yield on the 10-yr is currently trading at 3.84%. 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 off by about 50 points; the S&P’s are down about 6 points, while the NASDAQ looks to be about 4 points below fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Hewitt Assoc (NYSE: HEW) – Reported $0.37 vs. $0.38
Nordic American Tankers (NYSE: NAT) – Reported $0.78 vs. $0.88

News, Upgrades/Downgrades/Brokerage Research:

Yahoo! (Nasdaq: YHOO) – Microsoft drops bid for YHOO, Downgraded at Citi
UST Inc (NYSE: UST) – Upgraded at Deutsche Bank
Countrywide Financial (NYSE: CFC) – Downgraded at Friedman Billings
Google (Nasdaq: GOOG) – Target increased at Goldman
Bank of New York Mellon (NYSE: BK) – Added to Conviction Buy list at Goldman
Joy Global (Nasdaq: JOYG) – Target increased at Lehman
Bucyrus (Nasdaq: BUCY) – Target increased at Lehman
Ingersoll Rand (NYSE: IR) – Downgraded at Morgan Stanley

Mr. Moenning holds Long positions in stocks mentioned: MSFT

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.

David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: [email protected]

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