David Moenning's Daily State of the Markets: 10/14

Dead Cat Bouncing

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

After the worst week in 75 years, in which the Dow dropped 18% in just 5 trading sessions, the bulls got back to work yesterday and put together the Dow’s biggest one-day gain on record. The venerable DJIA wasn’t alone in the fun as Monday’s session produced the biggest percentage gain ever seen on the Russell 2000 and the biggest rally in the S&P 500 since 1939.

Among the items cited for triggering the classic, albeit impressive dead-cat bounce was the Fed, the Bank of England, the ECB, and the Swiss Central Bank deciding that the best way to solve this crisis, which was created by an extended period of easy money and low interest rates, was to create an environment where money is well, easy and interest rates are very low for what is likely to be a very long time.

Putting the sarcasm aside for a moment, everybody and their uncle knew that stocks had reached an extreme oversold condition and that sentiment was just about as negative as it’s ever been. Now toss in the forced liquidations from the hedge fund community and the not-so forced liquidations from mutual funds anticipating redemptions, and you had the makings for a nice bounce.

Yesterday morning, I told my office that I expected to see the Dow move at least 1,000 points in a big hurry if the early bounce held and that a test of 10,000 wasn’t out of the question before the thing ended. And while I have reported a few times recently that dead-cat bounces tend to be very exciting and relatively short, in all honesty, I didn’t expect to see my 1,000 points in one session. To which, I will have to point to yesterday’s missive and reiterate that this is what happens when computers control the bid/ask.

But in addition to an oversold market and extremely negative sentiment, the bulls had a couple other things going for them yesterday. First, our heroes in horns benefited from Ben Bernanke’s pledge to jump in his helicopter and to drop more dollars from the sky if he has to. In English, the Fed announced yesterday that it would begin providing “unlimited dollar funding” via its swap facilities. Next, word was that the FDIC was planning to guarantee all non-interest bearing accounts in U.S. banks. In addition, Hank Paulson is planning to “be like Buffett” and invest directly in banks. Then the European banks gathered together over the weekend and unveiled a coordinated effort to recapitalize their banking sector. And finally, the G-7, also known as your REALLY Big Brother, proclaimed that no institution of importance (that’s my favorite part) will be allowed to fail.

So with dollars falling from the sky, plans to fix the banks starting to come together, and the credit markets seeing some improvement, stocks simply roared higher as the shorts covered, traders got long, investors did some nibbling, and the computers did their thing.

So, the obvious question now becomes, will it last? The crash playbook says that after heading down farther than anyone ever thought possible, you will see a bounce that takes your breath away over a period of a few days. The bounce will instill confidence that everything is “all better now” and set up a “retest of the lows” which is triggered by some sort of bad news reminding investors of why stocks went down in the first place. So, will history repeat? Maybe not exactly, but we thought you should be aware of what has happened in the past.

Finally, while we don’t want to do or say anything to ruin the fun, we do need to point out that longer-term interest rates have started to spike higher. Why are rates rising when the Central Bankers are flooding the system with dollars? In short, the definition of inflation is “too many dollars chasing too few goods” and THIS is something to watch going forward.

Turning to this morning, we don’t have any economic news to sift through before the bell. But not surprisingly, the rally in stocks continued overseas as Japan enjoyed its biggest one-day pop ever, gaining an eye-popping +14.15%.

Running through the rest of the pre-game indicators, as we mentioned there are green screens in the overseas markets once again. Crude futures are up with the latest quote showing oil trading higher by $3.39 to $84.58. Interest rates are up on the longer maturities with the yield on the 10-yr currently trading at 4.03% while the yield on the 3-month T-Bill at 0.54% and overnight LIBOR is at 2.18%, which is down from 2.47% yesterday. And finally, with about 60 minutes before the bell, the futures in the U.S. are pointing to another wildly positive open. The Dow futures are currently up by about 350 points; the S&P’s are higher by about 45 points, while the NASDAQ looks to be about 55 points above fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

Domino’s Pizza (NYSE: DPZ) – Reported $0.14 vs. $0.21
Johnson & Johnson (NYSE: JNJ) – Reported $1.17 vs. $1.11
JB Hunt (Nasdaq: JBHT) – Reported $0.47 vs. $0.42
PepsiCo (NYSE: PEP) – Reported $1.06 vs. $1.08

News, Upgrades/Downgrades/Brokerage Research:

Prudential (NYSE: PRU) – Downgraded at Citi
SAP (NYSE: SAP) – Downgraded at Deutsche Bank
Morgan Stanley (NYSE: MS) – Debt rating reduced at Fitch
First Solar (Nasdaq: FSLR) – Upgraded at Friedman Billings
SunPower (Nasdaq: SPWRA) – Upgraded at Friedman Billings
Arkansas Best (Nasdaq: ABFS) – Downgraded at Goldman
Union Pacific (NYSE: UNP) – Downgraded at Goldman
Crane Corp (NYSE: CR) – Upgraded at Goldman
Affiliated Managers Group (NYSE: AMG) – Downgraded at Goldman
AGCO (NYSE: AG) – Downgraded at Goldman
Bucyrus (Nasdaq: BUCY) – Downgraded at Goldman
Aon Corp (NYSE: AOC) – Upgraded at Goldman
INVESCO (NYSE: IVZ) – Upgraded at Goldman
Marsh & McLennan (NYSE: MMC) – Upgraded at Goldman
Citrix Systems (Nasdaq: CTXS) – Upgraded at Jeffries
Air Products (NYSE: APD) – Upgraded at Jeffries
Cameco Corp (NYSE: CCJ) – Upgraded at Merrill
Eldorado Gold (NYSE: EGO) – Upgraded at Merrill
Royal Gold (Nasdaq: RGLD) – Downgraded at Merrill
T Rowe Price (Nasdaq: TROW) – Upgraded at Morgan Stanley
Janus Capital (NYSE: JNS) – Downgraded at Morgan Stanley
Google (Nasdaq: GOOG) – Target reduced at Oppenheimer, Deutsche Bank
Nvidia (Nasdaq: NVDA) – Target reduced at UBS
Progressive Corp (NYSE: PGR) – Upgraded at UBS

Disclosure: Mr. Moenning and/or related firms hold long positions in: AOC, MMC

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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