David Moenning's Daily State of the Markets: 3/12

So Far, So Good

All eyes were fixated on the charts yesterday as just about everyone who has ever drawn a trendline knows what’s at stake here. In short, everybody is watching the tape action very closely for clues as to the direction of the next move. An immediate reversal down, which has been the norm lately after a nice up day, would negate the positive action from the blast higher while another big up day would be considered a follow-through day. And while neither occurred yesterday, we’ll have to say that it’s “so far, so good” in terms of the potential for Tuesday’s rally being the start of something meaningful.
One of the things that people new to the chart watching game may not understand is that the all-important follow-through day – commonly defined as an advance of 1% or more on an increase in volume from the day before – does not have to come immediately after that initial rally day. This would explain the near panic among several talking heads over the markets lack of an advance by midday. It was almost comical to hear the skepticism and the negativity oozing from commentators based solely on the fact that the Dow was not soaring for a second straight day.

However, it is important to understand that the bulls have up to two full weeks to put together a textbook follow-through day as long as the move higher isn’t reversed in between. So, given that the market’s lack of a big advance yesterday was not necessarily a negative, the fact that the indices did not turn tail and run has to be considered a positive. In sum, this is what the term backing and filling is all about.

In case you missed yesterday morning’s diatribe, we are of the mind that Tuesday’s bounce was actually more than a just a bounce due to the fundamental nature of the move’s trigger. The thinking here is if the banks, which are at the center of this quagmire, are actually making money so far this year, it means that there is a very good chance that we’ve FINALLY seen the worst of the credit crisis. And this means that the prices of companies which are factoring in either bankruptcy or government takeover may be overdone to the downside.

In addition, if the root cause of the bear market is suddenly improving, then it shouldn’t take too long for the market to begin to realize that the sun will indeed shine on the economy again sometime in the next 12 months. And since the market is a discounting mechanism, well, you get the idea…

Staying with the banking theme, it also has to be considered a positive that JP Morgan (JPM) CEO Jamie Dimon told us yesterday that his firm, like Citi (C) and Bank of America (BAC) had told us on Tuesday, was actually making money so far this quarter. It appears that Warren Buffett indeed had it right when he called it a stellar environment for the banking industry earlier in the week.

In case you slept through that Money and Banking 100 course, the gist of the banking industry’s strategy is to acquire money cheaply and then lend it out at higher rates, collecting the spread along the way. So, with the Fed Funds rate at close to 0%, it does make sense that any banker worth their salt could make money these days – assuming, of course, that they can get around those pesky toxic assets on their balance sheet.

So, with Ben Bernanke reminding us this week that the US stands ready to provide banks with all the capital they need and the administration making noise about working toward a solution to the mark-to-market issue, we can’t help but feel that the bulls are about due for another few days in the sun. However, don’t expect this to be a straight up affair as we feel a buy-the-dips mentality makes sense here.

Turning to this morning, the warm and fuzzy feeling brought on by the Dow’s recent rally is fading this morning as worries over economic conditions have hit the foreign markets. On the economic front, Retail Sales came in a bit better than expected with a decline of just -0.1% in February, which was better than expectations for a drop of-0.5%. In addition, January’s numbers were revised higher to +1.8% from +1.0%.

Running through the rest of the pre-game indicators, with the exception of the Hong Kong, the overseas markets are lower across the board. Crude futures are higher with the latest quote showing oil trading up by $0.91 to $43.24. On the interest rate front, we’ve got the yield on the 10-yr currently at 2.90%, while 3-month LIBOR is at 1.32% and the yield on the 3-month T-Bill is trading at 0.22%. And finally, with about 45 minutes before the bell, stock futures in the U.S. have improved on the retail sales numbers but are still pointing down just a bit. The Dow futures are currently off by about 45 points; the S&P’s are down by about 4 points, while the NASDAQ looks to be about 9 points below fair value at the moment.

Stocks “In Play” This Morning:

Today’s Earnings Before the Bell:

American States Water (NYSE: AWR) – Reported $0.40 vs. $0.35
Smithfield Foods (NYSE: SFD) – Reported -$0.15 vs. -$0.30

Today’s Corporate News, Upgrades/Downgrades/Brokerage Research:

Telecom Italia (NYSE: TI) – Upgraded at BAC/MER
Lukoil (NYSE: LUK) – Downgraded at Citi
American Express (NYSE: AXP) – Target and estimates reduced at Citi
Charles Schwab (Nasdaq: SCHW) – Initiated Buy at Citi
TD Ameritrade (Nasdaq: AMTD) – Initiated Hold at Citi
E*Trade (Nasdaq: ETFC) – Initiated Sell at Citi
Johnson Controls (NYSE: JCI) – Upgraded at Deutsche Bank
Dicks Sporting Goods (NYSE: DKS) – Downgraded at Goldman
SunPower Corp (Nasdaq: SPWRA) – Downgraded at JP Morgan
American Tower (NYSE: AMT) – Downgraded at Morgan Stanley
Crown Castle (NYSE: CCI) – Downgraded at Morgan Stanley
SBA Communications (Nasdaq: SBAC) – Downgraded at Morgan Stanley
China Petroleum (NYSE: SNP) – Upgraded at UBS


Disclosure: Mr. Moenning and/or related firms hold long positions in: SBAC

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.TopStockPortfolios.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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