David Moenning's Daily State of the Markets: 10/03

Not This Time Around

After blasting 200 points higher to a fresh new high on Monday and having moved up more than 1200 points in about a month and a half, it is little wonder that the bulls took a breather yesterday. So, given the feeling that much of Monday’s surge was a result of short-covering instead of "real buying," the fact that we’ve got the September Jobs report on Friday, and the reality that the Fed is meeting shortly, I guess we can award the bulls a timeout here in order for them to catch their breath.

Stocks initially reacted negatively to the report that Pending Home sales slumped for the fifth time in the last six months and fell to their lowest level in six years. The National Association of Realtors suggested that “mortgage disruptions” were to blame for the drop and noted that home sales are off 21.5% from a year ago. The NAR also said that “more than 10% of sales contracts fell through at the last minute in August, primarily because of canceled loan commitments.”

After an initial move downward on the bad news, stocks seemed to recover as investors realized that this situation is not exactly new. In addition, in light of the fact that the mortgage market has improved over the past month and a rebound appears to be occurring, there was little reason to sell stocks on the housing data this time around.

In fact, with the thinking that all the bad news may be out, there appears to be little reason left to sell the homebuilders at all. After experiencing a brutal pummeling and at least a handful rebound attempts, it appears that shorting the homebuilders may no longer be the easy money trade. Yesterday, the group saw an impressive bounce and appears to have some momentum. But, with most of the stocks in confirmed downtrends, we’ll have to wait and see whether the move can be sustained.

There is another reason stocks didn’t tank on the home sale numbers that is worth noting. In short, we’ve got a Fed meeting coming up and speculation as to the outcome is still running rampant. So, with another weak housing report yesterday, the bulls point out that the number argues for another rate cut to come.

Turning to this morning, stocks are lower in the early going due, at least in part, to Morgan Stanley’s downbeat discussion of the tech sector. On the economic front, the jobs report “warm-up data” from ADP came in right at analyst consensus levels, which suggests that Friday’s Employment Report may not contain any big surprises.

Running through the rest of the pre-game indicators, the overseas markets are mixed this morning Crude futures are up $0.35 so far with the latest quote at $80.40. Interest rates little changed this morning with the 10-yr is trading at a yield of 4.53% at the moment. And finally, with about an hour before the bell, stock futures in the U.S. look like they will try to open to the downside. The Dow futures are currently off by about 56 points; the S&Ps are down by about 7 points, and the NASDAQ looks to be about 11 points below fair value at the moment.

Stocks "In Play" This Morning:

News, Upgrades/Downgrades/Brokerage Research:

General Motors (NYSE: GM) – Upgraded at BofA
PetroBras (NYSE: PBR) – Downgraded at Bear Stearns
Covance (NYSE: CVD) – Downgraded at Bear Stearns
Wyndham Worldwide (NYSE: WYN) – Bear Stearns initiates with Outperform rating
Brookfield Asset Management (NYSE: BAM) – Downgraded at Credit Suisse
TRW Automotive (NYSE: TRW) – Added to Conviction Buy list at Goldman Sachs
Johnson Controls (JNYSE: CI) – Removed From Conviction Buy list at Goldman
Temple Inland (NYSE: TIN) – Upgraded at Lehman
Ciena Corp (Nasdaq: CIEN) – Upgraded at Merrill Lynch
CSX Corp (NYSE: CSX) – Downgraded at Morgan Stanley
Micron Technology (NYSE: MU) – Downgraded at ThinkEquity

Mr. Moenning holds Long positions in stocks mentioned: MER

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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