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Daily State of the Markets |
Here we go again. After running higher, this time to the tune of +7.7% in less than three weeks, and then encountering the now-familiar stall pattern, the indices have once again embarked on a trip to the down side. And don’t look now, but yesterday’s dip of about 1% on everything except the Dow represented a second consecutive down day.
While this fact is sure to bring a smile to the glass-is-half-empty crowd, the question at hand is if this encounter with the dark side will be any different than the last three or four. If not, then if the bears are lucky enough to see a third straight down day, they are likely to start doing some covering. Because, in short, that’s about all the downside opportunity there has been in the last two and one-half months.
Yesterday’s dance to the downside was sponsored by a report on Existing Home Sales that was – wait for it – weaker than expected. I know that we haven’t had the opportunity to use that phrase much lately, but the fact that home sales fell by 2.7% in August when the Street was expecting a fifth straight monthly increase of 2.4% did not go over well.
The bears will point to the fact that the home sales report is chalk full of bad stuff and that if traders would simply bother to dig into the data, we’d be back at Dow 9000 before you could say “foreclosure-related sales.” Speaking of which, sales of homes out of foreclosure represented 31% of all home sales activity last month. And if those bargain basement deals were not available, to hear the bears tell it, sales would still be in the tank.
However, by digging into the report, one can find some good news as well. Despite the drop in sales, inventories fell 10.8% to 3.6 million units, which represents an 8.5-month supply at current prices. While this is indeed an incredibly dry statistic, we will point out that it is the lowest level of inventories since April 2007.
In the category of ‘we’ve been saying that for months,’ the bears pointed to a report from Morgan Stanley yesterday that questions the staying power of the recent run for the roses. As of Wednesday’s close, the S&P had gained +58.4% since the rally began, while the Dow has tacked on +42.5%, the NASDAQ has added a more impressive +69.2%, and the Russell 2000 has popped up +80.8%. Not bad for six months’ work, eh?
The point Morgan Stanley makes is that the current rally is typical of what follows major bear markets and is not the start of a new multi-year bull market. While this sounds remarkably similar to what we’ve been opining for many moons (mini bull in a secular bear, anyone?), it is nice to hear that the big boys of Wall Street are now singing the same song.
But in the near-term, the issue comes back to the question we posed in this morning’s title. Sure, we’ve got a little pullback going, but will this one be any different than the last three? While we don’t know the answer (the darn crystal ball is still in the shop), we will be watching the 1035 area as an important line in the sand.
Turning to this morning, Orders for Durable Goods in August fell -2.4%, which was below the consensus for an increase of 0.4%. And when you strip out transportations, orders were unchanged vs. the consensus an increase of 1.0%.
Running through the rest of the pre-game indicators, the foreign markets are mixed with only Japan making a major move (to the downside). Crude futures are moving lower with the latest quote showing oil trading down by $0.70 to $65.19. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.37%, while the yield on the 3-month T-Bill is currently at 0.09%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a slightly lower open. The Dow futures are currently off by about 25 points; the S&P’s are down about 5 points, while the NASDAQ looks to be about 6 points below fair value at the moment.
Upgrades/Downgrades/Brokerage Research:
Medco Health (MHS) – Downgraded at Argus Research Calamos Asset Mgmt (CLMS) – Upgraded at BofA/Merrill Janus Capital (JNS) – Upgraded at BofA/Merrill Franklin Resources (BEN) – Downgraded at BofA/Merrill Legg Mason (LM) – Downgraded at BofA/Merrill Rockwell Collins (COL) – Upgraded at BofA/Merrill Casey’s General (CASY) – Upgraded at Barclays Goldman Sachs (GS) – Mentioned positively at Citi Caterpillar (CAT) – Upgraded at Credit Suisse Parker-Hannifin (PH) – Upgraded at Credit Suisse Terex (TEX) – Upgraded at Credit Suisse Cummins (CMI) – Target increased at Credit Suisse DISH Network (DISH) – Estimates increased at Credit Suisse Research In Motion (RIMM) – Downgraded at Deutsche Bank, Goldman McAfee (MFE) – Upgraded at FBR Capital Holly Corp (HOC) – Upgraded at Goldman Occidental Petroleum (OXY) – Upgraded at Goldman Sunoco (SUN) – Upgraded at Goldman Apache (APA) – Upgraded at Goldman Forest Oil (FST) – Upgraded at Goldman Posco (PKX) – Downgraded at HSBC CONSOL Energy (CNX) – Downgraded at JP Morgan Massey Energy (MEE) – Downgraded at JP Morgan AmBev (ABV) – Downgraded at Morgan Stanley, Target increased at MS Telmex (TMX) – Downgraded at Morgan Stanley ADTRAN (ADTN) – Upgraded at Thomas Weisel Edwards Lifesciences (EW) – Upgraded at UBS
Long positions in stocks mentioned: GS, RIMM, ABV
Enjoy your Friday, have a pleasant weekend, and until next time, “may the bulls be with you!”
David D. Moenning
Founder TopStockPortfolios.com
For more “top stock” portfolios and research, visit TopStockPortfolios.com
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