Daily State of the Markets 
Monday Morning – August 24, 2009  

Anyone looking for a recipe for gains in the stock market need look no further than Friday’s session. Start with a healthy dose of positive economic data both here and abroad. Stir in an options expiration Friday – and especially a nice ripe one in August if available. Add a teaspoon of short-covering, a cup of upbeat remarks from the Fed Chairman, a pinch of mutual fund buying, and then sprinkle in just a dash or so of short-covering to taste. Bake at 350 for 30 minutes and voila; you’ve got yourself a very nice day in the stock market.

Friday’s 155 point pop to the upside pushed thoughts of Monday’s drubbing and all the talk of weak global recoveries to the back burner as the major indices all broke out of their recent consolidation patterns to finish at 10-month highs. Sure, it was a thin Friday session at the tail end of vacation season. And yes, it was an options expiration Friday. But a win is a win and as it has been said a time or two, the most bullish thing stocks can do is go up.

The day got started off on a positive note as the data out of Europe was surprisingly better than expected. While Europe hasn’t exactly been the center of the global recovery theme, Friday’s PMI’s showed meaningful improvement in both the manufacturing and services sector for August. The Eurozone Composite PMI increased to 50 from 47 in July and marked the first time the index moved above the all-important economic line in the sand in 16 months. And speaking of surprises, even the labor market component showed signs improvement.

The U.S. then got into the mix just after the market opened as Existing Home Sales jumped 7.2% in July to an annual rate of 5.24 million units; the highest level since August 2007. It was the fourth straight monthly increase and the most since data began being collected in 1999. Expectations were for a 2.2% gain to a 5.00 million unit annual rate. The report also showed that prices are beginning to stabilize as the mean price increased for the third straight month. And although prices are still off 10% from year-ago levels, last month marked the slowest rate of decline since October.

Next up came word out of Jackson Hole that Fed Chairman Ben Bernanke believes the global economies are beginning to emerge from the worst recession in 70 years. Although he remained a bit cautious, Bernanke said, “After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.”

The combination of ingredients went together well for the bulls as the Dow sprang to a gain of 155 points in the first 30 minutes. From there, things went about as expected during a Friday in late August as the market basically went sideways and traders started thinking about weekend plans.

From a chart standpoint, the key now for our heroes in horns will be any retest of the breakout level at 9400 on the Dow and 1012 on the S&P. A successful test of this area without falling through the ice so to speak, would be a positive whereas any sustained move below the line in the sand would suggest that Friday’s advance was one of those dreaded “breakout fakeouts.”

Turning to this morning, the Chicago Fed National Activity Index for July came in with a reading of -0.74, which was up a bit from June’s revised level of -1.82. And looking ahead to this week, the big item will be the weekly auction of government debt as the Treasury will sell $109 billion of Notes this week.

Running through the rest of the pre-game indicators, the major overseas markets are up across the board with Asian markets sporting big gains while Europe’s efforts are a bit more subdued. Crude futures are moving higher with the latest quote showing oil trading up by $0.23 to $74.12. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.595%, while the yield on the 3-month T-Bill is trading at 0.16%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly higher open. The Dow futures are currently ahead by about 25 points; the S&P’s are up about 3 points, while the NASDAQ looks to be about less than a point above fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Cummins (CMI) – Estimates and target increased at Barclays Parexel (PRXL) – Upgraded at Barclays American Express (AXP) – Upgraded at Barclays Capital One (COF) – Upgraded at Barclays Discover Financial (DFS) – Upgraded at Barclays Advanced Micro (AMD) – Upgraded at Citi Toll Brothers (TOL) – Downgraded at Citi Nokia (NOK) – Downgraded at Deutsche Bank Arch Coal (ACI) – Upgraded at JP Morgan Banco Santander (SAN) – Upgraded at JP Morgan Banco Bilbao Vizcaya (BBV) – Upgraded at JP Morgan Goldman Sachs (GS) – Mentioned positively at Rochdale Morgan Stanley (MS) – Mentioned positively at Rochdale Bank of America (BAC) – Mentioned positively at Rochdale Citi (C) – Mentioned positively at Rochdale Bank of New York Mellon (BK) – Mentioned positively at Rochdale Northern Trust (NTRS) – Mentioned positively at Rochdale State Street (STT) – Mentioned positively at Rochdale Zimmer Holdings (ZMH) – Upgraded at Thomas Weisel Stryker (SYK) – Downgraded at Thomas Weisel Kansas City Southern (KSU) – Downgraded at UBS

Long positions in stocks mentioned: BAC, GS, MS

Wishing you all the best today 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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