Daily State of the Markets 
Wednesday Morning – September 16, 2009  

If you speak with people in the bear camp these days you will likely encounter a fair amount of frustration and suggestions that the current market defies logic. After all, most bears are confounded by the market’s ability to march steadily higher as well as its inability to move lower during what would normally be corrective phases. And if you listen long enough, you will likely hear a host of reasons why stocks absolutely, positively cannot go any higher.

To which I’d like to respond: Welcome to the rebound. After the worst bear market in a generation, stocks have been discounting better days ahead on several fronts. And while our furry friends don’t want to hear it; my experience has been that once this process gets rolling, it usually doesn’t stop until it does.

It has now been more than six months since the March 9th low and the bears have produced only a few scary days since the rebound began. And in looking at the charts, we can understand the bears’ frustration. From March 9th through May 8th, the S&P soared 37% without a single stretch of even 3 straight down days. Then after a requisite pullback – which lasted a whopping 5 days – the market rallied another 7% before finally correcting a bit. After the June/July pullback, which was significant and did scare some people, stocks have enjoyed rallies of 15%, 5%, and now nearly 6% with only brief interruptions in between.


The point to this review of the market’s recent movements is that the pattern is clear; stocks rally and then encounter a brief pullback, and then rally some more. When will it end? Frankly, that’s the tricky part. The bulls could encounter difficulty at key technical points on the charts, or when valuations reach levels normally associated with something analysts like to call “fully valued,” or if the fundamentals begin to falter. But until then, anybody who has tried to short stocks recently will probably agree that it is best not to fight this tape.

The action so far this week has been a solid example of the idea that money is still coming into this market. While there really wasn’t any good news to work with on Monday, the bull camp was able to gain some traction with the news flow from Tuesday. August Retail Sales came in above expectations and while there was a “yea, but” or two that could be applied, the bottom line is the numbers were higher than the consensus across the board. The September Empire Manufacturing index was also above analyst expectations. Then the comment from Ben Bernanke that the recession has likely ended helped the bulls a fair amount. And while it wasn’t a rip-roaring affair, the gains did push all the major indices to another batch of new cycle highs.

So while stocks are once again overbought and could easily correct for almost any reason, it is probably best to stick with the bull camp for a while yet.

Turning to this morning, the Consumer Price Index for August was reported up +0.4%, which was a tenth higher the consensus for +0.3% and July’s unchanged reading. Excluding food and energy, the so-called Core CPI rose by +0.1%, this was in line with the expectations for +0.1% and July’s reading of +0.1%. And on a year-over-year basis, the CPI has fallen -1.5% while the Core has increased by 1.4%. Later this morning, we’ll get a report on Industrial Production and Capacity Utilization.

Running through the rest of the pre-game indicators, the foreign markets are mostly higher. Crude futures are moving lower with the latest quote showing oil trading off by $0.21 to $70.72. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.41%, while the yield on the 3-month T-Bill is currently at 0.08%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to another modestly higher open. The Dow futures are currently ahead by about 20 points; the S&P’s are up about 2 points, while the NASDAQ looks to be about a single point above fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Amazon.com (AMZN) – Upgraded at BofA/Merrill BJ’s Wholesale (BJ) – Upgraded at Barclays Alliant Energy (LNT) – Upgraded at Barclays Synovus (SNV) – Downgraded at Citi Choice Hotels (CHH) – Initiated buy at Citi Starwood Hotels (HOT) – Initiated buy at Citi LaSalle Hotel (LHO) – Initiated buy at Citi Marriott (MAR) – Initiated buy at Citi Mirant (MIR) – Downgraded at Citi Warner Music (WMG) – Upgraded at Citi Laboratory Corp (LH) – Downgraded at Credit Suisse Digital River (DRV) – Upgraded at Credit Suisse Quest Diagnostics (DGX) – Upgraded at Credit Suisse Fortune Brands (FO) – Upgraded at Goldman Aetna (AET) – Upgraded at Goldman Coventry Health (CVH) – Downgraded at Goldman General Mills (GIS) – Downgraded at Goldman Cigna (CI) – Target increased at Goldman Health Net (HNT) – Target increased at Goldman UnitedHealth (UNH) – Target increased at Goldman Humana (HUM) – Target increased at Goldman Martha Stewart (MSO) – Downgraded at JP Morgan Omniture (OMTR) – Downgraded at JP Morgan Sepracor (SEPR) – Downgraded at SunTrust Robinson Humphrey Whiting Petroleum (WLL) – Downgraded at SunTrust Robinson Humphrey Spring Nextel (S) – Downgraded at Thomas Weisel Ann Taylor (ANN) – Target increased at UBS PPG Industries (PPG) – Upgraded at UBS Verizon (VZ) – Downgraded at UBS

Long positions in stocks mentioned: GS, AMZN

Remember to take time to enjoy your day 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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