Daily State of the Markets 
Monday Morning – September 21, 2009  

Good morning. Although it was a quadruple-witch options expiration event, stocks did a lot of nothing on Friday – after doing a lot of nothing on Thursday. Thus, given that stocks had moved up +7.4% in the prior 9 trading days and have since stalled, it appears that the market has at best, moved into pause-mode for the time being. And in reality, I’m not sure I need to say much more?

Not surprisingly, the bears are out in force right now telling everyone “this is it.” Our friends in fur suggest that stocks have gone too far too fast and as such, a correction is likely close at hand. The list of complaints includes doubts about the validity of some economic numbers, the overbought condition, the protectionist games being played, the new role of the government, the exuberance in the press, the death of the consumer, the corporate real estate situation, and the likely resurgence of the credit crisis.

To be sure, stocks are overbought and are definitely overdue for some sort of corrective action. In fact, we’d welcome another pullback of -3% to -5% just to even out the game a little. Remember, moves that are completely one-sided don’t last. However, with an improving economy, earnings that just might surprise those dressed in bear costumes, and a very bad case of performance anxiety cropping up, investors might not want to fight this tape very hard after a pullback.

Why stay with the bulls in the near-term, you ask? As I wrote this weekend, after taking back the Financial Armageddon discount that was applied in the first couple months of the year, we are of the opinion that stocks are in the process of discounting better days ahead. And given that the market has advanced 21% since the July low, we’ll suggest that traders have done a decent job of discounting the end of the recession and will soon move into the next phase of the discounting game – where stock prices begin to discount the strength of the rebound.

On this score, the bears will tell us, in no uncertain terms, that the rebound is going to be less than robust. However, let’s keep in mind that this is a very well worn theme these days. The point being that everyone already knows and expects the recovery to be lame. So, with the bar set exceptionally low on both the economic and earnings front, it might be a good idea to be prepared for any data coming in above expectations.

Speaking of which, as we mentioned last weekend, it is “earnings guidance” that is doing the trick right now for the bulls as a host of companies have alerted analysts to the fact that their earnings are ahead of schedule. For example, since the “pre-announcement season” began on August 20th StreetAccount notes that of the 106 updates, 44 companies have actually increased their guidance. And for the record, this is more than twice as many companies that have reduced their guidance.

Turning to this morning, we don’t have any economic data to review before the bell. However, we will get a report on the Leading Economic Indicators (LEI) at 10:00 am.

Running through the rest of the pre-game indicators, the foreign markets are lower across the board. Crude futures are moving lower with the latest quote showing oil trading off by $1.92 to $70.12. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.45%, while the yield on the 3-month T-Bill is currently at 0.08%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 80 points; the S&P’s are down about 11 points, while the NASDAQ looks to be about 14 points below fair value at the moment.

Upgrades/Downgrades/Brokerage Research:

Campbell Soup (CPB) – Upgraded at Argus Research FedEx (FDX) – Upgraded at Argus Research VimpelCom (VIP) – Upgraded at BofA/Merrill Waters (WAT) – Upgraded at Barclays Agilent (A) – Upgraded at Barclays Regions Financial (RF) – Upgraded at Bernstein Wells Fargo (WFC) – Upgraded at Bernstein Zimmer Holdings (AMH) – Upgraded at Bernstein Comerica (CMA) – Downgraded at Bernstein Principal Financial (PFG) – Downgraded at Bernstein Abercrombie & Fitch (ANF) – Downgraded at Cowen & Co Altria (MO) – Downgraded at Credit Suisse Novellus (NVLS) – Upgraded at Credit Suisse Avalon Bay (AVB) – Upgraded at FBR Capital Equity Residential (EQR) – Upgraded at FBR Capital Home Properties (HME) – Upgraded at FBR Capital Biomed Realty Trust (BMR) – Downgraded at FBR Capital Prologis (PLD) – Downgraded at FBR Capital Bank of New York Mellon (BK) – Downgraded at Goldman Qwest (Q) – Added to Conviction Sell list at Goldman Total System (TSS) – Removed from Conviction Sell list at Goldman Applied Materials (AMAT) – Removed from Conviction Buy list at Goldman NetApp (NTAP) – Added to Conviction Buy list at Goldman Reliance Steel (RS) – Upgraded at KeyBanc Bed Bath & Beyond (BBBY) – Target increased at Oppenheimer Genzyme (GENZ) – Downgraded at Oppenheimer EMC (EMC) – Downgraded at Piper Jaffray Jack In The Box (JACK) – Downgraded at RBC Capital Celgene (CELG) – Upgraded at RW Baird Monster Worldwide (MWW) – Upgraded at UBS National Fuel Gas (NFG) – Downgraded at UBS Marriott (MAR) – Upgraded at Wells Fargo Starwood Hotels (HOT) – Downgraded at Wells Fargo Host Hotels (HST) – Downgraded at Wells Fargo Costco (COST) – Upgraded at William Blair

Long positions in stocks mentioned: GS

Don’t let success go to your head or defeat into your heart, 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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