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Daily State of the Markets |
The popular press attributed Wednesday’s triple-digit gains to the better-than-expected report on Industrial Production. While it is true that Industrial Production rose 0.8% in August, which was above the consensus for an increase of 0.6% and July’s production was also upwardly revised, there is one small snag with this explaining the bulls’ latest run for the roses.
Although there is no denying that the report supports the economic recovery theory that permeates the bullish mindset these days, the first problem is the report was released an hour before the market opened and was actually received without much fanfare in the premarket. And then, after an initial pop to the upside, the Dow actually turned tail and moved lower within 5 minutes of the opening bell. Thus, if it was the report on Industrial Production that was the driver behind the gains, it must have taken traders a while – a long while – to identify the positives in the report.
Instead, we’ll offer that the key point to yesterday’s rally was the distinct lack of any big news to force the shorts to run for cover or to encourage traders to click the buy button. Sure, there were a handful of positive inputs such as some strategic M&A activity, talk from media executives about a recovery in advertising, a nice rally in the regional banks, and more talk of China’s economic rebound being “well advanced.”
However, the point is that none of these stories were worth 100 points on the Dow – especially after the market had already enjoyed a run of 5% or so in just 8 days. Thus, we will have to admit that this move is likely being driven by money continuing to come in off the sidelines. Okay, options expiration week might also have something to do with it. But with the S&P now up 18% on the year, anyone and everyone who ran for cover earlier in the year and has not yet returned to the game has to be feeling some heat.
Although jumping on the bull bandwagon may be the game du jour, there are a great many analysts out there pointing to the S&P’s gain of 58% from the low and saying, in no uncertain terms, that this game has to stop – and soon! Our furry friends argue that valuations are becoming stretched given the state of the economy and that this melt-up period is sure to end badly.
While some of the bear arguments are worthy of consideration, and there is little doubt that things are getting more than a little extended, we will objectively point out that we are not yet seeing the type of divergences that usually accompany the end of big runs. However, we will promise to keep our eyes and ears open and note that a correction could start at any time.
Turning to this morning, we have another batch of economic data to review, so let’s get to it. Initial claims for unemployment for the week ending 9/12 came in at 545K, which was a little below the estimates for 557K. But unfortunately, last week’s numbers were revised to 557K from 550K. Continuing Claims for unemployment insurance were 6.23M vs. consensus for 6.1M and the prior week was revised higher to 6.101M from 6.088M. Next up, Housing Starts for August increased 1.5% to 598K, which was in line with expectations. Building Permits came in at 579K vs. 583K. July’s starts were revised up a bit to 589K from 581K while Permits were revised to 564K from 560K.
Running through the rest of the pre-game indicators, the foreign markets are higher across the board. Crude futures are moving lower with the latest quote showing oil trading off by $0.54 to $71.95. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.48%, while the yield on the 3-month T-Bill is currently at 0.10%. 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 5 points; the S&P’s are down about 2 points, while the NASDAQ looks to be about 7 points below fair value at the moment.
Upgrades/Downgrades/Brokerage Research:
MGM Mirage (MGM) – Upgraded at Argus Research SunPower (SPWRA) – Estimates and target increased at Barclays First Solar (FSLR) – Target increased at Barclays UnitedHealth (UNH) – Target increased at Bernstein Humana (HUM) – Target increased at Bernstein Nucor (NUE) – Upgraded at Citi Genworth (GNW) – Upgraded at Deutsche Bank Goodrich (GR) – Removed from Conviction Buy list at Goldman Spirit Aero Systems (SPR) – Added to Conviction Buy list at Goldman Express Scripts (ESRX) – Upgraded at Goldman Foster Wheeler (FLWT) – Upgraded at Goldman Medco Health (MHS) – Downgraded at Goldman Kroger (KR) – Downgraded at Morgan Stanley Supervalu (SVU) – Downgraded at Morgan Stanley US Bancorp (USB) – Upgraded at Rochdale Research Skyworks (SWKS) – Upgraded at Stephens RF Micro Devices (RFMD) – Upgraded at Stephens Cognizant Technology (CTSH) – Target increased at UBS Viacom (VIA.B) – Upgraded at UBS Black & Decker (BDK) – Downgraded at UBS Peabody Energy (BTU) – Downgraded at UBS Patriot Coal (PCX) – Downgraded at UBS
Long positions in stocks mentioned: GS, RFMD, ESRX
Have a great 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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