Is The Tide Turning?

Daily State of the Markets 
Friday Morning – June 17, 2011

Good Morning. Traders dealt with an abundance of inputs on Thursday. And while the news was definitely not positive across the board, it appears that the end result was. Thus, the argument can be made that when a market stops going down on bad news it means that those who wanted to sell have likely already done so. And if this is the case, then the long awaited bottom to the current corrective phase may be close at hand and the tide to this fairly miserable environment might be turning.

To be sure, calling tops and bottoms of intermediate-term market moves is a dangerous game. As Marty Zweig so famously said, “Those who rely on a crystal ball will wind up with an awful lot of crushed glass in their portfolio.” However, yesterday’s “action” should provide hope to anyone still holding the view that the sky is not going to fall.

The day started on a negative note as traders began to fear that the powers-that-be in Europe just might muck up the new bailout of Greece and wind up triggering (accidental or otherwise) a “credit event” in the process. In case you are not familiar with the term, a credit event occurs when something happens to trigger the payment of credit default swaps. And since no one on the planet is really sure who holds these things, who owes what on the CDS’s, or what the end result of such an event would be, the fact that the players within the EU continue to publically bicker over the terms of the new bailout deal caused traders to begin to fear the worst this week.

Then when we got the stunningly bad report from the Philly Fed General Business Activity Index, it looked like we might finally get that “whoosh” down that traders have been talking about. It also looked like the March lows were ready to be taken out and every technician in the game began hunting for the next logical stopping point for the bears. In short, things looked and felt bad.

However, a funny thing happened on the way to the wipeout – it just didn’t happen. And in short, THIS is what traders call “good action,” which is something that we haven’t seen for the past seven weeks. While there had been a couple of other reports that were actually moderately positive (Housing Starts/Building Permits and Weekly Jobless Claims both came in above consensus expectations), the real key to what could be viewed as an improvement in the environment was the quick recovery from the Philly Fed news.

Before I take this too far, let me offer up a very important caveat. Yesterday’s action is likely not the whistle telling us that it’s OK to jump back into the pool. Make no mistake about it; this market remains a slave to both the news from across the pond and the economic data here at home. But if either can improve, then the bulls might be able to make a game of it again.

As I’ve been saying, I’m of the mind that the folks at the EU/ECB/IMF won’t muck this up. Yes, there is likely to be some additional political wrangling and some chest thumping by politicians designed for the local constituencies. However, I am fairly sure that the guys and gals in charge “get” the fact that this situation is WAY too important to screw up. I feel confident that they will find a way to make sure Greece has the cash to cover its needs for the next two years and that a default will be avoided (for now). And if this comes to pass, the bulls will likely enjoy a rip-snorting good time.

However, the reason I caution against going “all in” and tapping that margin account here is the fact that the U.S. economy doesn’t appear to be hitting on all cylinders at the moment. And while the case can easily be made that the current correction has discounted the “soft patch,” the point is that should things slow down from here, well, we could have a problem.

So, while the tide MAY be turning for the current corrective phase, this is no time to be asleep at the switch.

Turning to this morning… Once again, the situation in Greece continues to be the focal point of the global markets. And with the announcement that France and Germany are now on the same page in terms of trying to get a quick solution to Greece that does not involve a credit event, stocks around the world have reversed course and are now movin’ on up in the early going.

On the Economic front… We don’t have any economic data to review before the bell. But we will get the University of Michigan’s Sentiment index at 9:55 am and then the Leading Economic Index at 10:00 am eastern.

Thought for the day… Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

  • Major Foreign Markets: Australia: +0.10% Shanghai: -0.77% Hong Kong: -1.17% Japan: -0.64% France: +1.02% Germany: +0.66% London: +0.12%
  • Australia: +0.10%
  • Shanghai: -0.77%
  • Hong Kong: -1.17%
  • Japan: -0.64%
  • France: +1.02%
  • Germany: +0.66%
  • London: +0.12%
  • Crude Oil Futures: -$1.12 to $93.83
  • Gold: -$1.10 to $1528.80
  • Dollar: higher against the Yen, lower vs. Euro and pound
  • 10-Year Bond Yield: Currently trading at 2.969%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +12.46 Dow Jones Industrial Average: +107 NASDAQ Composite: +13.86
  • S&P 500: +12.46
  • Dow Jones Industrial Average: +107
  • NASDAQ Composite: +13.86

Wall Street Research Summary

Upgrades:

  • Dean Foods (DF) – Mentioned positively at Bernstein
  • Oracle (ORCL) – Added to Focus List at Credit Suisse
  • Broadridge (BR) – JPMorgan
  • InterMune (ITMN) – JPMorgan
  • Staples (SPLS) – Nomura
  • DryShips (DRYS) – Sterne, Agee
  • Potash (POT) – TD Newcrest
  • Actuant (ATU) – UBS
  • Monster Worldwide (MWW) – UBS
  • Ciena (CIEN) – UBS

Downgrades:

  • Southern Union (SUG) – BMO Capital
  • Transocean (RIG) – Target and estimates cut at Canaccord Genuity
  • Research in Motion (RIMM) – Citi, JPMorgan
  • Celestica (CLS) – Citi
  • Flextronics (FLEX) – Target cut at Citi
  • Jabil (JBL) – Target cut at Citi
  • Diana Shipping (DSX) – Credit Suisse
  • Lennox Intl (LII) – Estimates cut at UBS
  • Watsco (WSO) – Estimates cut at UBS

Long positions in stocks mentioned: none

For more of Mr. Moenning’s thoughts and research, visit TopStockPortfolios.com

 

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.

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