What Comes Next? (And Be Careful Who You Listen To)

Daily State of the Markets 
Tuesday Morning – June 14, 2011

Good Morning. In listening to and reading various market commentaries from the big press outfits, what strikes me is how absolutely certain they are regarding the question of what comes next for the stock market. While traders everywhere have been talking about the oversold condition and how negative the sentiment has become for some time now, and how this combination usually leads to a bounce higher, the popular press continues to suggest that lower prices most certainly lay ahead.

For example, Reuters began their Monday market summary with the following: “Stocks drifted sideways, in what is likely to be a temporary pause in the selloff brought on by fears of another economic downturn.” I won’t bore you with four or five other similar quotes from the likes of CNBC, AP, etc. However, it is safe to say that the press has latched onto the idea that the stock market has only one way to go and that the reason for the ongoing decline is oh so easy to define: the recent weak economic data.

I have a couple of problems with this assessment. First and foremost is that fact that the stock market tends to lead the economy and not the other way around. Yes, it is true that traders may have been a little preoccupied with the “Correlation Trade” during much of May and as such, didn’t exactly get in front of the weakening data. However, a nearly 7% decline since the April 29th top is likely sufficient to discount what I would term “weakish” data. And since there is no guarantee that the data will weaken further from here, one could argue that the current corrective phase may be closer to the end than the beginning.

The second issue I have with the reporting suggesting that stocks can only go down from here is that the press, like most investors, is very good at predicting and preparing for what has already happened. The key point here is that we’ve already had a fairly substantial decline. And given that the sentiment in the market has reached relatively extreme negative levels, it is probably best to begin looking to “go the other way” instead of expecting more of the same.

It is said that investors need to be most bullish at the bottom and most bearish at the top of big moves. Think about that a moment. Given the barrage of bad news the press tends to provide during declines such as we are currently experiencing, this is actually a fairly difficult task for the average investor. And then there is also the fact that going contrary to the crowd just to be contrary can lead to big problems when a major move takes place.

It is for these reasons that I encourage investors to (a) learn how the game really works and then (b) learn to think for themselves. Because from where I sit, this market looks ready to bounce and to test the conviction of the bears. This is not to say that the rally I’m expecting will succeed or even last very long. No, we are likely going to be tied to the data for a while. But, please keep in mind that whenever everyone becomes certain as to what is going to happen next in this game, the opposite is likely to occur – at least in the short-run.

Turning to this morning… It looks like the bounce is “on” in the early going as the data out of China was not terribly disruptive and the economic news here at home is also not as bad as had been feared. In short, traders had been bracing for this week’s data to show the economy falling off of a cliff. But this morning’s reports show that is most certainly not the case at the present time.

On the Economic front… The labour Department reported the Producer Price Index (an indication of inflation at the wholesale level) for May rose by +0.2%, which was above the consensus estimate for +0.1% but well below April’s +0.8%. And when you strip out food and energy, the so-called Core PPI came in at +0.2%, which in line with the consensus for +0.2% and below April’s +0.3%.

The Commerce Department reported that Retail Sales fell in the month of May by -0.2%. However, this was above the consensus for -0.6%. When you strip out the sales of autos, sales were up +0.3%, which was in line with the consensus for an increase of +0.3% and just below last month’s revised +0.5%.

Thought for the day… Laughter is actually great exercise – it’s like jogging for the soul…

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: +0.35% Shanghai: +1.10% Hong Kong: -0.05% Japan: +1.05% France: +0.86% Germany: +1.47% London: +0.29%
  • Australia: +0.35%
  • Shanghai: +1.10%
  • Hong Kong: -0.05%
  • Japan: +1.05%
  • France: +0.86%
  • Germany: +1.47%
  • London: +0.29%
  • Crude Oil Futures: +$0.29 to $97.59
  • Gold: +$2.10 to $1517.80
  • Dollar: lower against the Yen, Euro and pound
  • 10-Year Bond Yield: Currently trading at 3.060%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +14.30 Dow Jones Industrial Average: +103 NASDAQ Composite: +21
  • S&P 500: +14.30
  • Dow Jones Industrial Average: +103
  • NASDAQ Composite: +21

Wall Street Research Summary

Upgrades:

  • Fresh Market (TFM) – BMO
  • Petroleum Development (PETD) – Canaccord Genuity
  • FirstEnergy (FE) – FBR Capital
  • Entergy (ETR) – Target increased at FBR Capital
  • MEMC Electronic Materials (WFR) – Goldman Sachs
  • Demand Media (DMD) – Goldman Sachs
  • Zions Bancorp (ZION) – Keefe, Bruyette Woods
  • Ventas (VTR) – UBS
  • Wendy’s/Arby’s Group (WEN) – UBS
  • Tanger Factory (SKT) – UBS
  • CBL & Assoc (CBL) – UBS
  • DryShips (DRYS) – Wells Fargo

Downgrades:

  • Warnaco Group (WRC) – Estimated reduced at Cowen
  • SunPower (SPWRA) – Goldman Sachs, Kaufman
  • Research In Motion (RIMM) – Estimates cut at JPMorgan
  • Advance Auto Parts (AAP) – Nomura
  • Cisco Systems (CSCO) – RBC Capital
  • Juniper Networks (JNPR) – RBC Capital
  • Caterpillar (CAT) – Target 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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