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Testing Their Conviction

Daily State of the Markets 
Wednesday Morning – June 16, 2010

Good morning. Those that know me are aware that I've long held the belief that the 200-day moving average is a relatively silly indicator. To be sure, there are any number of solid, long-term trend-following indicators that can help keep investors on the correct side of the market's major trend (if you have the charting capability, take a peek at a 27-month weighted moving average moved forward one period - now we're talking!). However, in my humble opinion, the 200-day simply isn't one of them. But for some reason, the media has concluded that a break of the 200-day - in either direction - is a very important signal of market health.

But, one of the keys to this game is to identify the driving forces behind the market's movements and to avoid passing judgment on them. Thus, if the traders are watching the 200-day, then the bottom line is we need to watch the 200-day as well. And cutting to the chase, yesterday's move by both the Dow and S&P above their respective 200-day ma's was one of the reasons for the 213 point joyride to the upside.

Putting technical factors aside for a moment, another primary driver to yesterday's fun in the summer sun was the news out of Europe, which, this time, was of the upbeat variety. With the market worrying that the debt mess in Europe will cause credit markets to freeze up ala the 2008 credit crisis, the fact that Spain, Ireland, and Belgium were able to hold successful T-Bill auctions was seen as a definite positive.

Sure, the fact that the yields on the auctions were up significantly over the past month isn't exactly encouraging as Spain had to pay 2.3% for 12 month bills. And for those of you keeping score at home, this was a 44% increase over the rate Spain paid for the same 12-month bills in May. But the key is that investors showed up to gobble up the higher yields being offered by two of the PIGI'S (the Belgium auction was heavily oversubscribed). Therefore, fears of a 2008-style replay were able to be put aside - well, at least for Tuesday, anyway.

It also didn't hurt that traders were reminded of the rebound in the U.S. economy yesterday. Although the Empire Manufacturing Index didn't really show much progress in June, the fact that the manufacturing sector in the New York region continued to expand (for the eleventh straight month) was a positive. And speaking of positives, the pop in the semiconductors was clearly one as the SOX (Philadelphia Semiconductor Index) romped higher to the tune of +5.54%, without any real news flow to trigger the move.

So, since the bulls were able to "get 'er done" yesterday by pushing the blue chip indices above their 200-day moving averages, the goal now is to keep the averages above those all-important technical levels. For if the market were to turn tail and immediately run back below the 200-day, even the non-believers will recognize that this would be a bad thing.

Turning to this morning... it looks like the bulls may have to try and defend their turf immediately as results from FedEx (NYSE:FDX) were disappointing and Nokia (NYSE:NOK) has lowered their outlook for Q2. Thus, it would appear that the bulls' conviction may be tested quickly this morning.

On the economic front... The Labor Department reported the Producer Price Index fell in May by -0.3%, which was a bit higher the consensus estimate for an decline of -0.5% but below April’s reading of -0.1%. When you strip out food and energy, the so-called Core PPI came in up +0.2%, which was a tenth above the consensus for +0.1% and in line with April’s +0.2%.

In addition, Housing Starts fell 10% in May to an annualized rate of 593K, which was well below the consensus for 625K. Building Permits for May fell -5.9% to 574K. This was well also below than the consensus of 637K and the April total of 610K.

Finally, here's something to ponder today: Most people aren't patient enough to get rich quick...

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: +1.21%
       
    • Shanghai: Closed
       
    • Hong Kong: Closed
       
    • Japan: +1.81%
       
    • France: +0.11%
       
    • Germany: +0.07%
       
    • London: +0.18%

     

  • Crude Oil Futures: - $0.64 to $75.60
     
  • Gold: + $3.50 to $1237.90
     
  • Dollar: Higher against Yen, Euro and Pound
     
  • 10-Year Bond Yield: Currently trading lower at 3.25%

     

  • Stocks Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -8.88
       
    • Dow Jones Industrial Average: -73
       
    • NASDAQ Composite: -17.83

       

Wall Street Research Summary

Upgrades:

  • American Axle (NYSE:AXL) - BofA/Merrill
     
  • Johnson Controls (NYSE:JCI) - BofA/Merrill
     
  • ON Semiconductor (ONNN) - BMO Capital
     
  • Power integrations (NASDAQ:POWI) - BMO Capital
     
  • Synovus (NYSE:SNV) - Credit Suisse
     
  • Priceline.com (PCLN) - Goldman Sachs
     
  • Pioneer Natural (NYSE:PXD) - Initiated Outperform at Macquarie Research
     
  • Halliburton (NYSE:HAL) - Estimates increased at UBS
     
  • Reliance Steel (NYSE:RS) - UBS

     

    Downgrades:

  • Autonation (NYSE:AN) - BofA/Merrill
     
  • Bally Technologies (NYSE:BYI) - Goldman Sachs
     
  • International Game Technologies (NYSE:IGT) - Goldman Sachs
     
  • DreamWorks Animation (NASDAQ:DWA) - Goldman Sachs

     

    Long positions in stocks mentioned: PXD

    For more "top stock" portfolios and research, visit TopStockPortfolios.com

     


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Disclosure: PXD