Daily State of the Markets

A Hard Learned Lesson

As long-time readers know, I am a card-carrying member of the-glass-is-half-full club when it comes to the big-picture outlook for both the U.S. economy and stock market. This is due to the fact that in 1995 I had a revelation that changed the way I looked at things from that point on. And to be honest, I am very thankful that I learned what turned out to be a fairly painful, yet important, lesson at the time.

You see, I had protected client assets from the 1990 bear market (which had occurred just three short years after the Crash of ’87 – an event that was still fresh in investors’ minds) by turning bearish and had done a decent job with what had bordered on a bear market in 1994. As such, I had inadvertently fallen into the trap of looking for declines in order to provide outperformance. And in the process, I wound up not being as prepared as I should have been for the ensuing – and very impressive – bull run.

A good thing about my personality though is that unlike so many in this game, I am able to recognize and admit when I’m wrong. I knew that, like baseball, the investing game was about dealing with mistakes and failures. So I didn’t spend a lot of time kidding myself that I needed to be “right” all the time.

Back in 1995, it was also positive that I had indicators and market models to lean on. And those indicators told me in no uncertain terms that the bulls were back. But as any young manager is prone to do, I decided that I “knew” better and I stayed cautious (remember, I had been successful with my “Dr. Doom” approach). Because my models were positive, I did get invested and I did make money. But not nearly as much as I knew should have.

And that’s when it hit me. The key – and the real point to this morning’s missive – is that for several years I had allowed myself to “talk my book.” I’d done a good job with the down markets, which felt great and clients loved it. And this justified my underperformance in the ensuing up market. However, as things improved in 1995, I realized that I had become something of a permabear. I recognized that if I had objectively identified what was actually happening in the market, I would have been much better off.

The bottom line this morning is that I think there is a decent chance that the current crop of bears are about to learn the same lesson I did 17+ years ago.

From that point on I decided some changes were in order. First, I needed to recognize that we live in the greatest country in the world and that in looking back at history, neither the economy nor the stock market tended to stay down for long. No, in the big picture, stocks tended to move higher over time. And while history showed also that the economy has succumbed to a recession every once in a while, the long-term trend hasn’t been half bad.

The second decision I made was that I needed a disciplined “guide” to basically keep me from myself when market environments changed. And that’s when I started employing market models in earnest.

Today, my models are much more sophisticated. They adapt to changing market environments. They employ multiple strategies. They have triggers for when to be aggressive and when not to. And they utilize multiple time-frames. But the concept is the same – I want a model that can objectively tell me which team the environment favors.

To be sure, market models are no panacea. They, like everything else in this game, screw up and get out of whack sometimes. But for the most part, the models are pretty darned good at defining the overall market environment. And it is for this reason that I leave the forecasting to the gurus and just try and stay in line with what my models are telling me.

With my models currently suggesting that the bulls are in charge and have earned the benefit of the doubt here, I just don’t understand the bear stance. Stocks are at or near all-time highs and yet it seems there is always something to complain about and/or worry about. For example, while the S&P and NASDAQ broke higher on Friday, my furry friends could be heard yammering on about the DJIA’s divergent behavior, the worry about the “sequester”, the fears about Europe, and even Venezuela’s currency devaluation. The glass-is-half-empty gang just doesn’t seem to be able to see that the economy is improving (albeit slowly) or that earnings weren’t half bad (67% of the 342 S&P companies reporting so far have beaten revenue estimates, which is up nicely from Q3’s 41% and the four-quarter average of 50%).

No, I think the bears of today are like I was in 1995. They are so worried about not getting slammed again that they can’t even fathom an environment that isn’t awaiting the next crisis. And yes, it may turn out – perhaps even this morning – that I was wrong to be optimistic or that there was indeed another crisis coming. But then again, that’s what my models are for. So instead of being negative and assuming that trouble is around every corner, I’ll simply wait until it actually shows up before I don the bear hat.

Publishing Note: I am attending a NAAIM (National Association of Active Investment Managers) conference with early meetings Tuesday through Thursday. Thus, Daily State of the Markets reports will be published as time permits.

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blindsided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of the U.S./Global Economy
    2. The State of the Earnings Season
    3. The State of the European Debt Crisis

The State of the Charts

Although my friends in the bear camp insist that Friday was a fluke and will quickly be reversed, both the S&P 500 and the NASDAQ broke out to new cycle highs. And while I do see that the DJIA has yet to confirm, a breakout is a breakout (unless, of course, it winds up being a fakeout). So, if the bulls can hold on to Friday’s gains for a couple days then the case can be made that the next stop is the old highs at 1565.

  • Current Support Zone(s) for S&P 500: 1513, 1500
  • Current Resistance Zone(s): 1550-65

                                   S&P 500 – Last 3 Months
Loading chart © 2001 TickerTech.com

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

  • Short-Term Trend: Positive
  • Intermediate-Term Trend: Positive
  • Long-Term Trend: Positive

                                   S&P 500 – Last 12 Months
Loading chart © 2001 TickerTech.com

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend – I.E. if there is any “oomph” behind the move.

Below are a handful of our favorite indicators relating to the market’s “mo”…

  • Trend and Breadth Confirmation Indicator: Positive
  • Price Thrust Indicator: Moderately Positive
  • Volume Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Positive
  • Technical Health of 100 Industry Groups: Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide “early warning signs” that a trend change may be near.

  • Overbought/Oversold Condition:  The S&P is once again overbought from both the short- and intermediate-term perspectives.
  • Market Sentiment:  No change: Our sentiment indicators remain solidly negative.

The State of the Economy

The overall health of the economy is a major input to the stock market. In order to help you stay up to date on all the important economic data, we publish a “State of the Economy” roundup each day. The report summarizes the day’s important economic data in an executive summary, quick-read format and then provides links to the most recent data, sorted by category. Here is a snippet from the recent report:

Most Recent Key Economic Releases:

Today’s economic releases:  There are no reports scheduled for release today.

Here is the latest State of the Economy Report

You can also sign up to receive an email alert whenever the “State of the Economy” report is published.

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market’s “big picture” environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: Positive – This tells us that we should continue to give the bulls the beneift of any doubt.

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

From The Equity Research Department

At StateoftheMarkets.com, our goal is to provide investors with everything they need to be more successful in the stock market. Here are the latest reports from our research department:

Remember to sign up for email alerts whenever our research department issues a report.

Turning To This Morning…

Asian markets were closed overnight for various celebrations including the Lunar New Year (“The Year of the Snake”). European markets are mixed as Italy and Spain continue to pose potential problems in the region. Here in the U.S., the futures are just slightly above fair value at the present time. Our best guess is that the major indices will likely once again be pushed around by the algos today. We’d continue to watch the action surrounding the dollar.

Pre-Game Indicators

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

Major Foreign Markets:
– Shanghai: closed
– Hong Kong: closed
– Japan: closed
– France: +0.59%
– Germany: +0.12%
– Italy: -0.08%
– Spain: -0.44%
– London: +0.37%

Crude Oil Futures: -$0.13 to $95.59

Gold: -$8.00 to $1658.90

Dollar: lower against the yen and euro, higher vs. pound

10-Year Bond Yield: Currently trading at 1.976%

Stock Futures Ahead of Open in U.S. (relative to fair value):
– S&P 500: +1.77
– Dow Jones Industrial Average: +13
– NASDAQ Composite: +3.59

Thought For The Day…

A person often meets his destiny on the road he took to avoid it. – Jean de La Fontaine

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist

Positions in stocks mentioned: none

Wondering what your short-term risk management strategy should be right now? Let Dave M. walk you through how his Daily Decision system works (a 100% rules-based system designed to guide your risk management strategy) Click Here to see Daveâ??s latest video presentation on the â??Adaptiveâ? Daily Decision System

For up to the minute updates on the market’s driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenningâ??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. One should always consult an investment professional before making any investment.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided â??as isâ? without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

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About the Author

David Moenning is the Chief Investment Officer at Sowell Management Services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 29 years.