Daily State of the Markets

A Very Large Wall of Worry?

As someone who spends their days watching the stock market action closely, I completely understand why the bears are looking for a meaningful pullback to begin sometime soon. In short, the trend of the past four years has been for the market to advance sharply for a period of time and then get blindsided by the next crisis. So, as the saying goes on Wall Street, “Once is a trend, twice is a tradition, and three times is a commandment,” I can’t really blame anyone for expecting things to turn ugly again.

Heck, I’m not immune to the worry that things will get mean and nasty again any moment now. Based on the way some of the stocks we watch are acting, I wouldn’t be surprised to see the bears get back in the game again in the near future. And frankly, it is pretty hard to argue against the idea that a pullback could commence sooner rather than later.

However, what surprises me is the veracity of the bear arguments in the face of new all-time highs for the DJIA. I don’t expect to see champagne corks flying on CNBC (well, okay, that wouldn’t surprise me one bit) or people running adorned in bull costumes. But the fact that the press seems to be backing the bear camp is a bit odd. Everywhere I turned Thursday morning, I saw headlines expressing worry about the stock market rally. In short, Reuters, WSJ, CNBC, and MarketWatch all had headlines telling folks to be wary of this market.

The Wall Street Journal’s top story in the Market’s section was entitled, “Bad-News Bears Crash the Party.” This article focused on the idea that a bunch of hedge fund managers are selling into the rally. The premise for the negativity is as follows: The Fed has orchestrated the move up in stocks, there are signs of excess in the bond market, there is froth in speculative stocks, a recession is likely, and the usual worries about Europe and Washington. And according to the managers cited by the Journal, all of the above will ultimately lead to a big decline in stocks – you know, the same type of decline that we’ve seen each year for the past four years.

The top 3 stories in the Reuters morning money digest were also less than supportive of the current move higher. The first line of the article entitled, “What If They Held a Bull Market and No One Came?” really said it all: “The remarkable thing about the Dow Jones Industrial Average’s new all-time high is how few people give a damn.” Next, there was, “As Dow Hits Record, Should You Pile In or Run Away?” And finally, a Reuters article asked, “Is It Too Late To Chase Stock Market Rally?”

MarketWatch ran the following early headline: “Dow’s New High: Bull Market or Bear Trap?” And in case the title didn’t tip you off as to the concept of the story, the sub-header made it pretty clear: “Can this rally continue: Not everything is as bullish as one might suspect.” Then after the market closed yesterday, the headline that adorned MarketWatch was: “How to prepare for the worst if the stock market corrects.” This article sang the praises of buying put options to help protect your portfolio from the coming correction.

Finally, CNBC, as is to be expected, played both sides of the fence by including the headline “Jobs Report Could Add More Fuel to Stock Rally” alongside Marc Faber’s piece titled, “It Will End Badly This Year.” (Although to be fair, Mr. Faber does tend to sing this same dour song each and every year.)

As the Dow was moving on up to yet another new all-time high yesterday morning, my reaction was, “Wow, talk about a wall of worry!” My point this morning is simple. And yes, I can be accused of using little more than anecdotal evidence here. But generally speaking, big moves in the market end when optimism runs hot – too hot – and not when everyone is worried about getting hit again.

My guess is that the majority of these stories are being written for the public investor who purportedly is just now thinking about getting back into the stock market again. But I ask you, do you personally know anyone who after getting scorched in 2008 and selling everything is just now starting to buy into stocks again? Does the so-called public investor who is supposed to think that a new all-time high in the Dow represents an all-clear signal to get back into the market really exist? Personally, I don’t know anyone like that and I think the premise is idiotic.

So, let’s assume that we’re not talking about someone who has been on the sidelines for the last four years. Let’s talk about the average investor who already has money invested in their stock portfolio, their IRA’s and their 401K’s. Let’s talk about someone trying to decide what to do with their IRA contributions this year. So for these folks, is this the time to go all in and put everything they’ve got into the market? In short, my answer is, of course not.

My premise is that stocks will have a strong year in 2013 if (and only if) there are no surprise crises. So, based on that assumption, now is the time to be accumulating positions. This means buying a little here and there – not bombing in with your entire account the moment the DJIA hits a new all-time high. And here’s another tip: Stop reading everything under the sun. Stop listening to all the self-proclaimed guru’s and turn off the “fast money” types. Instead, patiently implement a prudent plan/strategy this year. Be patient. Keep some powder dry to put to work when the inevitable dips come. Don’t get excited. And don’t chase things too far because pullbacks and corrective phases are part of the game in even the biggest bull moves. My guess is that if you execute such a plan for the remainder of the year you will be rewarded as the market continues to climb what appears to be a very large wall of worry.

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 Fed/Global Central Bank Policy
    3. The State of European Debt Crisis

The State of the Charts

Although it is said that the trend is your friend and that investors should never fight the Fed, we do need to recognize that stocks are overbought and that the momentum of the current move is not stellar. As such, a pullback wouldn’t be surprising in the near-term.

  • Current Support Zone(s) for S&P 500: 1525-35
  • 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: 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 overbought from a short-term perspective and remains moderately overbought from an intermediate-term view.
  • Market Sentiment:  Our sentiment indicators remain moderately negative on balance.

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:  Nonfarm Productivity and Unit Labor Costs, Weekly Jobless Claims, and Bloomberg Consumer Comfort.

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 – Our weekly model tells us to continue to give the bulls the benefit of the 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…

U.S. stock futures are following the European bourses higher this morning. However, the jobs report will likely dictate the direction of trade for the session.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -0.23%
- Hong Kong: +1.41%
- Japan: +2.64%
- France: +0.88%
- Germany: +0.58%
- Italy: +1.22%
- Spain: +1.69%
- London: +0.31%

Crude Oil Futures: -$0.38 to $91.18

Gold: +$0.60 to $1575.70

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

10-Year Bond Yield: Currently trading at 2.017%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +5.54
- Dow Jones Industrial Average: +59
- NASDAQ Composite: +11.31

Thought For The Day…

Most of us are just about as happy as we make up our minds to be. – Abraham Lincoln

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

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

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.

The information contained in our websites and publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

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 a the Chief Investment Officer at Heritage Capital Management. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio 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 25 years.