Daily State of the Markets

Beliefs, Knowings and Lessons Learned

I probably need to issue a word of warning about this morning’s meandering market missive. In light of the fact that I have run out of ways to say “The trend is your friend” and “Don’t fight the tape,” and I’ve used up all of my favorite Wall Street-isms lately – including “Do nothing, absolutely nothing until there is something to do” and “Things don’t matter in the markets until they do, but then they matter a lot” – I’m going to spend my time this morning talking about Ms. Market’s game and some of the things I’ve learned over the years in this business. As such, I’m definitely going to be “talking my book” and can probably be accused of being a bit self-indulgent. So, if you don’t care to hear about my views or my thoughts on this game, now would be a really good time to click the delete button.

For starters, let me state that I’m not a pure technician. Nope, as with most types of market indicators, chart analysis can only do so much for you. In short, I’ve learned over the years that the chart really doesn’t tell all and that most of the popular technical indicators can and do work pretty well – right up until they don’t. I’ve learned that head-and-shoulders, double tops/bottoms, flags, and any number of other chart formations may or may not be helpful in determining what to do next. I’ve learned that Fibonacci retracement work is great – at times. And I’ve learned that I’m just not smart enough to utilize the Elliott Wave theory.

Next, I am most definitely not a pure fundamentalist as markets can and often do diverge from some of the big picture stuff like economic data and earnings. And while I might be able to stumble round a company balance sheet and income statement if forced to at gun point, I don’t believe this is especially helpful in terms of making timely buying and selling decisions.

As I may have mentioned a time or twenty, I’m also not a believer in making market calls or predictions about what might happen next in the markets. So, I’m definitely not a global macro guy or a “deep thinking” discretionary trader. In addition, I’m not a pure trend-follower, I don’t play the “mean reversion” game much (although there are clearly times such as 2009, when this approach is golden), and I believe that there are indeed times that it’s okay to “fight the Fed” (just not right now). I’m not big on market valuations as they are next to useless from a timing perspective. I believe that sentiment indicators are greatly misunderstood and misused by the public. I don’t believe in buy-and-hold. I think that Modern Portfolio Theory, which may have been “modern” in the 1950′s, has clearly been debunked. I believe static asset allocation is downright silly because times and markets change. I see quarterly rebalancing as a great way to limit one’s returns (although it does pad a great many financial advisor’s wallets). I don’t think “hard stops” are a good idea. And while I AM a believer in systems and models, I’m not a pure quant as I don’t believe computers deal with change well and that a little human intervention every once in while can add significant value.

What I DO believe in is a flexible approach to investing that is based on guidelines, models, tendencies and rules. The bottom line is before I make a move in or out of a market, I want to know that the odds are in my favor when I make the move. But since I also know that you are likely to be wrong at least 40% of the time in this business, I strongly believe in managing risk at all times. As Warren Buffett is famous for saying, “Rule #1 in investing is don’t lose big money.”

I have learned that buying high and selling higher has its place and is a strategy that is every bit as good (if not better) as the traditional buy low and sell high mantra at times (does anybody remember how a bull market acts?). I believe in focusing on the leaders. I believe in buying the dips (at times) and identifying sound entry points. I believe that markets can do whatever it takes to frustrate the masses (the current joyride to the upside would be an excellent example of this).

I believe that electronic trading is here to stay. However, I believe some forms of HFT skirt the laws and should be banned. I believe the algos are only going to get better/smarter. And I believe that stock exchanges should not be privately owned/for-profit entities. But the good news is that as the technology gets cheaper and faster each year, the effectiveness of the current HFT game is likely to diminish over time.

I know for a fact that no one has this game wired. I know that ego is the enemy and that being stubborn is a mortal sin in investing. I am pretty sure that Ms. Market has a baseball bat with every trader’s name on it and that she isn’t afraid to use it when we get cocky. I know that using a pure momentum strategy is like playing with fire and that value investors can be wrong for years at a time. I know that breakouts can be “fakeouts” and that there is virtually no way to tell the difference without the benefit of hindsight. I know that I am not the smartest guy in this game – heck, I may not be the smartest guy in my firm!

I also know that I will be wrong somewhere in our portfolios today and that I’ll be wrong again somewhere the day after – and then the day after that. I know that this game isn’t about “being right” – it’s about getting it right. I know that being “early” is the same thing as being wrong. And I know that how you deal with your emotions and especially how you deal with being wrong is really the key to success in this business.

In sum, I believe there are times to be fully invested in the stock market, times to be leveraged long, times to be short, and times to stand safely on the sidelines. And then as the saying goes, I believe that timing is indeed everything. But hopefully as this little diatribe has displayed, there is a whole bunch of other stuff to consider in between the buying and the selling. So, here’s wishing you all the best in your investing adventures.

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 there was some intraday excitement yesterday relating to a rumor that Moody’s is readying a downgrade of U.S. debt, the end result wasn’t much to write home about. And while there is little doubt that the bears will find a way to get back in the game at some point soon, for now at least, the bulls remain large and in charge.

  • Current Support Zone(s) for S&P 500: 1525-35
  • Current Resistance Zone(s): 1560-65

                                   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: Positive
  • 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 primary sentiment model flipped to negative yesterday. And while this may not be a bull killer by itself, it does tell us that risk is rising.

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:  Retail Sales, Import and Export Prices, and Business Inventories.

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 remains in good shape at this time.

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…

As has been the trend of late, U.S. futures are following the global markets lower in the early going. European markets turned lower after rates rose at the latest Italian bond auction (this remains an area to watch closely) and a weaker than expected Industrial Production report. However, the latest update on Retail Sales in the U.S. is due out in 30 minutes, which could easily be a market mover here.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -0.99%
- Hong Kong: -1.46%
- Japan: -0.44%
- France: -0.44%
- Germany: -0.15%
- Italy: -1.55%
- Spain: -1.75%
- London: -0.92%

Crude Oil Futures: +$0.06 to $92.60

Gold: +$2.90 to $1594.60

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

10-Year Bond Yield: Currently trading at 2.002%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -2.83
- Dow Jones Industrial Average: -16
- NASDAQ Composite: -2.51

Thought For The Day…

â??The best thing about the future is that it comes one day at a timeâ? – 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)

Remember, you are in control your email alerts! You can receive alerts for more than 25 of State’s FREE RESEARCH REPORTS including: Flash Headline Alerts, State’s Chart of the Day, The Insiders Report, ETF Leaders Report, and The Focus List.


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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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.