David Moenning's  Instablog

Daily State of the Markets
Friday, May 24, 2013

Good Morning. Anyone awake and scanning their screens before the sun rose on Thursday morning likely had one thought running through their minds, "Here we go again." You see, each and every time the economy and the stock market had gotten something going since the credit crisis ended in early 2009, something came along - usually the perception of a calamity in Europe - to stop the bulls dead in their tracks. In fact, the rallies of 2010, 2011, and 2012 were all halted, sometimes in spectacular fashion, by the never ending debt crisis that was unfolding across the pond.

So, with the Japanese stock market down an eye-popping -7.32%, Europe getting tagged by more than 2%, and the S&P futures down more than 16 points, one could hardly be blamed for thinking that the bad old days had returned and that it was time to take cover. In fact, after seeing the carnage that was occurring overseas, I found myself relieved that our systems were not overly leveraged at the present time and that our exit point was close at hand.

Take a look at the chart below and you'll see what I mean. The 2010 rally was ruined by the first go-round with Greece. The "the economy is better than everyone thought" rally that ended in early 2011 was killed by an expansion of the Europe crisis. Then the combination of Greek drama and stupidity in Washington D.C. annihilated the market in the summer of 2011. And finally, the next "hey, things aren't so bad after all" rally of early 2012 was stopped in its tracks by, oh you get the idea.

S&P 500 - Weekly
(click to enlarge)

One of the important lessons that investors of all colors, shapes, and sizes have learned over the past four years is that gains in the market can be fleeting. One minute the economy is good and stocks are rallying nicely, and the next, well, not so much! And although my thesis for 2013 has been that stocks wouldn't experience a severe correction unless a new crisis emerges, my discipline says that what "is" happening in the market trumps what I think ought to be happening every time. So, given that the market's current rally has become extended and just about everybody, everywhere is looking for a correction, it looked like the annual panic was about to return,

But a funny thing happened on the way to the panic. Yep, that's right; it didn't happen. Sure, stocks opened lower. And the indices actually closed lower. But a drop of 13 points on the DJIA and a loss of -0.29% for the S&P isn't exactly the type of volatility that we saw during the panic-stricken days of 2010, 2011, and 2012.

Yes, it is true that the HSBC Flash PMI numbers out of China were weak. And yes, that is indeed bad for Europe's economy. It is also true that the current selloff in the bond market may be for real this time (Goldman Sachs seems to think so) because if the economy cooperates, the Fed may indeed begin tapering their stimulative efforts.

However, my point on this last trading day before a long holiday weekend is that the type of panic that dominated the markets in the spring/summer of the prior three years wasn't evident yesterday. Heck the VIX only managed to pop up 1.8% on Thursday. Normally, when things get overbought and then reverse, we see the so-called fear index spike higher by 5%, 10% or even 20%. Thus, a rise of 1.8% appears to be a fairly weak effort by the bears.

Can things get worse? Is the panic in Japan over? Will the games that the hedge funds play relative to currencies and equities in Japan continue? Will the holiday weekend mean an increase in volatility today? And will the corrective phase that began on Thursday keep going? My answers are: yes, maybe not, most likely yes, perhaps, and probably. However, given that so far at least there is no evidence of any real panic in the market, we should probably assume that any correction will likely wind up being of the garden variety.

Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

Turning to This Morning...

The volatility continued in Japan overnight as markets moved in a 6% range from high to low. At issue seems to be the concern that the country's massive QE campaign may have done enough for now. The volatility in the land of the rising sun seems to have spilled over into both European and U.S. markets. Futures in the U.S. had been trading higher but have since moved lower. Thus, it looks like the volatility of the past two days will be with us again today.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: +0.59%
- Hong Kong: -0.22%
- Japan: +0.88%
- France: -0.10%
- Germany: -0.77%
- Italy: -0.90%
- Spain: -0.97%
- London: -0.66%

Crude Oil Futures: -$0.66 to $93.59

Gold: -$2.30 to $1387.50

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

10-Year Bond Yield: Currently trading at 2.007%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -5.96
- Dow Jones Industrial Average: -25
- NASDAQ Composite: -11.30

Thought For The Day...

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

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 StateoftheMarkets.com 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 "as is" 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 this report 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.

Daily State of the Markets
Tuesday, May 21, 2013

Good Morning. One thing I've learned over the last 25+ years in this business is that when everyone in the game is looking for same thing to occur, it rarely does. You see, Ms. Market seems to enjoy making a mockery of the term "market logic" by oftentimes doing whatever it takes to frustrate as many market players as possible. And from my perch this may be exactly what is occurring right now.

In short, I'm not aware of anyone currently playing the game that isn't looking for some sort of pullback to begin momentarily. Sure, the bulls are on a roll. Yes, the central bankers of the world are printing money on a daily basis. And today is indeed Tuesday - so, as has been the trend of late, another joyride to the upside may be on tap for today. Oh, and the economy does seem to be in Goldilocks mode at the present time. But the bottom line is this market has gone a long way in a short period of time. As such, a pullback, a correction, or at the very least, a period of consolidation would seem to be the logical next step in this market's journey.

While I make it a habit to never, ever talk about what "ought" to be happening in the market. Exhibit A in my argument that a sloppy period might be coming - and soon - is that the current rate of ascent has been accelerating over the past month. Take a peek at the chart below and you'll see what I mean.

(click to enlarge)

First, note that four days ago the S&P broke out of the uptrend channel that had been intact for about six months. Next, take a gander at the uptrend line I've painted in that began in mid-April. Can you say "curve steepening?"

If my handy dandy paint skills aren't enough to convince you, I've also got some actual statistics to back up my thesis. However, before we go to the video tape, let's revisit my opening remark in today's missive; markets rarely do what everyone is expecting them to do!

Long time readers will recall that I like to keep tabs on momentum surge indicators. History shows that when the bulls completely overwhelm their opponents in a convincing fashion over a short period of time, a reliable buy signal occurs. We look for such surges in the 10-day totals of advances vs. declines as well as the percentage of stocks that exceed their 50-day moving averages. In short, when either of these two indicators gives the signal that a surge has occurred, the bulls tend to be large and in charge for the foreseeable future (one indicator has a perfect record since 1967 and the other has been right a year later 35 out of 36 times).

In looking at the history of these indicators, it is clear that the market tends to perform far better than normal two weeks after the signal is given as well as one, two, three, four, six, and twelve months later. For example, two weeks after the number of stocks above their 50-day moving average has exceeded 90%, the S&P has gained an average of +0.9% (the average of all two week periods is +0.3%). One month after the signal, the S&P is up an average of +3.1% vs. +0.6%. Three months later: +6.1% vs. +1.9%. And four months out, the median gain for the S&P has been +10.0% vs. the average of +2.5% for all four month periods. And one year after the signal, the S&P has returned +16.7% on average vs. +7.7%. Not bad eh?

However, in looking at the median gains for each of the periods following a momentum surge signal, it becomes clear that the rallies tend to stall out somewhere between the fifth and sixth months. Here are the numbers: Four months after the buy signal the median gain has been +10.0%. But six months after the buy signal, the median gain is +9.8%. This means that stocks have tended to move sideways somewhere during months five and six after the signal.

Now for the fun part. The buy signal I'm talking about here (when after first hitting 75%, the percentage of stocks above their 50-day moving average exceeds 90%) last occurred on January 4, 2013. And don't look now fans, but we are now into month number five of the signal.

So, if history is to either repeat or rhyme, this indicator suggests that the bulls' current run for the roses just might be due for a break. But then again, there still seems to be a fair amount of money sloshing around the financial system looking for a home these days. Oh and everyone, everywhere is calling for a pullback - so we'll just have to wait and see.

Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

Turning to This Morning...

Although Goldman Sachs has seen fit to increase their year-end projections for the S&P 500 to 1,750, things are fairly quiet in the early going today. There will be a lot of stories to watch today with some Fedspeak, the vote on Jamie Dimon's role at JPM, and Apple's testimony on Capitol Hill relating to the company's tax policies. However, with European markets down and little data to guide traders, it could be a quiet day. But then again, we should keep in mind that Tuesday's have been quite positive this year.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: +0.22%
- Hong Kong: -0.54%
- Japan: +0.13%
- France: -0.49%
- Germany: -0.39%
- Italy: -0.88%
- Spain: -1.01%
- London: +0.05%

Crude Oil Futures: -$0.64 to $96.07

Gold: -$7.10 to $1377.00

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

10-Year Bond Yield: Currently trading at 1.957%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.14
- Dow Jones Industrial Average: +11
- NASDAQ Composite: -1.67

Thought For The Day...

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

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 StateoftheMarkets.com 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 "as is" 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 this report 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.