David Moenning's  Instablog

Daily State of the Markets
Monday, April 22, 2013

Good Morning. Trying to gauge the message from the market action has been more difficult than usual over the past month. Beginning on March 19th the S&P 500's close flip-flopped from green to red and then back again each day for a record breaking fourteen consecutive days. After that, the bulls gained possession of the ball for three additional days (chalking up four straight green finishes in the process) and closed April 11th at an all-time high. But unfortunately, it's been largely downhill from there as we were then treated to two big down days, a big up day, two more scary down days, and then Friday's pop higher.

As far as price progress goes, the S&P finished Friday at almost the exact same spot it closed on March 11. Thus, I guess we could say that the market has been treading water and trying to make up its mind about what to do next for the past 29 trading days as the better-than-expected theme may have morphed into another spring swoon. Can you say, sideways... or how about, uncertainty?

Friday's closing price was interesting for a couple of reasons. First, there was little in the way of a catalyst to trigger the move higher. As such, the bulls contend that the recent selling has likely come to an end. Although one day does not a trend change, another positive factor the bulls are pointing to is the fact that Friday's bounce occurred exactly when and where it needed to.

(click to enlarge)

As you can see in the chart above, Friday's low (a) once again touched the uptrend line that's been intact since mid-November, (b) once again tested (successfully) the 50-day moving average, and (c) once again tested (also successfully) the important support zone at 1540. And to hear the bulls tell it, the combination of the fact that there no catalysts and a perfectly timed rebound means that a rally phase is likely to ensue.

However, before you get too excited, we should note that although the S&P bounced on cue, the venerable index still has important resistance (the horizontal line drawn on on the chart) it will need to plow through if the bulls are to resume control. So, given the market's propensity to have no memory from one day to the next these days, the bear camp might have a little something to say again here sometime soon. This is especially true given that earnings from some pretty big names have been downright crummy of late.

Speaking of a market that has no memory and a habit of flip-flopping; I'd like to offer up a possible explanation for the action. However, before I begin I should disclose that this is just one man's opinion of the way the market might be working these days.

I recently had the pleasure of participating in a live webinar with the gang at Benzinga and Marketfy where HFT was the topic of discussion. While I was a panelist in the discussion talking about the effects of HFT from a money manager's perspective, I learned a great deal from the other two panelists, who were both experts in the HFT field. What was cool for me was getting to spend 30 minutes talking to Hiam Bodek (the author of The Problem of HFT - which is an exceptionally technical series of writings on the subject) one-on-one about the impact and the state of HFT before the webinar began.

The key takeaways from the webinar and my chat with the two experts were: (a) HFT is becoming more crowded all the time, (b) the practice is becoming significantly less profitable (GETCO's HFT profits were down 80% last year), (c) the NASDAQ exchange, in Hiam's words, has "cleaned up its act" in terms of allowing predatory HFT trades, and (d) that electronic "speed trading" isn't going away any time soon.

It's the last point that is the basis for my thesis about the market's tendency to be up one day and then down the next. You see, if you have the right tools including a high-powered supercomputer, a micro-wave data feed that operates at the speed of light, and the ability to execute trades directly, your trading/investing time frame can be expanded dramatically. Instead of a 1-minute chart of the S&P 500 or SPY, you can utilize a millisecond chart. So, instead of 1 bar for each minute of the trading day, you have 60,000.

Instead of the 390 points on a 1-minute chart for each trading day, you have 23.4 million. Thus, you have the opportunities to "play" a trend-following game during each and every day - as well as the ability to go home "flat" and have no overnight risk. In other words, being able to work on a millisecond basis means that every single trading day brings countless opportunities to profit on the intraday trends.

Frankly, I can't fathom even the concept of the speeds involved. But I know that trading is trading and that trend-following can and does work well. So, even if you were following trends of the market on a 1/10th of a second basis, you could probably do pretty darn well.

So... if my thesis is correct, there are a handful of folks that have the tools, the know-how, and the money to play this game. And if you can profit from moves that would normally take place over several years (or more accurately, decades) each and every day, every opening bell is a brand new ball game. Welcome to the brave new world of day-trading.

The idea here is that the trend-following algos have the ability to create a self-fulfilling trend in the market. Thus, once a micro-trend move begins, the trend-following algos race to all jump on ahead of the next one. Then when the trend begins to reverse, yep, you guessed it; they race to jump out. In my humble opinion, this is how/why the market moves 5-7 points in 5 minutes on no news so frequently these days. Strength begets strength at the speed of light and vice versa.

So that there are no misunderstandings, this is simply my opinion of what could be happening within those whirring machines that the big-boys on Wall Street and Chicago have. Humans can't play this game because it simply unfolds too fast. Frankly, I'm jealous as I would love to be able to play this game. Maybe I'm all wet here and maybe such a trading game doesn't exist. But since technology gets cheaper every year, maybe we'll all be trading stocks faster than we can blink sometime soon.

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...

Stock futures appear to be reacting positively to (a) word that the G-20 is not going to stand in the way of Japan's massive QE program, which is causing the yen to plummet, (b) the reelection of the President in Italy, and (c) a strong rebound in gold prices. However, Caterpillar's reduction in their guidance is keeping a lid on the enthusiasm at the present time.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -0.12%
- Hong Kong: +0.14%
- Japan: +1.89%
- France: +0.47%
- Germany: +0.72%
- Italy: +2.03%
- Spain: +1.50%
- London: +0.44%

Crude Oil Futures: +$0.39 to $89.60

Gold: +$37.70 to $1433.30

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.720%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.95
- Dow Jones Industrial Average: +35
- NASDAQ Composite: +8.79

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
Friday, April 19, 2013

Good Morning. It has been said that a picture is worth a thousand words. And since my oftentimes meandering morning market missive winds up being about that many words most days, I guess I could take the easy way out this morning and just point you to the charts below. But what's the sport in that, right?

So that there are no misunderstandings, I should let you know that I don't consider myself a high level chartist/market technician and I do NOT believe that "the tape tells all" (on that note, does anybody remember the analyst that this tag line was originally associated with?). It has been my experience that technical analysis, like any number of other indicators, works great... right up until it doesn't. As such, I like to keep things simple, focusing on stuff like trendlines and support/resistance zones and leaving the fancy indicators to folks much smarter than I am.

I do, however, believe in trying to listen to the "message" or "the story" that can sometimes (but not always) be derived from the charts. And as I'm guessing you've surmised by now, this is one of those times where I think it is important to see/understand the chart action that is unfolding.

First off, you'll be pleased to know that I've learned how to insert shapes in my charts. Thus, my skill set with Paint now includes lines AND circles (who said an old dog can't learn a new trick, right?). Maybe next week I'll explore the concept of adding text or something extravagant like an arrow!

There are two points that I'd like to make this fine Friday morning. First, it is fairly obvious that the S&P 500 closed Thursday perched at a fairly important juncture from a chart perspective. Thus, the next move from here could be significant. And second, I'm wondering if the current pullback (which was close to -3.25% as of Thursday's close) will be enough. So, let's get to the charts.

S&P 500 - Daily
(click to enlarge)

The chart above is the S&P 500 on daily basis since November. The black line that I've drawn in represents an uptrend line that has been intact for five months now - and therefore, it is fairly important. The key points here are that the trendline (a) has been around for awhile, (b) has been tested before, and (c) is now under attack. Thus, a meaningful close below yesterday's low, would mean that the trendline is toast (and yes, that's a technical term - well, at least at my office).

Yesterday's action is also important from a couple other perspectives. First, the decline represented a "test" of the 1540 support area. One could argue that the intraday break below the 1540 line, which as you can see, had represented a support zone going back into early March, was a bad sign as none of the other tests of this area had gone much below 1540. However, the bulls will contend that the S&P did manage to rally back to the all-important 50-day moving average by the time the closing bell rang.

This is why I inserted the oval on the chart. Contained in that oval is the uptrend line, the 50-day moving average, and the near-term support level - all at or around the 1540 level. Therefore, whether you are a fan of the charts or not, this represents an important area from a technical analysis standpoint. The bears will suggest that a break below will cause stops to be hit and technical selling to come in. And of course, the bulls will argue that a successful test of this area will lead to new highs.

But now let's turn our attention to "why" this area is important. In my humble opinion, the players in the game are currently trying to decide if the current decline is enough to discount the "growth slowing" theme that has been coming out of the economic reports. And for the record, the Philly Fed and the LEI releases added to this theme yesterday as both reports missed the mark.

Okay, on to the next chart. While this is definitely not an exact science, let's look at the weekly chart of the S&P 500 and see if we can find any clues about what to expect next.

S&P 500 - Weekly
(click to enlarge)

Starting from the left, the first two circles on the chart represent the last two times we started the year off on a string of "better than expected" economic data. As you can see, both times, the market rallied in response to the BTE theme. However, both times, the data then took a turn for the worse, leading to a springtime correction.

But if you look closely at the chart, you can see that the first decline in the circles didn't lead directly to the nastiness that eventually ensued. No, each time there was another rally that followed the initial peak and pullback phase. From my perch, this action represents "the argument" that took place over the importance or meaning of the data. And as the charts clearly show, the bears eventually prevailed (with a little help from their friends across the pond, of course).

Now turn your attention to the oval at the upper right on the chart. Doesn't this pattern look a little familiar so far? And the fact that the economic data has been coming in below expectations recently would seem to fit in with the prior chart patterns. So... should we expect the bears to rule the day again at some point soon - perhaps after another rally try? Or will this time be different?

Although I can't answer these questions, I do think it can be very helpful to understand the question being posed by the action on the charts. And from where I sit, that question is: Will the current decline be enough to discount the slowdown in the data that is occurring? Stay tuned, as I wrote earlier in the week, this is about to get interesting.

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...

Stocks look like they will follow the overseas markets and bounce higher at the open. Asian markets rose on the rebound in commodity prices which was based on talk of improved growth rates in China. Here at home, the extent of the rally depends on the index in question as the DJIA is suffering from GE's earnings results while the NASDAQ is up strong on the back of Google's latest report. The key line of resistance to watch on any rebound attempt will be the 1552 zone on the S&P 500.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: +2.16%
- Hong Kong: +2.33%
- Japan: +0.73%
- France: +1.41%
- Germany: +0.38%
- Italy: +1.93%
- Spain: +1.49%
- London: +0.60%

Crude Oil Futures: +$0.55 to $88.28

Gold: +$14.40 to $1406.90

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.705%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +7.49
- Dow Jones Industrial Average: +12
- NASDAQ Composite: +21.40

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
Thursday, April 18, 2013

Good Morning. In yesterday's missive, we explored the question of if the economy was slowing enough to cause a meaningful correction. The conclusion was that since (a) stocks tend to look ahead six months or so and (b) the indices were recently at fresh all-time highs, the market might be looking beyond the current weak(ish) economic data to brighter days in the second half of the year. However, if the data were to worsen noticeably from here, we might be in for a rough ride.

This morning I am going to expand on this theme a bit by looking at "the story" that some asset classes may be telling right now. Specifically, we'll look at what's been happening in the bond market as well as the action in the metals pits.

Let's start with the story that the bond market has been telling of late. Below is a chart of the 10-Year Treasury Note Yield.

U.S. 10-Year Treasury Yield
(click to enlarge)

First, let me apologize for my lack of skills with Paint. But with a bit of explanation, I think "the story" will be clear. From December 2012 through early March 2013, you can see that the yield on the 10-year was in an uptrend. Generally speaking, the move from 1.55% to 2.05% was in response to improvement in the economic data. The bottom line to the story here is that better data means higher yields.

So, what has been happening since mid-March? In short, the data has been coming in a bit on the punk side. In addition, the crisis in Europe began to percolate again. So, how did yields react? Yep, you guessed it; yields have fallen from 2.05% to 1.70%. Thus, the story from the bond market seems to suggest that there is some weakness in the economy - and/or very little inflation.

Now let's turn our attention to the metals market. Obviously gold has been having a rough go of it lately as the yellow metal lost about $200 in just a couple of days. While investors have become accustomed to volatility over the past five years, this move redefines the concept. In fact, Ned Davis Research tells us that the move in gold was a 7.2 standard deviation event, meaning that it would happen about once every 2.7 million years.

My colleague, David Wismer, did an excellent piece on gold's bid dive yesterday, so I'm not going to go into all the reasons behind the move again this morning. In addition, the "gold story" really doesn't correlate well to the economy. But there may be something else at work here, so I'll come back to that in a bit.

While the movements in gold may not traditionally be associated with the state of the economy (unless there is a crisis at hand, of course), copper most certainly does. So, let's see if "Dr. Copper" has a story to tell right now, shall we?

iPath Copper ETF
(click to enlarge)

I'm going to guess that you don't need a PhD in economics to get the picture here. Again, we see the general rise that began last November, indicating that the economy was improving. However, around mid-February that trend broke and has been going the other way ever since. And most importantly, this copper proxy has been going the other way in a big hurry since April 9th.

Anyone versed in global macro trading will tell you that the story from "Dr. Copper" here is clear - all is not well in the economy. However, the veracity of the decline over the past couple of weeks does make one wonder if something else - or something more - might be at hand.

Next let's look at steel. After all, while some metals such as gold and silver may be traded for other reasons, the uses of steel are pretty straightforward.

Market Vectors Steel ETF
(click to enlarge)

If you are starting to see a pattern developing here, give yourself a gold star because "the story" from the action in steel appears to be the same one coming from Copper and bond yields.

To be fair, a hefty amount of the recent downside volatility can be pinned on China as this weekend's data confirmed that the growth rate of the world's second biggest economy is not what it was cracked up to be. Therefore, the "China Demand Trade" may have encountered some selling of late.

We can also look at the story coming from the action in coal. While not a metal, coal can be tied to economic activity. In short, if manufacturing plants are increasing production they will need more coal - and vice versa.

Market Vectors Coal ETF
(click to enlarge)

Does this chart look familiar? Yea, I thought so too. So the message is "growth slowing," right?

If we are talking about the general trend of yields, copper, steel, and coal, yes, it would certainly seem that the story being told is one of slowing growth. However, if we are looking at the more recent dance to the downside, there might be something else to consider.

Whenever something extraordinary happens in the markets and there isn't an obvious catalyst associated with the move, it usually means that some hedge fund master of the universe has "blown up." In English, this means that the fund has hit its maximum drawdown allowed and/or is being forced to liquidate. And on Wall Street, forced liquidations aren't pretty. There is no manager carefully selling into strength over a period of days, weeks, or months. No, generally we're talking about somebody dumping a boatload of something on the market in a very short period of time.

Another thing that happens in these situations is that word of the liquidation gets out. And for the sharks swimming on Wall Street, this is like blood in the water. Once the Street gets wind of a liquidation, everybody jumps into the same trade at the same time. The end result? Something akin to the 7.2 standard deviation decline in gold we just witnessed.

Unfortunately, I have absolutely no proof that a big gold manager - or better yet, a big metals manager - has blown up. But since the economic "story" hasn't changed dramatically over the past week, this sure makes sense to me. So, until we know for sure, I'm not sure I'd be bombing into the "sky is falling" story that's being told by the bears right now. A "growth slowing" story is one thing, but the recent move in the metals sounds like something else. Oh, and yes, I do indeed reserve the right to be wrong on that story once all the facts are made available. But until then, I'm going to keep watching and looking for the real story.

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...

It appears that the flip-flop pattern has returned as stocks look like they will move opposite from the day before for a fourth consecutive time today. The improved mood is being led by a rebound in Europe, where a solid bond auction in Spain and hope for a resolution in the Italian elections has put some green on the screens across the pond. Finally, there are some fairly big numbers out in the U.S. this morning that bear watching. But so far at least, the futures are pointing higher in the early going.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: +0.17%
- Hong Kong: -0.26%
- Japan: -1.22%
- France: +0.88%
- Germany: +0.47%
- Italy: +1.20%
- Spain: +1.31%
- London: +0.38%

Crude Oil Futures: +$1.26 to $87.94

Gold: +$14.80 to $1397.50

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.716%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +4.84
- Dow Jones Industrial Average: +48
- NASDAQ Composite: +10.32

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.