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David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980... More
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  • Headline Headache!

    Daily State of the Markets
    Friday, July 18, 2014

    Most investors know that today's stock market can move quickly when headlines hit the wires. And most investors are aware that the reason for the oftentimes sudden and swift movements are the headline-reading algorithms that are pre-programmed to respond to certain words within those headlines as well as the accompanying stories.

    On Thursday, the algos that can "read" headlines (well, scan for words at the speed of light, anyway) had a field day.

    Rarely have investors been treated to the string of headache-inducing headlines that was seen on Thursday. Sure, there were certainly days during the European debt crisis when the news came hot and heavy. But during this, as well as the other various crises that have occurred since 2008, the headlines usually referred to the theme of the day.

    On Thursday however, there was a plethora of topics that the bears could have chosen to act on. It truly was a sight to see.

    It Started With the Politicians

    After a strong session for the blue chip indices on Wednesday, where the Dow finished at a fresh all-time high, traders awoke to see European bourses down 1 percent or more and the S&P futures down double digits. The culprit was the newly announced sanctions by the U.S. and EU against Russia. Here's the story...

    The new sanctions against Russia were put in place after leaders in the West agreed that Moscow has failed to sufficiently diffuse the situation in eastern Ukraine. The White House announced that the new measures will hit large banks, energy firms and defense companies. This included banks Gazprombank and Vnesheconombank and energy companies Rosneft and OA Novatek.

    The EU also imposed new sanctions, but they were not quite as strict as those from the U.S. The EU said they would ask the EU-owned European Investment Bank to suspend new investment in Russia. They will also seek suspension of new lending by the European Bank for Reconstruction and Development.

    Russian President Putin responded by saying the latest sanctions announced would strain relations with the U.S. and would hurt both Russian and US businesses. Russian Prime Minister Medvedev said that the measures would achieve nothing and would encourage anti-US sentiment in Russia. He suggested that it will drive Russia to boost defense and security spending. And the Russian media cited a Kremlin statement that said it reserves the right to take retaliatory measures. Super.

    Then Jets Started To Fall From the Sky

    While a 12-point move in the S&P futures was certainly an eye-opener at 5:15 am, it was by no means a game-changing move. However, given the relative lack of volatility that this market has seen lately, the move definitely caused traders to sit up and take notice.

    But after the anticipated move down at the open on Wall Street, the dip-buyers returned in earnest. By 10:00, the S&P 500 was back to even and the Dow was hitting another all-time high on an intraday basis.

    But then the reports of jets falling out of the sky began.

    First there were reports that a military fighter jet had been shot down in Ukraine. Reports were sketchy and given that this was likely a military operation, there was little press coverage. Or perhaps the next headline was simply too overpowering for anyone to care.

    At about 11:00 am eastern, word was that a Malaysian airliner had crashed in eastern Ukraine. Within minutes the Twittersphere was on fire with reports that the passenger get carrying nearly 300 passengers and crew had been shot down by a surface-to-air missile.

    The problem for the markets wasn't the fact that a human tragedy had occurred. No, this was about the potential for WWIII to commence.

    I tweeted that the key to the rest of the session was whether or not the airliner had been shot down by either the Ukraine or Russian military - or if this was the work of "terrorists". In other words, if shooting down a civilian airliner was an "accident" or the work of individuals, stocks would be okay.

    Key to today's session: If a "terrorist" shot down the plane, stocks are ok. If "military" on either side did - it's a problem.

    - StateOfTheMarkets (@StateDave) July 17, 2014

    The reports, as well as the accusations out of Ukraine came fast and furious. But eventually it became clear that this had NOT been the work of either country's military. And as stocks began to rally once again, CNBC's floor reporter remarked that the market's reaction had been muted so far.

    A Fed-Head Chimes In

    Next up, St. Louis Fed President James Bullard made headlines by saying that the U.S. economy was reaching the Fed's goals faster than anyone had expected.

    Adding fuel to headline-reading algo's fire, Bullard reiterates that Fed may need to raise rates sooner than anticipated.

    - StateOfTheMarkets (@StateDave) July 17, 2014

    Although everyone was focused on the tragic airline crash, the headline from Bullard made traders realize that the Fed might be trying to collectively send a message to the markets. Given that the idea of raising rates sooner than most analysts anticipate has been repeated by various Fed officials lately, it was becoming clear to traders that the Fed is likely talking about a rate hike before June of next year.

    And yes, the algos noticed.

    Next, Israel Decides to "Take it Up a Notch"

    Just about the time you thought things couldn't get any worse, the headlines blared that Israel had begun a ground offensive into Gaza.

    While this conflict has been in place for some time now, Israel deciding to take the game to the next level added fuel to the geopolitical fire on Thursday.

    There's an Issue at the White House, Seriously?

    In what could only be describe as an "Oh, for heaven's sake" moment, late in the trading session, the headlines announced that the White House was on lockdown.

    The problem was an "unattended package on the north fence." And while the situation was quickly diffused, this appeared to be the straw that broke the camel's back in terms of the U.S. stock market "holding up" in the face of all the negative headlines.

    Suddenly, it was "sell first, and ask questions later." The trend-following algos jumped on board and the S&P dove another 14 points.

    While the bulls were to be applauded for their efforts to hold the line for much of the day, the unending string of headache-inducing headlines were simply too much to overcome. And in the last hour, the market "whooshed" lower.

    Oh, and 44 Hedge Funds Are Involved in New Insider Trading Probe

    After the close, the hits kept on coming. Google missed on EPS (although revenues and other metrics were strong enough to cause the stock to rise). IBM disappointed. And the SEC announced that 44 hedge funds were under investigation for insider-trading.

    According to Bloomberg, which cited an SEC filing, a regulatory investigation of insider trading concerning the U.S. House Ways and Means Committee involves 44 hedge funds, including 25 funds located in New York. Awesome.

    So there you have it... If there was any question about why stocks suddenly and without warning went into a tailspin yesterday, now you know why.

    The question of the day, of course, is if this was simply another in a long string of one-or-two-day wonders or the start of the meaningful correction that just about everyone on the planet has been calling for. Today's action should tell us a lot. So if you are planning on being at the beach or on the golf course, it might be a good idea to check in every once in a while.


    Looking For Investment Management Help?

    Check out Heritage Capital Research's NextGen Active Risk Manager
    Or call Heritage for more information at (847) 807-3590


    Turning to This Morning...

    The focus this morning remains on what exactly happened to MH17. U.S. intelligence believes that while it was indeed a surface-to-air missile that downed the airliner, killing all 298 people on board, the question remains, who fired the missile? Russia is blaming the Ukraine government. Ukraine blames pro-Russian separatists. In addition, the other geopolitical issues continue to be focal point of the markets this morning. Despite the negative session in Europe, where traders are also concerned about the state of the economy, U.S. stock futures are pointing to a modest rebound at the open.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -1.00%
    - Hong Kong: -0.28%
    - Shanghai: +0.17%
    - London: -0.39%
    - Germany: -0.63%
    - France: -0.12%
    - Italy: -0.12%
    - Spain: -0.77%

    Crude Oil Futures: -$0.03 to $103.16

    Gold: -$7.10 at $1309.30

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

    10-Year Bond Yield: Currently trading at 2.475%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +4.23
    - Dow Jones Industrial Average: +39
    - NASDAQ Composite: +16.94

    Thought For The Day...

    Find the good. It's all around you. Find it, showcase it & you'll start believing in it. -Jesse Owens

    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.

    Jul 18 8:39 AM | Link | Comment!
  • Indicators Suggest A Pullback Might Be Near, But...

    Daily State of the Markets
    Thursday, July 17, 2014

    One of Dave M's partners at Numetrix Capital, Paul Schatz, is filling in for Dave this morning. Here are Paul's latest thoughts on the "state of the markets."

    Good morning. The Dow hit yet another all time high yesterday and there hasn't been a 10%+ correction in 35 months. When stocks opened sharply lower on July 10th, the bears came roaring out of hibernation calling for everything from a 10% correction to the end of the bull market. It was a sea of ugly red prices on my screen due to Portuguese bank worries, and weak China data. That decline didn't even last a full day. Nor did the decline based on the -2.9% GDP print or Yellen's previous press conference or a host of other headlines that were quickly absorbed.

    I just cannot understand why more people are not excited about this market. It has truly been a bull market for the ages. The masses just keep hating and disavowing and predicting doom and gloom while the rest of us are smiling ear to ear for as long as we can. Bull markets do not end overnight and while this one continues to be old and wrinkly, it is generally healthy.

    Because I am running out of ways to celebrate after all these years, I thought I would spend some time exposing some of small cracks in the pavement.

    What can the bears hang their hats on?

    For now, the S&P 400 and Russell 2000 are seriously lagging the Dow, S&P and Nasdaq. High yield bonds, a major canary in the coal mine, have been lagging for almost a month. The NYSE advance/decline line has not confirmed the recent all time highs and has been lagging all month.

    Is that enough to end the bull market? Hardly, but it could certainly spell market pullback at any given time. Have we had these types of warnings before? Yes, many, many times during this bull market with most common outcome being a short-term pullback.

    Weakness remains a buying opportunity and the Dow should continue to power higher to 17,500, 18,000 and perhaps even higher before all is said and done.

    Paul Schatz

    Paul Schatz is President and Chief Investment Officer of Heritage Capital, LLC, in Woodbridge, CT. Paul developed and manages all eight of the firm's currently offered investment programs.


    Looking For Investment Management Help?

    Check out Heritage Capital Research's NextGen Active Risk Manager
    Or call Heritage for more information at (847) 807-3590


    Turning to This Morning...

    Just after yesterday's close, the U.S. and EU announced further sanctions against Russia in response to Russia's alleged support of separatists fighting in the Ukraine. Russian President Putin said sanctions would take U.S./Russia relations into a dead end and cause very serious damage. As a result, Russia's RTS stock market fell -3% Thursday, leaving it down -5.4% on the week. As one might expect, oil and gold are moving up and bond yields are down this morning. However, none of the moves are alarming at this stage. European bourses have declined on the new sanctions and U.S. futures are following suit, with the bears appearing to gain momentum in the last hour.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.06%
    - Hong Kong: -0.01%
    - Shanghai: -0.55%
    - London: -0.61%
    - Germany: -0.80%
    - France: -0.99%
    - Italy: -1.35%
    - Spain: -1.06%

    Crude Oil Futures: +$1.25 to $102.45

    Gold: +$2.40 at $1302.70

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

    10-Year Bond Yield: Currently trading at 2.516%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -8.97
    - Dow Jones Industrial Average: -49
    - NASDAQ Composite: -21.00

    Thought For The Day...

    Great things don't emanate from the comfort zone...

    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.

    Jul 17 8:07 AM | Link | Comment!
  • Which Matters More: Yellen Or Earnings/Econ Data?

    Daily State of the Markets
    Friday, July 16, 2014

    The big event of Tuesday was Federal Reserve Chairwoman Janet Yellen's semi-annual testimony on monetary policy before the Senate Banking Committee. No one really expected Ms. Yellen to break any new ground with her prepared testimony. So the key for traders was to listen to the tone of the Fed Chair's testimony and more importantly, how she responded to the Senator's questions.

    While Yellen's prepared remarks and the vast majority of the Q&A session did not provide any new, meaningful insight on the Fed monetary policy, the session with the Senate Banking Committee did wind up moving the markets.

    On the policy front, the key takeaway was that Ms. Yellen wasn't quite her usual uber-dovish self. No, the bottom line is she was seen as slightly more hawkish than expected. Not a big deal really, but the "tone" was worth noting.

    Specifically, Ms Yellen said, "If the labor market continues to improve more quickly than anticipated by the [Fed], then increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned."

    Remember, the Fed has kept short-term rate near zero since late 2008 and that the consensus expectation for the Fed's first rate hike is June 2015 or slightly thereafter. So, given that Yellen's testimony and the way she worded her responses (which stressed that the Fed would be data dependent going forward) was slightly less dovish, analysts believe that the door may now be open for rate hikes to occur sooner than expected.

    The Big Surprise

    As tends to be the case around any Fed-related event, the market was fairly volatile while Yellen was testifying. The bottom line here is the HFT algos were trained on both the prepared testimony and then every single word that came out of the Fed Chair's mouth during the Q&A session. Therefore, there were several spikes during the testimony yesterday - all to the downside.

    Some in the financial press called it Yellen's "Irrational Exuberance" moment (referencing Alan Greenspan's suggestion that the stock market had gotten a bit out of hand in the late 1990's). The big surprise in Ms. Yellen's speech appeared to be not one, but two references to the idea that valuations had become stretched in the areas of biotech and social media.

    Picking on Biotech and Social Media

    Since Ms. Yellen's comments on the two embattled sectors came from her prepared testimony, this was NOT a slip of the tongue. No, the Fed Chair apparently wanted to send a message.

    Yellen wrote: "...Valuation metrics in some sectors do appear substantially stretched-particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year."

    It was surprising enough for the Fed Chair to mention specific industry groups, which have absolutely nothing to do with monetary policy, the economy, or inflation, which are the Fed's traditional bailiwicks. However, Yellen brought up the stock market valuation issue a second time in her testimony.

    Yellen also wrote: "Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched," she said, "with ratios of prices to forward earnings remaining high relative to historical norms."

    The Algos Respond

    The news-feed algos are pretty good at identifying potential market-moving issues and this time was no different. Boom - biotech (NYSEARCA:XBI), social media (NASDAQ:SOCL), internet(NYSEARCA:FDN), and small caps (NYSEARCA:IWM) were hit with sell algos.

    SPDR S&P Biotech ETF (XBI)

    As the graph of the XBI clearly illustrates, traders and their ultra-fast computers sold the former momentum names in earnest on Tuesday. And given that the XBI appeared to break down into a downtrend, one could argue that the momentum meltdown trade could be "on" again.

    Yellen Trumps Earnings

    It was not surprising to see the market focus on Yellen's comments about the mo-mo names and the small caps. However, it was also interesting to note that Yellen's valuation call basically trumped positive earnings and some pretty good economic data.

    For example, the earnings from Citi (NYSE:C), JPMorgan (NYSE:JPM), Goldman (NYSE:GS), Johnson & Johnson (NYSE:JNJ) and Intel (NASDAQ:INTC) were ALL better than expected on both the top and bottom lines. Heck, Intel even raised guidance for the coming quarter. Not bad.

    In addition, the Empire Manufacturing Index, which measures business conditions in the New York region came in at 25.6 in July, which was a 4-year high and well above the consensus for 16.8 and last month's reading of 19.3.

    So... the question of the day is what will drive the markets going forward. Will it be Yellen's valuation call and the potential for rates to rise sooner than expected? Or will the improving earnings/economic data will drive the markets. Stay tuned.


    Looking For Investment Management Help?

    Check out Heritage Capital Research's NextGen Active Risk Manager
    Or call Heritage for more information at (847) 807-3590


    Turning to This Morning...

    Traders are looking on the bright side this morning as Intel's earnings, China's GDP, the IBM and Apple Deal, and the gains in European bourses have combined to put Janet Yellen's comments about the timing of rate hikes and the valuations of small caps, biotech and social media stocks in the rear-view mirror. China's GDP, Industrial Production, and Fixed Asset Investment data were all better than expected and European stock markets are up strongly this morning. As such, S&P futures are pointing to a strong open on Wall Street.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.10%
    - Hong Kong: +0.27%
    - Shanghai: -0.16%
    - London: +0.98%
    - Germany: +1.42%
    - France: +1.48%
    - Italy: +2.16%
    - Spain: +1.48%

    Crude Oil Futures: +$0.70 to $100.74

    Gold: unch at $1297.10

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

    10-Year Bond Yield: Currently trading at 2.548%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +8.92
    - Dow Jones Industrial Average: +56
    - NASDAQ Composite: +29.90

    Thought For The Day...

    A word of encouragement after failure is worth more than an hour of praise after success.

    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.

    Jul 16 8:39 AM | Link | Comment!
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