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David Moenning is a the proprietor of StateoftheMarkets.com. In addition to providing free and subscription-based portfolios on "State", Dave is a full-time money manager and the President and Chief Investment Strategist of a Chicago-based Registered Investment Advisory firm. Dave... More
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Daily State of the Markets
  • Are Traders Preparing For The Worst? 0 comments
    Oct 3, 2012 8:37 AM

    Daily State of the Markets
    Wednesday, October 3, 2012

    Good morning. As we've been discussing lately, the recent "tape action" seen in the market hasn't exactly been stellar. In fact, it's been pretty crummy overall and downright ugly at times. Over the past thirteen sessions, the bulls can to point to exactly one decent day while our friends in the bear camp are quick to point out that there has been at least one bout of intense intraday selling in twelve of the thirteen days in question. And once again yesterday, the sell programs seemed to dominate the majority of the intraday action.

    For a while Tuesday morning, it appeared that the algo's designed to sell stocks were being run on the half-hours. Every thirty minutes, the market would succumb to a big batch of sell programs and take another hit. As such, once again the early bounce higher was quickly erased as program after program took the indices to new lows for much of the day.

    The standard answer to the question of why the quants continued to favor the sell side was that Spain's PM Rajoy had said that a formal request for aid from the EU/ECB "was not imminent." This came after an earlier report stated that Madrid was getting closer to asking for aid and that such a request could come as soon as this weekend. So, as one might have expected, the programs took the Rajoy headline and pounded the indices lower.

    However, if one had been paying attention, the ongoing selling didn't seem to make a lot of sense. You see, the initial Reuters report talked about the idea that Spain was getting close to asking for help. The report did not state that the request was expected over the weekend - no, it stated that Rajoy could make the move as soon as this weekend. So, while a knee-jerk reaction to the headline made sense (computers are good at recognizing headlines, not thinking), the ensuing sell programs did not.

    Given that the programs have not exactly been programmed to receive lately, I'm wondering if there might be something more at work here. While the algo's can and often do change their tune in a matter of minutes (stocks did in fact finish with a nice little run to the upside yesterday over the last hour), I'm guessing that the prevailing negative attitude might be tied to the idea of traders preparing for the worst.

    Front and center here is the upcoming earnings season. It is no secret that earnings growth in Q3 is expected to be weaker than anything we've seen recently. Given that analyst expectations have been coming down over the past couple of months and that the U.S. economy clearly hit another summer speed bump, it doesn't take a rocket scientist to see that there could be some downside risk to the reports. As such, the hedgies (who have largely missed this year's joyride to the upside in stocks) may be cutting back exposure in front of the earnings parade.

    Traders may also be preparing for the worst on the Europe front. Don't look now fans but Greece is back in the news. And if you've been paying attention at all over the past three years, you will agree that Greece has had a tendency to (a) miss its budget targets and (b) create market volatility in response to whatever deadline is on the table at the time. So, with the Troika currently going over Greece's books and a deadline on aid decisions due next week, well, traders may be looking to sidestep the next chapter in the ongoing Greek tragedy.

    And finally, there is China. While logic would dictate that the once-a-decade change in Communist leadership (slated to occur on November 8) would lead to a pickup in stimulus activity once the new group takes over, there is a lot of talk these days about China coming up short on the stimulus front. The thinking is that China may decide to under stimulate their economy, which, given the mess in Europe and the flagging growth in the U.S., would leave the global economy without an engine. I'm not suggesting this will be the case, mind you, I'm simply pointing to another area where traders could be preparing for the worst.

    Yet, despite all the crummy "action" and the seemingly relentless sell programs, it is important to note that (a) our market environment models continue to suggest that the bulls be given the benefit of the doubt here and (b) the bears haven't been able to get much going to the downside. In fact, the S&P 500 is just -1.37% below its recent high, which was put in on September 14th. So, while the intraday action has been lousy lately and traders may indeed be preparing for the worst, so far at least, the current phase looks more like a run-of-the-mill consolidation phase than a precursor to a big dive. Here's hoping it stays that way.

    Turning to this morning... Stock futures once again are pointing to a higher open for Wall Street in response to the ADP Employment report. However, the key question is if recent trend of intraday selling will continue today. Stay tuned.

    On the Economic front... We get a look at the ADP Employment and ISM Non-Manufacturing reports this morning.

    Thought for the day... "Economists were invented to make weathermen look good" - Anonymous

    Pre-Game Indicators

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

    • Major Foreign Markets:
      • Shanghai: closed
      • Hong Kong: +0.23%
      • Japan: -0.44%
      • France: -0.30%
      • Germany: +0.04%
      • Italy: +0.13%
      • Spain: -0.62%
      • London: +0.08%
    • Crude Oil Futures: -$0.72 to $91.17
    • Gold: +$4.50 to $1780.10
    • Dollar: higher against the yen, lower vs. euro, and pound
    • 10-Year Bond Yield: Currently trading at 1.614%
    • Stock Futures Ahead of Open in U.S. (relative to fair value):
      • S&P 500: +7.26
      • Dow Jones Industrial Average: +12
      • NASDAQ Composite: +7.46

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave

    Download our Special Report on our New "Adaptive" Active Risk Management System for the Stock Market


    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. (NASDAQ:HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission 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.

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