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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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Daily State of the Markets
  • Understanding The Way The Game Is Played Sometimes 0 comments
    Nov 26, 2012 8:13 AM

    Daily State of the Markets
    Monday, November 26, 2012

    Good Morning. The day after Thanksgiving is traditionally a quiet session where anyone actually at their desks winds up questioning their decision and doing a lot of online shopping. However, this time around stocks exploded higher with the DJIA gaining 173 points. The move capped off a week in which the indices gained ground each day and put up the best weekly performance in over two months. To anyone long the market, Friday's action produced a smile by the time the closing bell rang. But the joyride to the upside also left a lot of folks scratching their heads.

    Despite the holiday-like session, I received a handful of calls from colleagues on Friday - all asking the same question: What the heck is going on here? Make no mistake about it; these were investment professionals looking for answers. And no, I'm not talking about financial planners or "wealth advisors," these calls were from fellow money managers trying to make sense of the sudden blast.

    One caller, who had admittedly been "out at the mall" in the early morning wanted to know the news that triggered the spike up. He assumed that there had either been a breakthrough on the latest Greece deal (which is expected to come early this week), some dovish comments regarding the fiscal cliff negotiations, or perhaps a more permanent arrangement in Gaza. And then before I could answer, he also threw out the idea that perhaps some early "Black Friday" sales numbers had been released.

    When it was my turn to speak, I suggested that all of his ideas were certainly logical and that he was definitely on to something with the assumption that the move was tied to a headline. And then, just for fun, I informed my friend that he might have forgotten about the potential impact of the recent economic data as the German IFO Business Climate Index rose for the first time in 7 months and that China's Flash PMI had moved back up into the expansion mode for the first time in 13 months. After a pause, he responded with "Nah, those data points are enough to trigger this kind of a response."

    I then immediately admitted that he was right, as the German IFO and Chinese Flash PMI numbers, while strong and definitely BTE, wouldn't trigger a gain of 1.3% on a day in which nobody was home. Having had my fun, I quickly admitted that it was indeed a headline out of Europe that seemed to be triggering the buying. "But," I said, "it wasn't the headline you might have expected and the market reaction isn't completely intuitive."

    I went on to inform my colleague that it was the breakdown in the EU budget talks that was getting all the attention. "Hmmm..." he replied. "What was the exact headline?"

    I said that there were actually two headlines from Europe today. The first was, "EU Budget Talks Break down." And the second was, "EU Leaders Summit to Discuss Long-Term Budget Called Off." To which my friend replied, "Ooh, that doesn't sound good."

    "That was my exact reaction too when I heard the news," I said. But I then explained that after a couple of minutes with the key charts, it all made sense to me. "Do tell," he replied.

    I told my friend to pull up a chart of the euro. And after a brief pause I heard "WOW!" on the other end of the phone. "Why on earth is the euro soaring?" he demanded. I said that the answer required a bit of financial gymnastics but proceeded to explain that the talks involving the long-term budget for the EU involved something like a trillion euros of austerity measures. "As such," I explained, "Calling off the talks and pushing them into next year means that government spending in the Eurozone won't decline, which is good for the economy, and in turn, good for the euro."

    "Ah, that makes perfect sense," my friend replied. He went on to say, "But the move in the euro seems a bit bigger than I might have expected. And holy moly, look at the dollar!"

    My response was short and to the point, "Exactly - now you've got it." I went on to opine that the outsized move in the euro likely triggered a fair amount of algo-induced short-covering as well as the related computer-driven selling in the dollar. "Which, in turn..." I began. But before I could get to the big finish, my friend beat me to the punch with, "Which, in turn... Leads to a "risk on" trade in stocks, emerging markets, gold, materials, etc!"

    My colleague went on to say, "Of course, that makes perfect sense - thanks for walking me through that." I said that I was glad to help and proceeded to open up a discussion about the likelihood of the new-found "risk on" trade hanging around for a while. After a quick back-and-forth on the subject, we concluded that a flip of my lucky peso (which is reserved for only the really big decisions) was probably in order.

    With the mystery of why stocks exploded higher on Friday solved, we turned our attention to this week. I reminded my friend that Congress was returning to Washington and that the parties involved with the fiscal cliff would likely do some negotiating in the press. "Therefore, we probably should expect the market's ride to get bumpy in the near term," I offered. To which he replied, "You got that right, that's how this game is likely going to be played."

    Turning to this morning... Although Aisan markets were mostly higher overnight, concerns over the fiscal cliff (there has been no progress made in the last 10 days) as well as renewed worries in Europe are pushing European markets and U.S. futures lower this morning.

    On the Economic front... We will get the Chicago Fed National Activity Index as well as the Dallas Fed report this morning.

    Thought for the day... Go in the direction of your dreams. Live the life you've imagined. -Thoreau

    Pre-Game Indicators

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

    • Major Foreign Markets:
      • Shanghai: -0.51%
      • Hong Kong: +0.55%
      • Japan: +1.81%
      • France: -0.87%
      • Germany: -0.38%
      • Italy: -0.56%
      • Spain: -0.73%
      • London: -0.62%
    • Crude Oil Futures: -$0.37 to $87.91
    • Gold: -$0.40 to $1751.00
    • Dollar: higher against the yen, euro and pound
    • 10-Year Bond Yield: Currently trading at 1.667%
    • Stock Futures Ahead of Open in U.S. (relative to fair value):
      • S&P 500: -7.65
      • Dow Jones Industrial Average: -73
      • NASDAQ Composite: -10.79

    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. (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.

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