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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
  • What's Your Investing Frame Of Reference? 0 comments
    Jan 24, 2013 8:20 AM

    Daily State of the Markets
    Thursday, January 24, 2013

    Good morning. To the bears or any of the "fast money" types who believe that stocks simply cannot go any higher in the near term because the indices are "overbought," the recent action must be incredibly frustrating. I know lots of folks who have put on hedges, raised cash, and/or started to sell short recently because, in their words, "the market can't go much higher." However, while stocks are certainly overbought and perhaps due for an Apple-induced pullback in the near-term, I learned a VERY long time ago that it doesn't pay to tell Ms. Market what she can and can't do.

    One problem that many investors (professionals and amateurs alike) have relates to their investing experience or what I like to call their "market frame of reference." In other words, investors assume that going forward; the market will continue to act as it has acted in the past. The only problem here is that while a trader with 10 years of experience right now may think they've "seen it all," they've really only seen one type of market cycle. And it is for this reason that there are so many people saying that stocks just can't possibly advance from here.

    Think about that for a second. For anyone who has been trading/investing for anything less than thirteen years, their frame of reference for the stock market is an uber-volatile, uber-nasty secular bear market that is occasionally interrupted by some decent moves to the upside. This has been a market where the S&P 500 hasn't seen any real progress since the heady days of the tech bubble... A market that usually winds up succumbing to substantial declines at least a couple times a year... And a market where the next BIG decline is not a question of "if" but "when."

    Compare this "market frame of reference" to someone who started investing in the early 1980's. By the time the Y2K thing came around, their frame of reference was completely different. Buy-and-hold was king. Buying the dips was the only real intelligent strategy. And accessing your credit cards to add more money to your margin account wasn't considered outrageous at all. After all, history had shown that bear markets only showed up once in a blue moon and that the bulls had always resumed their charge shortly thereafter.

    So, ask yourself a question: What's your "market frame of reference?" Is your investing experience based primarily on the last 13 years? Or are you a grizzled veteran like myself that's been lucky enough to have seen both types of secular environments?

    For those of you that haven't enjoyed the good times, let me assure you that they will return at some point. And the fact that you are likely rolling your eyes at this thought means that the next secular bull market may begin sooner than you might think. For once people become convinced that stocks are never going to work again for the long-term, well, they usually do.

    One argument in favor of the idea that the secular trend may soon change is what is being called "the great rotation." In a recent article, CNBC defined this as "a tilting of pension and insurance funds' strategic, long-term asset preference back toward equity from extreme positioning in bonds." In other words, given that (a) bonds have enjoyed a 30+ year bull market, (b) yields are near historic lows (c) yields are being kept artificially low by the Federal Reserve, and (d) barring another external shock, the global economy is projected to rebound in the coming months, the really big institutional managers may be starting to move money from bonds back into stocks.

    To be sure, the only way we will know this is happening is via some diligent research and a healthy dose of hindsight. However, one of the footprints left by such a move will be the return of a "buy the dip" mentality. So, if "the great rotation" is underway (and I have no proof yet that it is) then we should expect any upcoming declines in the market to wind up being rather pedestrian relative to what we've seen over the past 4 years.

    So, as I wrote yesterday, we should look forward to the next corrective phases as they may provide us valuable clues about the type of environment can expect in the coming years. And the bottom line is I think we will have a clue on this score by the time summer rolls around.

    Turning to this morning... Overnight markets were impacted primarily by Apple's disappointing earnings report. However, unlike the big dive that is occurring in the in the NASDAQ futures, Asian and European markets are mixed with any declines being modest. Here at home, the S&P futures currently point to a decline of a few points while the DJIA futures are actually higher. Thus, it will be interesting to see if the Apple doom will take over the market after the opening bell rings.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Shanghai: -0.77%
    - Hong Kong: -0.15%
    - Japan: +1.28%
    - France: +0.05%
    - Germany: -0.10%
    - Italy: -0.02%
    - Spain: -0.05%
    - London: +0.34%

    Crude Oil Futures: +$0.30 to $95.53

    Gold: -$10.60 to $1676.20

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

    10-Year Bond Yield: Currently trading at 1.815%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -2.46
    - Dow Jones Industrial Average: +7
    - NASDAQ Composite: -31.27

    Thought For The Day...

    No one has ever made himself great by showing how small someone else is. - Irvin Himmel

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave

    In his latest video presentation, Dave M. walks you through the 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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