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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
  • A Hard Lesson To Learn 0 comments
    Feb 11, 2013 8:40 AM

    Daily State of the Markets
    Monday, February 11, 2013

    Good morning. As long-time readers know, I am a card-carrying member of the-glass-is-half-full club when it comes to the big-picture outlook for both the U.S. economy and stock market. This is due to the fact that in 1995 I had a revelation that changed the way I looked at things from that point on. And to be honest, I am very thankful that I learned what turned out to be a fairly painful, yet important, lesson at the time.

    You see, I had protected client assets from the 1990 bear market (which had occurred just three short years after the Crash of '87 - an event that was still fresh in investors' minds) by turning bearish and had done a decent job with what had bordered on a bear market in 1994. As such, I had inadvertently fallen into the trap of looking for declines in order to provide outperformance. And in the process, I wound up not being as prepared as I should have been for the ensuing - and very impressive - bull run.

    A good thing about my personality though is that unlike so many in this game, I am able to recognize and admit when I'm wrong. I knew that, like baseball, the investing game was about dealing with mistakes and failures. So I didn't spend a lot of time kidding myself that I needed to be "right" all the time.

    Back in 1995, it was also positive that I had indicators and market models to lean on. And those indicators told me in no uncertain terms that the bulls were back. But as any young manager is prone to do, I decided that I "knew" better and I stayed cautious (remember, I had been successful with my "Dr. Doom" approach). Because my models were positive, I did get invested and I did make money. But not nearly as much as I knew should have.

    And that's when it hit me. The key - and the real point to this morning's missive - is that for several years I had allowed myself to "talk my book." I'd done a good job with the down markets, which felt great and clients loved it. And this justified my underperformance in the ensuing up market. However, as things improved in 1995, I realized that I had become something of a permabear. I recognized that if I had objectively identified what was actually happening in the market, I would have been much better off.

    The bottom line this morning is that I think there is a decent chance that the current crop of bears are about to learn the same lesson I did 17+ years ago.

    From that point on I decided some changes were in order. First, I needed to recognize that we live in the greatest country in the world and that in looking back at history, neither the economy nor the stock market tended to stay down for long. No, in the big picture, stocks tended to move higher over time. And while history showed also that the economy has succumbed to a recession every once in a while, the long-term trend hasn't been half bad.

    The second decision I made was that I needed a disciplined "guide" to basically keep me from myself when market environments changed. And that's when I started employing market models in earnest.

    Today, my models are much more sophisticated. They adapt to changing market environments. They employ multiple strategies. They have triggers for when to be aggressive and when not to. And they utilize multiple time-frames. But the concept is the same - I want a model that can objectively tell me which team the environment favors.

    To be sure, market models are no panacea. They, like everything else in this game, screw up and get out of whack sometimes. But for the most part, the models are pretty darned good at defining the overall market environment. And it is for this reason that I leave the forecasting to the gurus and just try and stay in line with what my models are telling me.

    With my models currently suggesting that the bulls are in charge and have earned the benefit of the doubt here, I just don't understand the bear stance. Stocks are at or near all-time highs and yet it seems there is always something to complain about and/or worry about. For example, while the S&P and NASDAQ broke higher on Friday, my furry friends could be heard yammering on about the DJIA's divergent behavior, the worry about the "sequester", the fears about Europe, and even Venezuela's currency devaluation. The glass-is-half-empty gang just doesn't seem to be able to see that the economy is improving (albeit slowly) or that earnings weren't half bad (67% of the 342 S&P companies reporting so far have beaten revenue estimates, which is up nicely from Q3's 41% and the four-quarter average of 50%).

    No, I think the bears of today are like I was in 1995. They are so worried about not getting slammed again that they can't even fathom an environment that isn't awaiting the next crisis. And yes, it may turn out - perhaps even this morning - that I was wrong to be optimistic or that there was indeed another crisis coming. But then again, that's what my models are for. So instead of being negative and assuming that trouble is around every corner, I'll simply wait until it actually shows up before I don the bear hat.

    Publishing Note: I am attending a NAAIM (National Association of Active Investment Managers) conference with early meetings Tuesday through Thursday. Thus, Daily State of the Markets reports will be published as time permits.

    Turning to this morning... Asian markets were closed overnight for various celebrations including the Lunar New Year ("The Year of the Snake"). European markets are mixed as Italy and Spain continue to pose potential problems in the region. Here in the U.S., the futures are just slightly above fair value at the present time. Our best guess is that the major indices will likely once again be pushed around by the algos today. We'd continue to watch the action surrounding the dollar.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Shanghai: closed
    - Hong Kong: closed
    - Japan: closed
    - France: +0.59%
    - Germany: +0.12%
    - Italy: -0.08%
    - Spain: -0.44%
    - London: +0.37%

    Crude Oil Futures: -$0.13 to $95.59

    Gold: -$8.00 to $1658.90

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

    10-Year Bond Yield: Currently trading at 1.976%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +1.77
    - Dow Jones Industrial Average: +13
    - NASDAQ Composite: +3.59

    Thought For The Day...

    A person often meets his destiny on the road he took to avoid it. - Jean de La Fontaine

    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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