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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
  • Will The Worry Stick? 0 comments
    Feb 25, 2013 8:11 AM

    Daily State of the Markets
    Monday, February 25, 2013

    Good morning. Our furry friends in the Bear camp tried their darndest to play the worry card last week. And given the fact that the S&P 500 wound up with the first losing week of the year, I guess we will have to admit that they succeeded to some degree. However, given the "excuses" offered for the two-day dance to the downside and the quick rebound on Friday, I'm not entirely sure that the glass-is-half-empty gang will be able to convince investors that they should be quaking in their boots right now.

    On Tuesday, stocks broke to new highs for the current bull market cycle. At the close, it appeared that despite the kicking and screaming by the nattering nabobs of negativity about the overbought condition and all the bad stuff still "out there," a new leg of the uptrend was about to begin. But after being shut out of the game for just about every session of the year so far, the bears then proceeded to find a way to scare people on Wednesday. And before you could figure out which type of algo was being run, Tuesday's breakout had turned into a fakeout.

    Although the majority of the damage done last week occurred in less than two hours (over Wednesday afternoon and Thursday morning), suddenly fear was in the air. Suddenly traders were no longer confident that the Fed would continue to support the economy. Suddenly there were worries about China. Suddenly traders cared about Europe again. And although the data has been pretty darn good of late, suddenly the U.S. housing market was a concern. Believe it or not; in just two short hours, the worry was back and the bears looked to be making a comeback.

    The problem was that if one was objective in their view, the impetus for all the worry was a bit of a stretch. If you will recall, the sell programs started in earnest on Wednesday after the Fed minutes indicated that "many" FOMC members were concerned about the long-term impact of extended quantitative easing. While the argument that the Fed might pull the punch bowl from the QE party sooner than had been anticipated seemed to make sense on Wednesday, by Friday morning the idea seemed almost silly.

    Remember that Ben Bernanke's Fed emphasizes transparency. Thus, if Gentle Ben was contemplating any kind of change, we'd likely hear about it first. In addition, the minutes indicated that (a) there didn't appear to be any discussion about the potential timeframe for the tapering or outright ending of asset purchases, (b) there was no strategy for said tapering discussed, and (c) there was a rather vigorous defense of the QE programs by the more dovish members of the FOMC (which likely included Chairman Bernanke and Vice Chair Janet Yellen).

    Then on Thursday, six of the seven economic reports in the U.S. and the only report in Europe that really mattered, were all weaker than expected. In short, after this batch of data, the idea that the Fed would stop supporting the economy any time soon didn't have a lot of support.

    And finally on Friday, St. Louis Fed President James Bullard told CNBC that the FOMC was likely to keep rates low for a "very long time." So, the folks screaming that the sky really is going to fall sometime soon because of the Fed really didn't have a leg to stand on. As such, stocks rallied Friday, with the Dow and S&P both erasing Thursday's entire decline - and then some.

    Whenever stocks move up and down as quickly as they did last week, we assume that one of the moves was "false" or, at the very least, not completely justified. Not surprisingly, the bears will contend that the fakeout move was Friday's as the Italian election and the sequester is bound to put worry back in the game come Monday. (Italians go to the polls on Monday and March 1st is the deadline for the sequester - although we have learned that a deadline in Washington is really nothing more than a general guideline).

    On the other side of the court, our heroes in horns contend that the "B.S. buzzer" could be heard sounding loudly after Wednesday's decline and that Thursday's drop was merely technical in nature.

    So, will stocks start another dance to the downside this week or resume this year's joyride to the upside? To be sure, I don't have an answer as my goal is to merely try to stay in tune with the environment. Thus, I'll be watching last week's levels for clues. But from my perch, the question of the day is if the worry will stick.

    Turning to this morning... Futures in the U.S. are following the global markets higher in the early going. Chinese markets rallied despite the weakest HSBC PMI reading in four months while European markets are surging in spite of UK's debt downgrade. Some suggest the low voter turnout in Italy and the likely selection of a QE dove for the BOJ as catalysts for the move. However, the early exit polls in Italy should start rolling in around 9:00am eastern, which will be something to watch.

    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: +0.16%
    - Japan: +2.43%
    - France: +1.88%
    - Germany: +2.48%
    - Italy: +2.38%
    - Spain: +1.92%
    - London: +0.75%

    Crude Oil Futures: +$1.07 to $94.20

    Gold: +$18.80 to $1591.60

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

    10-Year Bond Yield: Currently trading at 1.972%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +8.95
    - Dow Jones Industrial Average: +64
    - NASDAQ Composite: +20.62

    Thought For The Day...

    The way I see it, if you want the rainbow, you gotta put up with the rain. -Dolly Parton

    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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