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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
  • "You Were Wrong!" 0 comments
    Mar 21, 2013 8:11 AM

    Daily State of the Markets
    Thursday, March 21, 2013

    Good Morning. The first words of the conversation definitely got my attention. After confirming that he did in fact have the guy making the decisions on the market, the caller, in a not-so friendly tone, bellowed into my ear, "You were wrong!" Although this assault was likely designed to get a charge out of me, I decided to be diplomatic and replied, "Could you be more specific?"

    I quickly proceeded to explain that in the business of investing other people's money, we are "wrong" somewhere in our portfolios each and every day. Even in the most rip-roaring bull markets, you are bound to have a position or two scattered amongst your holdings that isn't behaving as you'd like. As such, being "wrong" is just part of the job description. Good investors learn to deal with this issue and have a plan to deal with being "wrong," while beginners let red numbers define them and/or make them feel dumb.

    It turns out that this particular caller was upset that in our active risk management strategy for the U.S. stock market, we had exited our long positions on Tuesday only to then re-enter them (albeit in a lower beta fashion) on Wednesday. Given that (a) it was possible that a new "spring crisis" was brewing, (b) the market had traded rather spastically over the last two days, (c) everyone on the planet had been calling for a meaningful correction (something that has happened every spring for like a decade running), and (c) we had locked in a nice gain on the position we sold, I didn't really understand the problem.

    Even after the caller explained that we had gotten whipsawed by buying higher than we had sold the day prior, I struggled to understand why he was upset. After all, we had "missed" just one day and the DJIA had advanced just 56 points during our time-out. I proceeded to explain that when our Market Environment Model (which is designed to tell us, as you might suspect, which team the current market environment favors) is neutral, we utilize a short-term trend following strategy in this program. I then added that during these neutral, or what I like to call "iffy" times, our objective is to try and stay on the right side of the short-term trend. "The goal" I said, "is to be there when the next big, important move happens in the market." I finished by patiently outlining the fact that the trade-off for "being there" when the next big move begins is that we will get whipsawed during these "neutral" market environments. "It's just part of the deal," I said.

    To my utter amazement, the man told me, and in no uncertain terms, that he wasn't paying me to be wrong. "You are a professional. You are experienced. You say you understand the markets. So, get it right next time - or else."

    "Or else... what?" I replied.

    "Or else, you get fired, that's what," came the words on the other end.

    Having had this, or some variation of this conversation a few times over the past twenty-five years, I decided to continue to be professional and polite (well, at least up until the time I told him to take his business elsewhere). I said, "Look, while I don't want to suggest that your point of view is wrong, you do understand that the stock market is tricky, right?" Without pausing, I continued. "I've been at this a very long time and I've made my share of mistakes, but following a disciplined approach isn't one of them. As I explained a moment ago, when the market is overbought and the risk of a correction is high, our systems are designed to take less risk. So, if the short-term trend breaks down, we move to the sidelines. And then if the market rebounds, we jump back in."

    I went on to explain that such an approach may "sound" dumb or maybe even "wrong" but that there is simply no way on earth to be right all the time. "The overall goal" I added, "is to get the majority of the big moves right. And this is what our strategy is built for." I then went for the big finish. "I can tell you with absolute certainty that we WILL be "wrong" from time to time. I know for a fact that we will look "dumb" on occasion. And experience has taught me that this is okay - as long as you are getting the bigger moves right."

    "Well Dave," (apparently we were on a first-name basis now) "that's just not good enough for me. I'll think about what you said, but I will probably be calling back tomorrow to fire you." I chuckled and told him that there was no need and that we would take care of "firing us" yet this afternoon. I almost told him to call me back when he realized that he was actually the one that was wrong here. But, I resisted the urge and hung up knowing that if everybody was "right" in this game, I'd be out of a job.

    So, I'm here to admit that yes, I was indeed wrong. Oh, and I should add that it won't be the last time, either. But the bottom line is I'm okay with that. After all, just like taking crummy phone calls, being wrong is part of the game.

    There is an abundance of data inputs this morning, but few are helping the mood of the markets. While China's Flash PMI was above expectations, the numbers from the Eurozone were weaker than expected. Speaking of W.T.E., Oracle's earnings after the bell can be placed in the punk category. Then on the Cyprus front a "Plan B" is gaining traction but the EU/ECB has given the country a deadline of March 25 to raise the 5.8 billion euros needed to secure the 10 billion euro bailout deal. Finally, there are no fewer than seven economic reports to be reviewed between 8:30 and 10:00 am eastern. At this time, U.S. futures are pointing to a moderately lower open on Wall Street.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Shanghai: +0.29%
    - Hong Kong: -0.14%
    - Japan: +1.35%
    - France: -0.95%
    - Germany: -0.71%
    - Italy: -0.08%
    - Spain: -0.38%
    - London: -0.71%

    Crude Oil Futures: -$0.26 to $93.24

    Gold: +$0.40 to $1607.90

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

    10-Year Bond Yield: Currently trading at 1.954%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -2.81
    - Dow Jones Industrial Average: -12
    - NASDAQ Composite: -14.96

    Thought For The Day...

    "I am not what happened to me, I am what I choose to become." -Carl Jung

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave


    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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