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David Moenning is a the proprietor of StateoftheMarkets.com. In addition to providing free and subscription-based portfolios on "State", Dave is a full-time money manager and the President and Chief Investment Strategist of a Chicago-based Registered Investment Advisory firm. Dave... More
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Daily State of the Markets
  • Everyone Expects A Correction. So, What Do The Cycles Say? 0 comments
    Apr 8, 2013 8:31 AM

    Daily State of the Markets
    Monday, April 8, 2013

    Good Morning. Just about everyone in the game right now is anticipating a correction in the stock market. Most believe that it's not really a question of if the market will pull back from its recent all-time highs, but a matter of how bad the decline will be. The recent sideways divergent action in the indices, the faltering momentum, the defensive leadership, the bevy of punk economic data seen recently, the issues in Europe, the dive in interest rates, the action in metals, the crash in the yen, and even the latest outbreak of bird flu in China are cited as reasons that stocks can and should begin a precipitous decline any minute now.

    Heck, I don't know of a single investor, trader, or money manager that expects stocks to move higher from here without pulling back first. And while I actually agree with the popular consensus that the bulls are due to take a rest right about now, I have also been around long enough to know that when everybody expects something to happen, it rarely does. Remember, Ms. Market has a funny way of doing whatever she can to frustrate the masses. So, if you are aggressively positioned for a pullback, you may want to recognize that your position is exceptionally crowded right now.

    Yes, I am indeed concerned about the chart action on the NASDAQ, the Midcaps, and especially the Russell 2000 indices. The latter smallcap index is in a clear-cut downtrend at the present time, has busted through its 50-day moving average, and isn't that far away from putting in a "lower low." And from a chart-watcher's point of view, this would mean the intermediate-term uptrend, which has been in effect for more than four months now, would be toast.

    However, as I noted last week, the charts of the S&P and the Dow are a horse of a different color. The S&P 500 is simply moving sideways at the moment, while the DJIA remains in a pretty impressive uptrend - and hasn't even broken its 10-day moving average (yet?). As such, followers of the blue-chip indices may wonder what all the fuss is about right now.

    So, with the outcome of the game a bit of a question mark right now, I thought this would be an opportune time to check in with our cycle composite to see what history says "should" happen during the month of April.

    As I've noted a time or two during such exercises, while the cycle composite is one of the inputs in our Market Environment Model, we would never consider making an investment decision based on the cycle work alone. You see when the cycles are "on," the market often follows the general trend of the cycle quite nicely. But, when the cycles are "off," well, they can be way off for a long period of time.

    As you may recall, our cycle composite is comprised of the one-year seasonal cycle, the four-year Presidential cycle, and the 10-year decennial cycle. In looking at the cycle so far this year, the bottom line is that with the exception of the action seen in March, the stock market has been pretty much in tune with the cycle composite. As such, we will have to say that the cycles are currently "on" and that paying attention to what is projected to happen in April might be a worthwhile endeavor.

    The good news is that unlike the projection for March, April's cycle composite trend is pretty straightforward. In short, the cycles suggest that April will be a strong month for stocks overall. In looking at the chart, the composite says things will be basically straight up until the last week of the month until some choppiness sets in. So, given that everyone everywhere is looking for stocks to fall, I personally find this interesting.

    In looking at the components of the cycle composite, there isn't much variation on the theme to be seen. The one-year cycle suggests that the first half of the month will be strong and then stocks will pull back a bit going into May. The four-year cycle sports a downward trend in the first week, which is followed by a strong rally and then a pause near the end of the month. And then the ten-year cycle basically says "buy 'em!"

    Looking at the cycle composite from a shorter-term perspective, the projection is positive each day for the next six days and eight of the next nine. But again, the general direction of the cycle projection is much more important than any daily reading.

    My primary point on this fine Monday morning is that this is the type of environment where it is very easy to succumb to group-think. It is all too easy to assume that what the majority expects to happen will indeed happen. As I've mentioned, I too can rattle off a handful (or two) of reasons why stocks "should" decline from here. However, given that the cycles tell us that the month of April has been pretty darn good; this is also the time where it might pay to stop listening to the masses and make decisions based on what is actually happening in the market.

    My view is pretty simple right now as my primary market models are neutral this morning. This tells me to follow the trend of the market (assuming one develops soon) and to try and be ready for the next big move. After all, the trick to making big money in the market over time is to consistently capitalize on the types of moves we saw from November through March and then try your darndest not to screw it up while waiting for the next big move. And for me, this means playing the game more conservatively until our models improve.

    Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

    Turning to This Morning...

    It looks as if the flip-flopping back and forth between red days and green days may continue today as U.S. futures are following Europe higher in the early going. Despite some disconcerting headlines out of Europe, it appears that Japan's new easing efforts continue to be a tailwind. However, there is a fair amount of disagreement about what to expect from the earnings parade here in the U.S., which officially kicks off after the close today when Alcoa reports. Finally, the market internals remain sketchy at the present time so this is no time to become complacent.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Shanghai: -0.60%
    - Hong Kong: -0.04%
    - Japan: +2.80%
    - France: +0.56%
    - Germany: +0.26%
    - Italy: +0.25%
    - Spain: +0.35%
    - London: +0.34%

    Crude Oil Futures: +$0.93 to $93.63

    Gold: +$0.30 to $1576.20

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

    10-Year Bond Yield: Currently trading at 1.722%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +4.37
    - Dow Jones Industrial Average: +31
    - NASDAQ Composite: +8.55

    Thought For The Day...

    "What the wise man does in the beginning the fool does in the end" -- Warren Buffett

    Thought For The Day...

    Every time you smile at someone, it is an action of love, a gift to that person, a beautiful thing. -Mother Teresa

    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. (NASDAQ: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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