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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, 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
  • Action Speaks Louder Than Words 0 comments
    Jun 20, 2013 8:27 AM

    Daily State of the Markets
    Thursday, June 20, 2013

    Good Morning. Are we having fun yet? For a seventh consecutive day, stocks were whipped around in a violent fashion by the big boys and their computer toys yesterday. The Dow once again put up a triple-digit move, this time a dive of 206 points. The problem is that each move tends to reverse the last as the market appears to have little memory from one day to the next. For example, on Tuesday, it looked like the recent downtrend was over and the bulls were back in business. But after Wednesday's algo-induced shellacking, well, not so much.

    At issue on Wednesday was the latest update on the economy and Federal Reserve policy from Ben Bernanke. Although the Fed Chairman basically said what everyone expected he would say and he did not provide any surprises during his press conference, traders decided to freak out anyway when bond yields moved to their highest levels of the year.

    Sure, Gentle Ben did tell us that the Fed may begin to "moderate" their bond purchases by the end of the year if the data shows sufficient improvement. And yes, Mr. Bernanke did say that the Fed may finish their QE program by the middle of next year. In English, this means that if the economy continues to improve, the Fed will begin to reduce their stimulus programs and eventually stop them over the next year.

    In addition, the Fed Chairman made it very clear that "taking the foot off of the gas is NOT the same thing as applying the brakes." This was meant to emphasize the point that the Fed expects a fair amount of time to pass between the time they stop providing stimulus and the time they actually begin to raise interest rates.

    To be honest, everything Mr. Bernanke said was logical. Again, there were no surprises. There were no "ah ha" moments that triggered sell programs in stocks. But apparently the boys in the bond pits were not impressed. You see, the Fed's projections for the economy were slightly better than had been expected. (But then again, the Fed has become notorious for overestimating the economy's rate of growth.) And apparently this sparked a rather emphatic selloff in bonds, sending yields spiking in the process.

    From my perch, I did not see a direct correlation between something Bernanke said and the sudden, violent sell programs that hit both the stock and bond markets. However, it became very clear, very quickly that the stock market was the tail and the bond market was the dog yesterday. So, with yields surging (the yield on the 10-year moved from 2.208 to 2.330 in about an hour) traders tied their algos to the move. For every uptick in bonds there was a corresponding sell program in stocks as well as an increase in the dollar.

    The bears tell me that it's now "game over" for the bond market; that we've seen the secular low in yields; and that folks are trying to get out of bonds before the Fed makes their moves. To be sure, there is no refuting this logic as a 30-year bull market in bonds will likely end if/when the economy improves enough for the Fed to begin exiting. But my point is that such a decision - a decision which involves perhaps trillions of dollars - doesn't occur in a one-hour time span.

    Yes, rising rates could easily hurt the housing market. And a stronger dollar hurts manufacturers who sell their products globally. And there is little doubt that a significant rise in rates from here could be a negative for the economy in general.

    However, yesterday's violent movement in the stock, bond, and currency markets took place over a period of less than two hours. And there was little-to-no real news disseminated. Therefore, I have a very hard time accepting these big-picture, fundamental arguments as the reason behind a 200+ point reversal in the DJIA.

    Yet at the same time, any good technician will tell you that it is the action in the market that counts - not the words of a politician or central banker. So, while I remain skeptical of yesterday's move, I will agree that the action in the near term will likely speak louder than any words coming out of Washington. Remember, it's not the news but rather how the market reacts to the news that matters.

    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...

    Weak economic data out of China (the Flash PMI signaled contraction for a second straight month and came in at a 9-month low) and soaring interest rates have put traders around the globe in a selling mood this morning. Asian markets were hit hard overnight and European bourses are down approximately 2% across the board. The action in commodities is confirming the growth fears as Gold is plunging in early trade. Not surprisingly, the U.S. futures are following suit and project a red open at the corner of Broad and Wall. However, we should note that there is a slew of economic data due out this morning, which could certainly impact trading.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Shanghai: -2.77%
    - Hong Kong: -2.88%
    - Japan: -1.74%
    - Germany: -2.58%
    - France: -2.61%
    - Italy: -1.95%
    - Spain: -2.36%
    - London: -2.33%

    Crude Oil Futures: -$1.33 to $96.91

    Gold: -$67.40 to $1306.60

    Dollar: lower against the yen, higher versus euro and pound

    10-Year Bond Yield: Currently trading at 2.438%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -10.03
    - Dow Jones Industrial Average: -77
    - NASDAQ Composite: -21.55

    Thought For The Day...

    "Great spirits have always encountered violent opposition from mediocre minds." -Albert Einstein

    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 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. (OTC: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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