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David Moenning
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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
  • Learning To Say, "It's Not What I Do" 0 comments
    Jul 11, 2013 7:37 AM

    Daily State of the Markets
    Thursday, July 11, 2013

    Good Morning. First off, I'd like to thank all of you that took the time to communicate your thoughts on our Global Macro series. Your kind words were sincerely appreciated. And since the responses were unanimously positive, we will make a habit of checking in on the macro themes on a monthly basis from now on.

    Perhaps the key takeaway from our brief review of the global macro categories is that the U.S. stock market is really the only game in town that is working these days. Yes, it is true that Japan is also a bright spot in an otherwise difficult foreign market environment. However, having been at this game a while, I continue to wonder if the current move in Japan will be anything more than the typical "trade" that has come along every few years in the land of the rising sun.

    So for this morning's missive, I figured it made sense to turn our attention back to the good 'ol USofA. More specifically, I'd like talk strategy for dealing with what can often be a bucking bronco type of a market and how to "get it right" most of the time.

    Let me begin by clarifying my use of the word "right." So that there is no misunderstanding, I'm not talking about making calls on television, radio, my websites, Twitter, or any other form of financial media. As I've mentioned a time or twenty, I don't know anyone who has been able to consistently "call" the moves of the U.S. stock market over the long-term. No, I'm talking about getting the moves right in your account; not making an endless stream of predictions.

    To be sure, the short-term trend of the stock market is currently positive. The S&P has finished higher in nine of the last eleven sessions, has gained more than 5% since the 6/24 low, and has now erased the entirety of the "tapering = tightening" freak-out. In fact, the S&P is now just about 1% away from its all-time high and the DJIA only needs 117 points to reach a new high, while the NASDAQ Composite has broken out to a new cycle high and the Russell 2000 has continued to make new all-time highs over the past week.

    Now let me ask you... How many of you thought the market would turn on a dime on June 24th? With interest rates spiking to new highs, stock prices breaking down, and the fast money crowd yammering on about tapering being the same thing as the Fed actually raising rates, how many of you had confidence that our buy signal on 6/26 had any chance of being successful?

    To be honest, I too had my doubts. We were coming off not one, not two, but three straight "whipsaw" trades and my guess is the thought that went through most people's mind when the signal was given was, "Oh boy, here we go again."

    As you might imagine, I tend to get a lot of Monday-morning quarterbacking when we experience more than a couple clunker trades in a row. Why don't you use mean reversion, I'm asked. Why not "ride the range" by buying the low end of the range and selling the top end of the range? Why not buy the dips and sell the rips as the big boys on t.v. are always suggesting?

    My answer to any and all of these types of questions is the same. In short, I respond with, "It's not what we do."

    In my humble opinion, there are three keys to getting the big moves right the vast majority of the time:

      A. Having a system/strategy designed to keep you on the right side of the markets meaningful moves
      B. Having a thorough understanding of the plusses and minuses of your system/strategy
      C. Sticking to it when things don't go your way

    It's that last part that is SO difficult for SO many investors (professionals and individuals alike). You see, most investors equate losses with being "dumb." And nobody likes to look or feel "dumb" in this business. But here's the thing; being "dumb" is a vital part of this game. Contrary to what the geniuses on the financial channels and the internet websites will tell you, truly successful investors look "dumb" all the time. Yet if their "dumb" moves are smaller than their "smart" moves, and this formula can repeat on a consistent basis - boom, you're in business!

    Since 2009, the active risk management subscription service we offer that "times" the stock market has been "right" just about 56% of the time (55.7% according to Marketfy - a nifty, high tech site the verifies trades of internet subscription services). This means I've looked "dumb" 44% of the time. Not so hot, right? However, according to Marketfy, the average "smart" trade has gained +8.5% while the average "dumb" trade gave back -3.15%. Take a moment and do the math on that and I think you'll agree that "letting your winners run and cutting your losses short" is still a pretty good way to play this game.

    Please don't misunderstand. I'm not saying that what we do is perfect. Far from it. In fact, is this the best way to manage money? Probably not. Is it the smartest system in the world? I doubt it. But the key is that it works for me. And most importantly, I can live with the ups and down. I understand that when our Environment Model is neutral, I'm likely to look "dumb" more often than usual. And I can live with that, because, yep, you guessed it; "it's what we do."

    So, my advice to each and every investor out there is the same. Identify what it is that you do and stick to it. My guess is that you will absolutely, positively look "dumb" at times. Yet, if you do indeed stick to it, you will sleep better at night and be quite happy with your bottom line at the end of most years. And perhaps most importantly, when someone asks you if you got into the latest and greatest hot-dot trade, you can respond, "It's not what I do."

    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...

    In case you have been wondering about the primary driver in the market, the reaction by the futures and global markets to Ben Bernanke's comments after the close yesterday afternoon should clear things up nicely. The bottom line is Bernanke said that the economy will need additional stimulus for the foreseeable future. Boom - the global rally was on. However, with the futures projecting an open at or around the May 21 high on the S&P 500, it is a safe bet that sell programs will be waiting at that level. As such, it will be interesting to see if the bulls can hold their ground throughout the session.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: +0.39%
    - Hong Kong: +2.55%
    - Shanghai: +3.23%
    - London: +0.60%
    - Germany: +1.10%
    - France: +0.72%
    - Italy: +0.04%
    - Spain: +0.24%

    Crude Oil Futures: -$0.69 to $105.85

    Gold: +$33.00 to $1280.40

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

    10-Year Bond Yield: Currently trading at 2.560%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +17.88
    - Dow Jones Industrial Average: +147
    - NASDAQ Composite: +29.14

    Thought For The Day...

    You can't base your life on other people's expectations. -Stevie Wonder

    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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