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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
  • While We Wait: Let's Talk Strategy 0 comments
    Jul 31, 2013 8:04 AM

    Daily State of the Markets
    Wednesday, July 31, 2013

    Good Morning. With the market clearly waiting on the data, the Fed and Friday's jobs report, I've decided to spend my pixels this morning talking something that is dear to my heart - investing strategy. I've spent a fair amount of my 33-year career investigating, testing, and/or developing various investing strategies. As such it will suffice to say that I've explored a lot of ideas on the subject. And while this may not make me an expert on every strategy known to man, I do know a little something about a great many of them.

    As I have mentioned a time or twenty, I am a believer in utilizing a systems-driven approach to investing. To be sure, such an approach is not be right for everyone. But after having worked with investors of all colors, shapes, and sizes (i.e. individuals, professional money managers, financial advisors, fund managers, brokers, hedge fund managers, etc.) over the past 33 years, I can say with confidence that using a systems-based, disciplined approach to investing in the markets is probably the best approach for most investors, most of the time.

    The key point is that the vast majority of investors don't have a plan for their portfolio. Perhaps the following quote by the illustrious Yogi Berra sums up my point nicely. "You've got to be very careful if you don't know where you are going because you might not get there."

    Unless you are a seasoned pro who has learned to "do what I do" and to tune out all the noise that one is bombarded with on a daily basis from colleagues, the internet, and T.V., too many investors tend to fall victim to what I call "strategy hopping." One minute you are a trend-follower. The next, you are a discretionary trader following the "hot dot" trade of the day (think Apple, Tesla, etc.) and letting your "gut" be your guide. Next, you want to "be like Buffett." Next, you're back to "buy and hold." And the next, well, you get the idea.

    The problem is there are a lot of ways to "skin the cat" in this game (i.e. beat the market). Thus, investors definitely have options. For example, if followed religiously, a trend-following strategy WILL outperform the market over time. The same can be said for utilizing a mean-reverting approach as well as stock selection strategies, a global macro approach, theme-based strategies, and even day-trading. But the keys are (a) knowing what approach you are taking, (b) understanding what type of strategy you can and can't "live with" from an emotional standpoint, (c) understanding fully the plusses and minuses of the approach being employed, and (d) sticking to it over time.

    Again if you don't know where you are going, you might not get there! In other words, having a plan of attack is the very first decision you have to make. And believe me, you absolutely, positively must make a decision regarding the strategy you are going to utilize on your investing journey if you expect to get where you want to go.

    Granted, you can't just decide to use any old strategy. You've got to do your homework here. A base level assumption is that the strategy you will employ is sound and has proven to be effective at capturing the majority of the gains available during bull markets and avoiding (or better yet, profiting from) the severe declines seen during bear markets. However, if you are able to identify the type of strategy that works for you and your emotional makeup, know what to expect from your approach, and are committed to sticking to your strategy over time, then you will have a leg up on the vast majority of investors - individual and professional alike.

    I'll use the recent moves made in our Active Risk Manager strategy (aka our Daily Decision) as an example of what I'm talking about. In short, the moves we've made this year have been far from perfect and our most recent move has left some folks scratching their heads. But, if I take a step back from the blinking lights, the news flow, the chatter from the "fast money" geniuses on TV, and then, most importantly, if I can turn off my own personal opinion relating to what I think is going to happen next in the market; it appears that the moves are actually pretty logical. And making moves that make sense on a consistent basis is about all you can ask of your strategy.

    After a strong run up from the beginning of the year, the market entered a corrective phase in the middle of May. Then by the middle of June, a great many pundits opined that the bull run had ended and that it would be all downhill from there. Given that the corrective phase was clearly more than a one-day wonder, our Market Environment Model, told us that the current environment was "iffy." As such, our systems told us to play the game cautiously, but to continue to play the game all the same.

    In these "iffy" environments, our plan is to follow the short-term trend of the market in an effort to "be ready" for the next meaningful move. While such an approach does indeed wind up getting us on the right side of the next big move more times than not, there can be many "false starts" before that next big thing begins. And this is where many investors get nervous.

    The problem is that a short-term trend following strategy is only "right" a little more than 50% of the time. This means that when the market is in one of these "iffy" environments, we wind up losing money on about half of our trades. But the key here is that such an approach utilizes one of investing's age-old concepts: "letting winners run and cutting losses short."

    So, on June 26th, our short-term trend system said it was time to get on the long side. Did that move "feel" good? Was I confident that such a buy would be profitable? Did I "want" to make that move? In a word, no. In fact, things "felt" pretty darn rotten at the time and I braced myself for another losing trade (there may even have been some desk pounding, a little under-the-breath cursing, and stapler tossing at the time).

    But the point is that regardless of what I "thought/felt" might happen next or what the "fast money geniuses" were blathering on about on the financial channels, I am a disciplined investor. As such, I followed my system and implemented the trade. I knew that my chances of success were only 50/50. But I also knew that in order to be ready for the next meaningful move, this was the price I'd have to pay. "This is the crappy part," I reminded myself.

    The big point is that unlike most investors, I understand my system. I know the plusses and minuses of the system. And I understand that allowing myself to try to decide which signals to "take" and which to avoid is a fool's errand. So while I wasn't excited about that signal, I pulled the trigger on the move anyway. And much to my surprise, the S&P proceeded to move up 90 points (about 5%) after the buy signal. Go figure!

    Please accept my apology for rambling on about this concept again this morning. Yes, I have talked about the idea of having a discipline and sticking to it a time or twelve before. But the key point that I think is so vitally important to understand is that sometimes you need to step back from the day-to-day emotions of the market and remind yourself of the approach you are taking. In short, getting away from the trees (the daily action) and focusing on the forest (your overall investment strategy) can be very helpful.

    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...

    While the earnings parade continues this morning and the unemployment data out of Europe wasn't as bad as had been expected, the bottom line is that all eyes are focused on the data and the Fed on this last trading day of July. Before the bell we get ADP Employment and the first look at Q2 GDP. Then just after the bell we'll get Chicago PMI and finally the Fed announcement after lunch. In the early going futures are a bit higher. But again, today will be all about the news.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -1.46%
    - Hong Kong: -0.32%
    - Shanghai: +0.20%
    - London: +0.66%
    - Germany: -0.33%
    - France: -0.29%
    - Italy: -0.48%
    - Spain: -0.76%

    Crude Oil Futures: +$0.18 to $103.26

    Gold: +$4.60 to $1328.60

    Dollar: higher against the yen, euro and pound

    10-Year Bond Yield: Currently trading at 2.623%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +3.44
    - Dow Jones Industrial Average: +20
    - NASDAQ Composite: +7.42

    Thought For The Day...

    "To have striven, to have made the effort, to have been true to certain ideals - this alone is worth the struggle" -- William Penn

    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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