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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
  • What Do The Cycles Say About August? 0 comments
    Aug 6, 2013 8:33 AM

    Daily State of the Markets
    Tuesday, August 6, 2013

    Good Morning. Although stocks are clearly in an uptrend at the present time, one could not be blamed for feeling like the dog-days of summer are upon us. With the exception of just a couple solid up days, the stock market has spent the vast majority of the last three weeks going sideways. But with the Russell 2000 finishing Monday at a fresh all-time high, the NASDAQ closing at another new 13-year high, and the S&P only a smidge away from new high ground, it is hard to argue with the fact that the overall trend remains a friend to the bulls.

    However, the bears are quick to remind anyone willing to listen that all good things come to an end, eventually. Another saying that the glass-is-half-empty crowd has been heard bandying about lately is "the market can remain irrational longer than you can remain solvent." And while this might appear to be a warning about not staying on the wrong side of the tape for too long, in the bear camp it is actually a reference to the idea that this market has no business being where it is these days.

    Speaking of Wall Street wisdom, most successful investors will agree that markets are never wrong, people are. And back in the 1980's, one of the first lessons I learned about this game was that nobody cares what I think. This is a lesson that I remind myself of on almost a weekly basis. Yet, I find it fascinating that thirty years later, the airways are filled daily with professionals telling us what is going to happen next and that there is still a raging bull market in opinions about the stock market.

    Rest assured, I'm not going to launch into yet another diatribe on the benefits of staying in tune with what the market IS doing or using systems to guide your buying and selling decisions. However, I do need to provide yet another caveat that what I'm about to discuss could easily be placed into the "predictive camp" and that using such an approach in a vacuum can be downright dangerous. Again, I don't believe in making predictions. But the bottom line is that checking in with the cycles of the stock market can be a useful exercise as the market oftentimes follows either the one-year, the four-year Presidential, the ten-year decennial cycle, or a combination all all three cycles to a "T."

    So, given that it is early in the month and there isn't much happening right now, I figured this was as good a time as any to check back in with our cycle work.

    The first point to make about the cycles is that after diverging a bit in June, the market appears to be back on track with the projections of the cycle composite (a combination of the one-, four-, and ten-year cycles). While the cycles called for a fairly big dip in July - which didn't happen - the cycle had also not called for much of a decline in June. So, these moves appear to have cancelled each other out.

    Looking ahead to August, the cycle composite is choppy, within in a fairly tight range throughout much of the month. And then near the end of the month, a modest uptrend resumes into early September. Therefore, both teams may wind up becoming frustrated over the ensuing weeks.

    Once again though, there are some discrepancies among the messages provided by the individual cycles that are worth noting. For example, while the one-year cycle projects a steady advance in August, the four-year actually suggest a downtrend that stays intact until November. And as you might suspect, the tie-breaker - the ten-year decennial cycle - suggests that August will be modestly higher.

    So, there you have it; the market is likely to move up, down, or sideways! And if you feel compelled to insert an eye roll here, I couldn't blame you. However, my takeaway is that since the one-year suggests a strong up move and the ten-year points to a modest trend higher, the odds would seem to favor the bulls. But... should the bears finally find a raison d'etre and if prices start to break down, it might be a good idea to pay attention to the four-year cycle.

    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...

    Overnight markets were mixed and there was really no major moves of note. The only real headline came out of Australia where the Bank of Australia cut its benchmark interest rate to a record low of 2.5% (from 2.75%). European markets are waffling just above and below the zero line and U.S. futures are pointing slightly lower. In addition, there aren't any big economic reports scheduled for release this morning. However, we will hear from Chicago Fed's Charlie Evans today.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: +1.00%
    - Hong Kong: -1.34%
    - Shanghai: +0.51%
    - London: -0.14%
    - Germany: -0.04%
    - France: +0.17%
    - Italy: -0.05%
    - Spain: +0.17%

    Crude Oil Futures: +$0.49 to $107.05

    Gold: -$13.70 to $1288.70

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

    10-Year Bond Yield: Currently trading at 2.649%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -2.69
    - Dow Jones Industrial Average: -24
    - NASDAQ Composite: -1.47

    Thought For The Day...

    The answer lies within ourselves. If we can't find peace and happiness there, it's not going to come from the outside. - Tenzin Palmo

    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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