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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
  • What Does The Market Fear Most? 0 comments
    Aug 16, 2013 8:00 AM

    Daily State of the Markets
    Friday, August 16, 2013

    Good Morning. If ever there was a self-fulfilling bearish prophecy, this was it. Everybody, everywhere has been watching the same lines in the sand, the same data, the same earnings guidance, and the same speeches by Fed officials. Everybody, everywhere knew that internal momentum had been waning, that complacency was running high, and that if the S&P 500 broke below important support, it would lead to an almost instantaneous "whoosh" lower. And sure enough, from the very moment the futures broke below the equivalent of the 1680 on the S&P 500 early Thursday morning, it was Katie, bar the door.

    After having been frustrated mightily for the vast majority of the past nine months, the bears must be feeling pretty good right about now. And while the S&P is only off 2.8 percent from its August 2nd high, everybody, everywhere assumes that stocks are heading lower from here.

    The excuses du jour for Thursday's rout in the stock market were many and varied. For starters, apparently Cisco Systems (NASDAQ: CSCO), which is known for manufacturing earnings that impress by a penny or so, didn't have good things to say about the future after the close on Wednesday. Next, the yen-carry trade began heading the wrong direction overnight on concerns that corporate taxes in Japan won't be reformed after all. Then there was the Wal-Mart (NYSE: WMT) report, which also raised some concern about the coming quarters. Next, the yield on the 10-year U.S. government bond spiked to a fresh high for the cycle. And all of this occurred before the sun was up at my office.

    The yield spike, the yen rally, and the guidance issues from two very big names were clearly the triggers for the selling on Thursday. And to be sure, there were algos chasing algos once the S&P's line in the sand at 1680 was breached. However, it is important to recognize that there are other big-picture worries out there as well. And the bottom line is the combination of the big-picture stuff and the near-term catalysts simply overwhelmed anybody interested in doing some bottom-fishing on Thursday.

    Any time there is an important break in the market, I believe it is important to understand why the move occurred. Yes, algos can certainly both create and reinforce a move. However, I simply don't believe that markets dive 225 points just for the heck of it. No, there is usually a reason to be found for the move, if you are willing to look hard enough for it.

    So, now that we understand the catalysts for Thursday's dive, the next question, of course, is how low can it go? And for that question, we need to look a little harder at the big picture.

    The question I am noodling on this morning is actually the title of this morning's missive: What does the market fear most? As I began scribbling down the list of "worries" that traders may be feeling queasy about these days, I noted the usual suspects: China growth, the budget battle, Europe's banking system, the calendar, interest rates, valuations, the economy, the Middle East, and the Fed. But in all honesty, with the exception of the renewed rate surge, nothing on this list was new. And as anyone who has been at this game a while knows, markets can deal with just about anything - as long as there are no big surprises.

    Then the light bulb in my feeble brain lit up and I scribbled down one word: Uncertainty. Yep, that's right; uncertainty is the real issue of the day. Uncertainty about what to expect going forward is the reason folks take profits, reduce risk, or decide to "go the other way" for a while. Uncertainty is what causes traders to say, "I've seen enough, the market can do its price discovery without me." And uncertainty winds up being the primary cause of the big declines.

    The key question here is if there is enough uncertainty at the present time to turn a garden-variety pullback into a meaningful correction. Is fear of a "policy mistake" by the Fed enough to cause a decline of more than 5%? Is the uncertainty over when "the taper" might start significant enough? Will the unknown of how "the taper" might actually impact the markets do the trick? Can the concern about the lack of revenue growth morph into a focal point that keeps traders' attention for more than a day or two? And what about the bite that rising rates might have on the economy? Are any of these worries big enough to warrant another mid-year dance to the downside?

    Long-time readers know that, unlike all those folks on CNBC and Bloomberg, I don't know the answers to these questions. However, I believe that sometimes it is actually much more important to know what the questions are than the answers. And while I may be guilty of beating a dead horse here, the real question is what is the market worried about the most?

    Frankly, this is one of those times when the tape may indeed tell all. Although most of Wall Street traders are at the beach with their kids, what the market does over the next week or two will likely answer some or all of the questions posed this fine Friday morning. So, my advice is to stay tuned because this ought to be interesting.

    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...

    Anyone looking for a global market crash following Thursday's thrashing on Wall Street will likely be disappointed this morning. While there was massive volatility in China (the Shanghai stock index moved from -1% to +5% in minutes before lunch), most markets have held up fairly well in the face of the Dow's 225 point dive. Europe is mixed in the early going and U.S. futures point to a rebound attempt at the open on Wall Street.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.75%
    - Hong Kong: -0.09%
    - Shanghai: -0.67%
    - London: -0.08%
    - Germany: -0.24%
    - France: +0.09%
    - Italy: +0.38%
    - Spain: +0.36%

    Crude Oil Futures: +$0.19 to $107.52

    Gold: +$3.30 to $1364.20

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

    10-Year Bond Yield: Currently trading at 2.788%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +3.27
    - Dow Jones Industrial Average: +13
    - NASDAQ Composite: +4.17

    Thought For The Day...

    "Unthinking respect for authority is the greatest enemy of truth." -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 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.

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    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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