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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
  • Is It Time For This Bull To Take A Break? 0 comments
    Oct 29, 2013 8:11 AM

    Daily State of the Markets
    Tuesday, October 29, 2013

    A couple of conflicting Wall Street-isms seem to be weighing on traders currently. The first is, "The trend is your friend." So far in 2013, the trend has indeed been kind to anyone holding long stock positions. As of yesterday's close, the S&P 500 sports a gain of 23.55 percent, which, if it finished here, would represent the second best year for the venerable index in the last fifteen years (for the record, 1998's gain of 26.67 percent is the only year to exceed 2013's return).

    The bulls' current joyride to the upside has been especially painful for the bear camp, who came into 2013 expecting to have a field day. The bears had a long list of negative macro issues that they expected to come home to roost. There was the impact of the sequester, Europe's debt mess, the slowdown in China, and the assumption that the idiocy in D.C. would cause investors to head for the hills.

    However, a funny thing happened on the way to the debacle... Nothing bad has transpired (yet?). And what's worse for the Negative-Nancy crowd is that investors started looking ahead to better days early in the year. So, before a bear could look up the definition of "the sequester," stocks were off to the races. And with the exception of a couple modest pullbacks, stocks haven't looked back since.

    The State of the Market is Strong

    To be sure, the state of the stock market is strong at the present time. Below is a quick run-down of the traditional market drivers (in no particular order):

    • The Trend: With the market indices at or near all-time highs, by definition the short-, intermediate-, and long-term trends are all positive.
    • Momentum: Market momentum too is in pretty good shape as the trend-and-breadth confirm indicators, the momentum models, as well as the volume models are all currently green.
    • Earnings: Just about any way you measure it, the EPS for the S&P 500 is likely to finish at a record high. Sure, the growth rate could be better. But as long as earnings are growing, the bears may continue to struggle.
    • Economy: The key to understanding how the economy impacts the stock market is to look ahead. Remember, the market is a discounting mechanism for the future and traditionally, stocks look ahead three to six months. So, with the economy still growing - albeit at a painstakingly slow pace - the bulls get the benefit of the doubt.
    • Inflation: Although the recent dive in the dollar is sure to spark another bout of commodity inflation, the CPI levels remain low and contained. Advantage bulls.
    • Interest Rates: There is little doubt that the trend of interest rates has been rising (although the yield on the 10-year has pulled back a bit in last couple of months) and will likely continue to do so for years to come. However, rates are rising from artificially low levels and are doing so for a good reason (improving economic conditions). Thus, unless rates move significantly higher - and in a big hurry - the interest rate environment will likely remain favorable for stocks.
    • The Fed: Everyone on the planet knows the Fed will begin to taper their QE program at some point. However, Mr. Bernanke, Ms. Yellen et al have also gone out of their way to communicate that there will be "considerable amount of time" between the time the stimulus would stop and an actual rate-hike campaign would begin. So, for now at least, the phrase "Don't fight the Fed (especially when they are on a mission)" applies.

    It should be noted that all of the above is merely a "quick and dirty" review of the key drivers to the stock market and is not meant to be an exhaustive analysis of the issues. The reason behind this exercise was to make the point that the stock market is in pretty good shape and is likely to stay that way for a while. But...

    But... "Trees Don't Grow to the Sky"

    The second key phrase investors may need to be reminded of is "trees don't grow to the sky." Put another way, the stock market doesn't move in a straight line. As such, traders and investors alike should recognize that it may soon be time for the bulls' current joyride to the upside to pause.

    There are a couple of key exhibits to be offered up in favor this argument.

    First and foremost, stocks are overbought from both a short- and intermediate-term time frame. While this in and of itself, is not a problem for the market, bad things tend to happen when both time frame cycles are aligned such as they are now. Thus, a technical set-up is in place.

    Next is the sentiment indicators, which are now negative across the board. This tells investors that sentiment has reached an extreme and that conditions are now ripe for a selloff to take hold. In addition, a sentiment indicator with a solid long-term record gave a sell signal two weeks ago.

    This is No Time to be Asleep at Wheel

    In sum, the bulls are clearly on a roll at the present time and performance anxiety could easily drive prices higher into year-end. However, the number of reasons to be cautious at this stage continues to grow. Thus, the bottom line is a yellow warning light would appear to be flashing above the NYSE board at the present time.

    However, to clarify, unless a new crisis arises, any corrective action in the near-term is likely to be short and shallow, and investors may want to consider buying the dip again.

    Publishing Note: I have an early meeting on Wednesday and will publish a morning report. Regular "State" reports will return on Thursday.

    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 earnings season is in full swing this week, traders will turn their attention to a big batch of economic data this morning and then the results of the FOMC meeting tomorrow. Before the bell, traders will get a look at the U.S. PPI. Then shortly thereafter the reports on Retail Sales and Consumer Confidence will be released. Overseas markets were mixed while futures in the U.S. are pointing to a slightly positive open at this time.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.49%
    - Hong Kong: +0.18%
    - Shanghai: -0.23%
    - London: +0.46%
    - Germany: +0.15%
    - France: +0.36%
    - Italy: +1.45%
    - Spain: +0.89%

    Crude Oil Futures: -$0.72 to $97.96

    Gold: -$10.00 to $1342.20

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

    10-Year Bond Yield: Currently trading at 2.525%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +4.04
    - Dow Jones Industrial Average: +32
    - NASDAQ Composite: +13.32

    Thought For The Day...

    "Failure is the opportunity to begin again more intelligently" -- Henry Ford

    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. (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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