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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 Can Be Learned When The Algos Are In Charge? 0 comments
    Nov 13, 2013 8:20 AM

     

     

    Daily State of the Markets
    Wednesday, November 13, 2013

    The goal of this report, which can oftentimes be classified as a meandering morning market missive, is to identify the primary drivers of the stock market. To be sure, there are certainly times when the drivers of the action are actually quite easy to identify. And then there are days like Tuesday, where there was nothing terribly obvious to the naked eye.

    While the end result didn't appear to be meaningful (the DJIA and S&P 500 indices each lost 0.2 percent, the NASDAQ actually eeked out a slight gain), sometimes how the action unfolds on an intraday basis can speak volumes about what is actually happening in the market.

    Algos Back At It

    After one of the least volatile days of the year on Monday, the bottom line is the algos got back to work on Tuesday. Although there wasn't much in the way of economic inputs to consider (the NFIB Small Business index came in below expectations), the boys and their computer toys did get some "taper" headlines to work with after the market opened.

    In what was clearly an all-algo-all-the-time affair, stocks were pushed and pulled in both directions based on whatever came out of a Fed governor's mouth. Never mind the fact that most of what passed for "news" yesterday was anything but, the algos were armed and ready to react - and move the S&P 5 or 6 points each time within a matter of minutes.

    First Up, Richard Fisher

    The first to hit the wires with comments was Dallas Fed President Richard Fisher, who, is set to become a voting member of the FOMC next year.

    As usual, Mr. Fisher suggested that the Fed can only do so much and should step away soon. Fisher reminded the audience that the QE program cannot continue forever. In addition, the Dallas Fed President raised concerns about the size of the Fed's balance sheet and the challenges it poses, adding that QE "becomes riskier by the day."

    Although Mr. Fisher's views are widely known, the algos apparently got the headline they were searching for (at the speed of light) and stocks moved down in a straight line.

    Now Batting: Dennis Lockhart

    Next up was Atlanta Fed President Dennis Lockhart. Not surprisingly, the generally hawkish Mr. Lockhart told the press that he "would not take [the taper] off the table at this time" and that the FOMC could very well begin pulling back on it's $85 billion a month bond buying program in December.

    Lockhart also said the recent Nonfarm Payroll report data was encouraging, but not "decisive" evidence of a sustainable improvement in the labor market. Mr. Lockhart added that he wanted to see inflation accelerate toward the Fed's 2% goal before beginning to taper.

    And yes, the algos noticed Lockhart's comments about the potential for a "Dectaper" - and not in a good way.

    And Finally, There Was Kocherlakota

    Then there was Minnesota Fed President Narayana Kocherlakota. Kocherlakota first said market speculation about tapering is "puzzling" in the light of the current economic challenges. In other words, he didn't understand why folks are concerned about the Fed "tapering" when the economy isn't exactly hitting on all cylinders.

    On that note, Kocherlakota added that tapering now would produce a drag on an already slow economy. And finally, he repeated his recent call to cut the Fed's unemployment threshold to 5.5% (from 6.5%) and reiterated his feeling that the Fed must be ready to do more to stimulate economic growth. A dove indeed.

    As you might have guessed, the algos once again reacted - this time to the upside.

    What's The Takeaway?

    So what, if anything, should investors take away from a day like Tuesday?

    The first point is to understand that after the bulls have enjoyed a decent move higher, the market tends to consolidate for a spell. During these sideways, range-bound periods, buyers tend to "stand aside." In short, everybody knows stocks have run and become overbought in the process. As such, anyone looking to add exposure will likely hold off until some sort of pullback occurs.

    (click to enlarge)

    The key is that this leaves the market vulnerable to selling pressure - and also to algo-driven activity such as was seen yesterday. Remember, the goal of an "ignition algo" is to start a trend that other algos will then jump on to. And the bottom line is this is what appears to be transpiring now.

    The best course of action then is to hang tight and watch carefully for signs that the "consolidation" phase may be morphing into something worse. On that score, the key level to watch would be 1740 on the S&P 500 cash. Above this level means that the consolidation continues. Below it, well... maybe not so much.

    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...

    The mood appears to be turning dour in the early going in response to a combination of disappointment out of China's planning session and growing deflation concerns in Europe. The foreign markets are lower across the board and the U.S. futures have followed suit, pointing to a decline at the open.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.15%
    - Hong Kong: -1.91%
    - Shanghai: -1.82%
    - London: -1.38%
    - Germany: -0.69%
    - France: -0.84%
    - Italy: -1.25%
    - Spain: -0.66%

    Crude Oil Futures: +$0.38 to $93.42

    Gold: +$4.80 to $1275.40

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

    10-Year Bond Yield: Currently trading at 2.751%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -6.64
    - Dow Jones Industrial Average: -62
    - NASDAQ Composite: -10.83

    Thought For The Day...

    Nothing is more honorable than a grateful heart -- Lucius Annaeus Seneca

    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.

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