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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
  • 2014: What's The Plan, Stan? 0 comments
    Dec 17, 2013 8:01 AM

    Daily State of the Markets
    Tuesday, December 17, 2013

    This is the time of year when investors tend to take stock of their efforts over the past twelve months. Investors big and small look back on the year that was and try to determine what went right, what went wrong, and if any changes need to be made going forward. In other words, this is the time to assess how your approach to the markets fared in 2013 and what your strategy is going to be for the coming year.

    While this may be restating the obvious, one of the biggest mistakes many individual and professional investors alike made in 2013 was to miss out on the stellar gains that were available in the U.S. stock market. To be sure, it is a rare year when the U.S. market is THE place to be. It is rare when diversification is a dirty word and exposure to bonds, gold, emerging markets and commodities cost your portfolio a pretty penny.

    The Key to 2013 Was...

    But that's exactly what happened in the past year. If you focused on the U.S. and you had a strategy to get in and ride the bull trend, you had a good year. If not, well...

    If you didn't manage to capture a healthy chunk of the 25+ percent gain from the S&P 500, don't feel bad because an awful lot of investors didn't. And we're not just talking about Mom and Pop here either. Nope, after a disappointing year, a great many pros will be happy to hit the performance reset button on January 1, 2014.

    For example, Hedge Fund Research's Composite Index sports a gain of just 8.28 percent for 2012 through the end of December. Granted the two-and-twenty crowd doesn't target the stock market exclusively. However, the disparity between hedge fund returns and the S&P has rarely been so large. The point is that if the brightest minds on Wall Street underperformed the stock market in 2013, don't beat yourself up too badly if you did too.

    The problem: Too Much Macro

    After the credit crisis and the seemingly never ending European debt crisis, too many investors fell in love with the "macro" approach to investing. With correlations among asset classes having been stuck on "1" every time a crisis reared its ugly head, investors decided the best thing to do was to play the "risk on, risk off" game.

    The only problem here is, unless you are a skilled, experienced macro player, basing your investment strategy on your macro view of the world can be a mine field. Unless you understand that economics don't always drive the market, basing your exposure on expectations for employment, inflation, or GDP can be a real problem. And unless you have a solid understanding of "cause and effect" in this business, focusing on "macro" can easily lead you astray.

    Think back to the beginning of the year. Europe was in recession, China's growth was slowing, Unemployment in the United States was stubbornly high, and GDP growth expectations weren't exactly strong. So, why on earth then did the U.S. stock market surge 25 percent?

    It's All About The Future

    This is where the cliché, "something everyone knows isn't worth knowing" comes in. U.S. stocks moved higher in 2013 because the outlook for the future was improving. Corporate profits were set to hit an all-time high. Inflation was low. Interest rates were extremely low. And unless a new crisis suddenly appeared, the future looked brighter. So, that negative macro view was rear-view mirror thinking.

    Remember, the view that the sky was going to fall in 2013 that so many investors held dear at the beginning of the year was essentially "old news." The markets had been dealing with Europe for three years already. The unemployment in the U.S. was indeed high, but it was also improving. And since the U.S. economy hadn't double-dipped in the face of Europe and the idiocy in D.C., well, it probably wasn't going to slip back into recession on its own.

    The Solution Is...

    So, when looking ahead to 2014 there a couple things to consider. First, what occurred in 2013 isn't likely repeat in 2014 - so do yourself a favor and don't expect it to. Sure, history may rhyme on occasion, but it's probably not a great idea to go into the New Year expecting another 25 percent gain. Okay, it could happen. But betting on it probably won't be the best plan of attack.

    No, the better way to play is to understand that if you want to capture the types of gains that were available in 2013, you've got to have a plan to do so. Remember, no one rings a bell when it's time to get in or out of the stock market. As such, you've got to have a strategy to lean on.

    What's Your Plan Going To Be?

    So, as you review what went right and what went wrong in your portfolio in 2013, ask yourself; what is your plan going to be next year? Do you have a system, a strategy, or even a signal or two that will alert you when the environment is changing? If not, doesn't having one sound like a good idea?

    Since everyone will still be waiting on the Fed to make their decision on the taper, tomorrow morning we'll try to be of service in this regard. On Wednesday, we'll take a look at one buy signal and the one sell signal you could take with you to a deserted island and still stay on the right side of the market's big moves. Oh, and the buy signal being discussed would have gotten you invested in U.S. stocks on January 4, 2013.

    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...

    Despite economic sentiment data coming in above expectations in Germany and the Eurozone, European bourses are sagging this morning. Stock market indices were mixed in Asia with Japan higher and China lower. Here at home, U.S. futures are slightly ahead of fair value in the early going as traders appear to be on hold until the FOMC announcement tomorrow.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: +0.83%
    - Hong Kong: -0.20%
    - Shanghai: -0.46%
    - London: -0.22%
    - Germany: -0.14%
    - France: -0.68%
    - Italy: -0.23%
    - Spain: -0.15%

    Crude Oil Futures: -$0.27 to $97.19

    Gold: -$6.70 to $1237.70

    Dollar: higher against the yen, euro and pound.

    10-Year Bond Yield: Currently trading at 2.866%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +1.51
    - Dow Jones Industrial Average: +23
    - NASDAQ Composite: +2.21

    Thought For The Day...

    "People of accomplishment rarely sat back & let things happen to them. They went out & happened to things" -Leonardo Da Vinci

    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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