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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
  • 13 Things We Learned In 2013 - Part II 0 comments
    Dec 30, 2013 9:36 AM



    Daily State of the Markets
    Monday, December 30, 2013

    In the first installment of "The 13 Things Investors Learned in 2013," we explored the fact that the U.S. stock market was the best/only place to be this year. We talked about the idea that the periodic crisis-driven dives that had plagued the market for the previous four years failed to materialize this year as "no new crisis meant no meaningful correction." Then we touched on how sentiment had become incredibly lopsided at the start of 2013. And finally, we talked about the current role of HFT in the stock market game.

    But before we launch into the second installment of lessons learned, it is probably a good idea to reiterate what investors might face in 2014.

    First, it is probably a very good idea to enter 2014 with an open mind and your risk-management tools at the ready as the historical cycles are calling for a substantial decline in the first half of the year. So, while the asset allocators may make January another fun month for stocks, one shouldn't expect 2014 to be a replay 2013.

    However, since using a crystal ball isn't always the best way to play this game, let's continue to look back at 2013 and the lessons that investors should have learned.

    5. The Macro Guys Got It Wrong - AGAIN

    One of the biggest mistakes investors made in 2013 was to fall in love with the idea that the macro view drives stock prices. With Europe's debt crisis showing no real signs of improvement and the folks in Washington continuing to act like children, the macro crowd decided that the crisis play book would continue to work in 2013. Boy, were they wrong.

    The big lesson here is that the macro view doesn't always drive stock prices. Yes, it is true that economics and the macro view can and do move markets - at times. However, it is also important to recognize that markets "price in" problems over time - especially those problems that are widely known. And given that the EU had not crumbled during the prior three years, traders apparently moved on in 2013.

    It is vital to remember that the focus of the market is a moving target. Just because traders were worried about the PIIGS in 2010, 2011, and 2012, didn't mean that the EU would remain the focus in 2013. Nope, the bottom line here is the crisis faded after Draghi pulled the bazooka out of the closet and the market began to look ahead to brighter days.

    6. Diworsification Is a Thing

    It is generally accepted that diversifying one's portfolio across asset classes will (a) reduce risk, (b) smooth out the ride, and (c) improve returns - especially during bear markets.

    However, 2013 taught investors that there needs to be an asterisk applied to this hard and fast investment rule. You see, when investors wind up overweighted in a market that has been artificially inflated by central bankers for years and then that artificial support begins to go away, well, staying in that market may not be the best idea.

    In short, investors should have learned that bond prices can go down as well as up. And given that the Fed will first stop buying bonds and then eventually begin to sell them, this is a VERY important lesson to understand going forward.

    7. There is No Free Lunch In This Game

    Speaking of the potential for a secular bear market in bonds, another takeaway from 2013 is that "setting it and forgetting it" in terms of the asset allocation in your portfolio is a thing of the past. Yes, I understand that some very smart guys have won Nobel Prizes for their work on diversification. However, there is little substitute in this game for being in the right place at the right time.

    Another way to look at this is that investors have to earn their returns these days. Instead of expecting markets to act as they have in the past, investors have to pay attention to what's working now and what is driving the action.

    8. QE - Everybody's Doing It

    One of the absolute biggest lessons investors should have learned from 2013 is an oldie but a goody: It doesn't pay to fight the Fed - especially when they are on a mission.

    Cutting to the chase, investors need to recognize that a trillion here and a trillion there means that before long you've got a bull market on your hands! Why? Because, in short, all that money has to go somewhere. And with the U.S., UK, Japanese, and EU's central banks all in QE mode, there was plenty of money that needed to find a home in 2013. Also remember that money goes where it is treated best, which, in 2013, meant the U.S. stock market.

    Does this concept make sense? Maybe not. Will it continue? Yes - until it doesn't. But don't forget, the most important lesson here is that fighting the Fed is usually a bad idea.

    9. Oh Yea, THIS is What a Bull Market Looks Like

    Unless you've been at this game for 15 years or more, you may not remember what a full-fledged bull market looks like. From 2000 through 2009, the stock market went through a bust-to-boom-to-bust cycle that scared most investors half to death.

    However, since March 10, 2009, the game has been very different. While the ride has been rocky and there have been plenty of issues to worry about along the way, take a look at the chart below. Yes fans, THIS is what a bull market looks like.

    S&P 500 Weekly
    (click to enlarge)

    Sure, the joyride to the upside could end at any moment. Yes, the bears could cause fear to make a comeback in 2014. But the key takeaway is to recognize that the markets are constantly changing.

    The current bull run will indeed give way to a bear eventually. So, don't be surprised when it does. But then, by the same token, don't be surprised when the bears go back into hibernation and the bulls return - remember, most investors weren't ready this time around.

    Publishing Note: I'll be continuing my break from the keyboard this week but promise to get back to work when traders return to their desks next week.

    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 two bombings in Russia and the unrest in Turkey are getting some attention this morning. However, it appears that the holiday trading environment continues on Wall Street this morning as things are fairly quiet in the early going.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: +0.69%
    - Hong Kong: +0.01%
    - Shanghai: -0.15%
    - London: -0.34%
    - Germany: -0.39%
    - France: -0.16%
    - Italy: +0.14%
    - Spain: -0.22%

    Crude Oil Futures: -$0.55 to $99.77

    Gold: -$6.80 to $12.7.20

    Dollar: lower against the yen, euro and pound.

    10-Year Bond Yield: Currently trading at 2.986%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +1.60
    - Dow Jones Industrial Average: +11
    - NASDAQ Composite: +2.27

    Thought For The Day...

    "Get out when the market lets you out" -- Paul Tudor Jones

    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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