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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
  • The Question Of The Day Is... 0 comments
    May 1, 2014 8:03 AM

    Daily State of the Markets
    Thursday, May 1, 2014

    While the exploration of the various catalysts that might trigger the next bear market in stocks is certainly an important endeavor, the near-term action in the stock market is fascinating to say the least at the present time. Thus, we will cross our fingers and hope that the bears can be held off one more day, as the goings on in the stock market demands some analysis this morning. (And we promise to return to our list of Bear Market catalysts on Friday).

    In case you don't spend your days pouring over charts, excel spreadsheets full of indicators, and more market models than you can shake a stick at, there is a very large disconnect happening in the market currently. And since it is quite rare to see the degree of divergence that is occurring, it is worth devoting some time so as to understand what the heck is going on.

    It's All Good, Right?

    On the 25th anniversary of CNBC hitting the airwaves (time flies when you are having fun, right?) the Dow Jones Industrial Average closed at a fresh all-time high. Although you have to squint pretty hard to see it and check the closing number to be sure the DJIA actually did best the high of 16,573 on April 2, 2014, the new high appeared to be a fitting celebration.

    DJIA Daily

    However, before you run to the computer and check how much margin you've got available in your account, you may want to peruse the rest of the charts contained in this report. Because, contrary to the hoopla that filled the CNBC sets at yesterday's close, all is not well at the corner of Broad and Wall these days.

    Okay, so Exhibit A is the chart of the DJIA above. While it is REALLY hard to see that the venerable index did indeed finish at a new all-time high on Wednesday, it is also hard to be overly negative with that type of price action.

    So, let's move on. Exhibit B is the chart of the S&P 500 shown below.

    S&P 500 Daily

    To be honest, the chart of the S&P looks pretty good as well. The bulls will argue that the index broke out of the wedge formation that has been forming during April. And since most consolidations are resolved in the direction the index was heading before the consolidation began, it isn't too terribly surprising to see an upside breakout here.

    However, the bears will counter with the idea that the so-called breakout left a lot to be desired. The S&P didn't exactly exhibit jailbreak characteristics and when looking at the internals, the move didn't really have any oomph behind it. Thus, our furry friends contend that with the resistance overhead, the breakout could very well turn into a "fake out" at the drop of an algo.

    But Wait, There's More...

    While it could be argued that the current debate by the opposing teams is merely the usual banter, the folks donned in their "Da Bears" hats have a couple other charts to show you here.

    Take a gander at the chart below. This is the iShares Russell 2000 ETF - or the IWM - on a daily basis.

    iShares Russell 2000 ETF (NYSEARCA:IWM) Daily

    Take a moment and compare the action of the IWM to the S&P and DJIA from March through yesterday. The Dow looks to be moving higher in a choppy fashion. The S&P appears to be going largely sideways. And the IWM? Well, that's a horse of a different color.

    Yes fans, that's what a downtrend looks like.

    It is also worth noting that there are what looks like two fairly important lines in the sand - here and at about $100 on the IWM.

    So... if the Russell doesn't turn around in a big hurry, it would appear that the small caps could be in big trouble in the event of further weakness.

    But wait, there's more...

    Global X Social Media Index (SOCL) Daily

    The cause of the disconnect between the "generals" (the DJIA and S&P 500) and the "troops" has been the rather enthusiastic selloff seen in the former momentum names. The chart of the Global X Social Media ETF (NASDAQ: SOCL) makes this point perfectly clear.

    While the Dow and S&P have waffled around a bit since the beginning of March, the social media names have been crushed. Yes, we've talked about this before. However, as the saying goes, sometimes a picture is worth a thousand words.

    The Question of the Day

    So, the question of the day is if the blue chip indices can really continue movin' on up when there is so much destruction going on in the former leaders such as Netflix (NASDAQ: NFLX), LinkedIn (NASDAQ: LNKD), Amazon.com (NASDAQ: AMZN), Pandora (NYSE: P), Yelp (NASDAQ: YELP), Twitter (NASDAQ: TWTR - YIKES!), and some company called Gogo, Inc (NASDAQ: GOGO).

    On the one hand, it is worth remembering that in the 2000-02 "tech bubble bear" the broad market in general, and value stocks in particular, didn't do too badly. No, it was the high fliers that were wiped off the face of the earth, while the broad market hung in there pretty well.

    However, unlike today, the broad market had struggled during the big technology boom of 1999. So, it might be hard to argue that this is a perfect corollary. But, the point is that there have been times in history where the mo-mo names were beaten unmercifully while the broader market was not.

    Will that be the case here? So far, so good, the bulls argue. But at least from my perch, this appears to be the most important question of the day. Therefore, the action during the "Sell in May and go away" will be very important. Stay tuned!

    Looking For Money Management Help?

    If you are looking for help with money management, check out Heritage Capital Management's Active Risk Manager Service - or call Heritage for more information at (630) 250-4700.

    ALL NEW: The Next Generation of the Daily Decision system is now available to clients of Heritage Capital. The upgraded system utilizes swing trading and mean reversion strategies during neutral market environments, multiple indices for long positions, incremental moves in and out of the market, multiple managers and multiple strategies - with the overall goal being reduced volatility, fewer and less impactful whipsaws, and a "smoother ride." To learn more about the "Next Generation" system, Read the Research Report

    Turning to This Morning...

    The focus of the market would appear to be squarely on the Federal Reserve at the moment. And with the Fed not providing any surprises at yesterday's FOMC meeting, traders remain modestly upbeat. Overnight markets are a tough read as Hong Kong, Shanghai, Germany, and France are all closed for various holidays. Here in the U.S. futures are trading flat-to slightly higher at the open.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: +1.26%
    - Hong Kong: closed
    - Shanghai: closed
    - London: +0.21%
    - Germany: closed
    - France: closed
    - Italy: -0.88%
    - Spain: -0.02%

    Crude Oil Futures: -$0.76 to $98.98

    Gold: -$11.90 at $1284.00

    Dollar: lower against the yen, euro and pound

    10-Year Bond Yield: Currently trading lower at 2.658%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -0.10
    - Dow Jones Industrial Average: -5
    - NASDAQ Composite: +7.44

    Thought For The Day...

    Kind words can be short and easy to speak, but their echoes are truly endless. -Mother Theresa

    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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