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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
  • Can The Market Survive The Mo-Mo Meltdown? 0 comments
    May 2, 2014 8:03 AM

    Daily State of the Markets
    Friday, May 2, 2014

    By now, you are no doubt aware that there is a major dichotomy occurring in today's stock market. 2013's big winners are suddenly 2014's misery positions. Mo-mo has become a no-no. And many of the former leaders have been beaten unmercifully over the last two months.

    You've probably seen the charts before, but again, a picture is worth a thousand words. So let's review what has been happening in the momentum names lately.

    First there is social media. You know, companies that most of the over-40 crowd has never heard of. Twitter (NASDAQ: TWTR), LinkedIn (NASDAQ: LNKD), Yelp (NASDAQ: YELP) etc.

    The bottom line is that while these names were all the rage in 2013, suddenly it isn't too cool to be invested in this space.

    Global X Social Media (NASDAQ:SOCL) Daily

    While the damage is not nearly as severe, the once-hot internet stocks have also come back down to earth in a rather swift fashion. And although the decline of -18.3 percent isn't an abject disaster, these stocks have clearly lost their mo-mo mojo.

    First Trust Internet (NYSEARCA:FDN) Daily

    Then there is Biotech. Once the darling of nearly every hedge fund and fast-money trader's portfolio, this chart is the poster child for why ALL investors simply MUST have an EXIT STRATEGY for each and every position they own.

    Biotech (NYSEARCA:XBI) Daily

    And yet, the blue chip indices have been doin' just fine, thank you. In fact, the large-cap indices don't seem to give a hoot about the devastation taking place in so many of the former high fliers.

    Take a gander at the chart below of the S&P 500. Now quickly compare the trend of the S&P over last few months to the charts above.

    S&P 500 Daily

    Now, for all you hot-money traders out there, take a look at the next chart. while trucking and airlines and package delivery companies aren't exactly sexy, they DO seem to be working right about now.

    Seriously, ask yourself, would you rather own Southwest Airlines (NYSE: LUV) or Twitter (NASDAQ: TWTR) here?

    DJ Transports Daily

    Speaking of momentum plays, the fast-money always loves a good rotation play. So, where are these players investing in now, you ask? Yep, that's right, utilities.

    Utilities Select Sector SPDR (NYSEARCA:XLU) Daily

    Suddenly big and boring is beautiful. Suddenly earnings matter. Suddenly valuation metrics are getting noticed. And suddenly, investing in social media isn't so socially acceptable any more.

    The Big Q: Can The Market Survive the Mo-Mo Meltdown?

    The question on everyone's mind - and the reason the review of the next 5 potential bear catalysts got put off again today - is can the broad market continue to simply ignore the momentum meltdown?

    Those in the bear camp contend that the Dow and S&P simply can't hold up forever if the mo-mo names continue to be crushed. And history shows that momentum meltdowns tend to persist for at least a couple more months. As such, doesn't it make sense to "Sell in May and go away?"

    Have We Seen This Movie Before?

    The answer to the question posed above is, yes, we have indeed seen this movie before. In fact, since 1982 there have been 5 instances in which the high momentum stocks have sold off by at least 12 percent while the S&P declined less than 4 percent.

    In 1983 the mo-mo names (defined at the top 10 percent of stocks based on 52-week rate of change) dove while the S&P held up. It is interesting to note that in this case, the S&P actually rallied more than 5 percent to a new high in between the initial crack in the momentum names and the ultimate 35.7 percent decline. The interesting thing is the S&P only dropped a total of 12.7 percent during the entire year-long mo-mo wipeout.

    In 1997, while the momentum stocks fell 22 percent into the end of the year (literally), the S&P consolidated sideways and then proceeded to rally more than 25 percent.

    In 2004, the mo-mo stocks fell 21 percent over 31 weeks while the S&P dropped only 8 percent. In 2006, the hot stocks were tagged for a loss of 23 percent over 4 months while the S&P fell less than 7 percent. And then currently, the momentum names have fallen, on average 12.5 percent while the S&P has dropped a smidge over 3 percent.

    What To Expect Next

    Putting all of these instances together a pattern appears. IF (note the use of capital letters) the S&P can continue to hold up in the face of the momentum selloff, the S&P typically consolidates from anywhere from 2 to 4 months before heading higher.

    That's the good news. The bad news is investors may be facing several more months of the up-and-down, back-and-forth action that has been in place since the beginning of March. Joy.

    Publishing Note: I am traveling next week (I am playing host at NAAIM's annual "Uncommon Knowledge" Conference) and will publish morning commentaries only as time permits (which, based on past experiences, isn't likely to be much!).

    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...

    It's the first Friday of a new month, which means it is Jobs day. The Labor Department will release the Big Kahuna of economic indicators; the Nonfarm Payroll and Unemployment data. In overnight news, tensions in Ukraine continue to increase, AstraZeneca rejected Pfizer's $100 billion merger offer, and the Eurozone's Manufacturing PMI results were a bit better than the preliminary numbers. Here at home, U.S. futures are trading ever-so slightly above fair value ahead of the Jobs report.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.19%
    - Hong Kong: +0.57%
    - Shanghai: closed
    - London: +0.22%
    - Germany: -0.02%
    - France: -0.45%
    - Italy: +0.51%
    - Spain: +0.22%

    Crude Oil Futures: +$0.30 to $99.72

    Gold: +$3.60 at $1287.00

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

    10-Year Bond Yield: Currently trading at 2.625%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +1.12
    - Dow Jones Industrial Average: +4
    - NASDAQ Composite: +3.04

    Thought For The Day...

    The man who has no imagination has no wings. -Muhammad Ali

    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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