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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, 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
  • History Doesn't Suggest Major Correction Is Due 0 comments
    May 12, 2014 8:17 AM

    Daily State of the Markets
    Monday, May 12, 2014

    The question of the day is relatively straightforward at this time: Will we see a meaningful decline (defined as a loss of -10 percent or more) on the S&P 500 in the near term or not?

    From the bears' perspective, the answer is an unequivocal "yes." Our furry friends cite the ongoing mo-mo meltdown (Social Media (NASDAQ: SOCL), Internet (NYSE: FDN), and Biotech (NYSE: XBI) all hit fresh lows this week), the rotation into defensive sectors (Utilities (NYSE: XLU), Staples (NYSE: XLP), etc.), the Presidential cycle, the situation in Ukraine/Russia, the Fed's taper, a pick-up in inflation, and the ever popular "Sell in May and go away" strategy.

    In the opposing dugout, the bulls are quick to remind us that there have been several cases in history where the broad market was not impacted by a mo-mo meltdown to any great degree, that the economy appears to be bouncing back from the polar vortex-induced pause, that rates are behaving, that inflation remains below the Fed's target, that the "Sell in May" game doesn't always work, and that "something everyone knows isn't worth knowing."

    Something That Everyone Knows...

    If you want to have some fun, take a look at the search volume for the phrase "Sell in May." Looking at the last 10 years of data, the number of searches for the words "sell in May" usually surges in February and peaks in March. This would appear to be logical as stocks typically improve during the first two months of the year and then traders begin to wonder whether or not it is time to bail.

    What's interesting is that this year, the number of searches relating to "sell in May" are just about double the average of the last 9 years. Thus, one could argue that "everyone" is looking for a correction in the near-term.

    However, we need to keep in mind that historically, Ms. Market displays a tendency to frustrate the masses at every turn. So, with just about everyone on the street looking for a meaningful decline to begin at any moment, it looks like that those looking to "sell in May" are in the majority. And frankly, this should make anyone thinking about heading to the sidelines soon more than a little nervous.

    Optimism is NOT Too High

    It is also worth noting that investor sentiment is NOT strong at this time. This could easily be explained by the facts that (1) the violent selloff in the momentum names has shaken confidence, (2) the recent hiccup in the economic data has many wondering whether or not the soft patch will continue, (3) the situation in Russia/Ukraine is keeping folks on edge, and (4) the calendar now reads May.

    Regardless of whether or not the above list is complete, it is important to recognize that many measures of investor sentiment are not overly positive at this time.

    Why do you care? The bottom line here is that most meaningful tops in the stock market are accompanied by strong readings in investor sentiment. And currently, this is simply not the case.

    One of our favorite measures of short-term stock market sentiment is currently negative with a reading of 35.6. Note that sentiment is considered overly optimistic when this indicator is above 62.5. In fact, the current reading actually falls in the "Extreme Pessimism" zone, where the S&P 500 has historically gained at an annualized rate of more than 31 percent per year since 1995.

    In other words, stock market sentiment is actually so weak right now that stocks have usually moved higher - not lower - from these levels.

    History Shows...

    However, history shows that there have been cases in which the stock market has declined by 10 percent or more when sentiment has been weak. The cases include 1981, 1983, 1987, 1998, and 2008.

    What is interesting to note is that most cases where the market fell by 10 percent or more when sentiment was also weak occurred when the overall market was already in decline. In fact, in the 1987, 1998, and 2008 occurrences, stocks were actually in the process of bottoming after an important fall.

    1983 Revisited?

    But then there is the 1983 occurrence to consider. Unlike what happened in 1981, 1987, 1998, and 2008, in 1983 the market continued to head lower after a mo-mo selloff despite weak market sentiment.

    During the 1983 case, it appears that the selloff in the momentum names actually caused the weak sentiment readings. And since the market had been in a secular bear market, it is not surprising that the buy-the-dip crowd failed to take action and the broad market continued to decline.

    But it is important to note that stocks have been movin' on up since 2009 and many believe that a secular bull market has now begun. Therefore, one could argue that the current case is not likely to become a repeat of 1983.

    What To Watch For Now

    Thus, based on history, it will be important to watch sentiment going forward. If the mo-mo selloff begins to pick up steam, it could indeed impact investor psyches and become a problem. But given that the S&P and Dow remain with a stone's throw of all-time highs, it looks like investors are not too worried at this time.

    Looking For Investment 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...

    Although the election in eastern Ukraine appears to have favored secession, overnight markets do seem to be fazed by the news. Instead, continued M&A activity is the focus in the early going this morning. There is little in the way of economic data to be released today. However stock futures are currently pointing to a higher open on Wall Street.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.35%
    - Hong Kong: +1.83%
    - Shanghai: +2.08%
    - London: +0.36%
    - Germany: +0.89%
    - France: +0.08%
    - Italy: +0.97%
    - Spain: +0.66%

    Crude Oil Futures: +$0.50 to $100.49

    Gold: +$9.00 at $1296.60

    Dollar: lower against the yen, euro and pound

    10-Year Bond Yield: Currently trading at 2.643%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: +5.77
    - Dow Jones Industrial Average: +44
    - NASDAQ Composite: +16.10

    Thought For The Day...

    "Man. He sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present: the result being that he does not live in the present or the future: he lives as if he is never going to die, and then dies having never really lived." -- The Dalai Lama

    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 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. (OTC: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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