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David Moenning
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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
  • Has The Much Ballyhooed Correction Begun? 2 comments
    Jun 25, 2014 9:57 AM

    Daily State of the Markets
    Wednesday, June 25, 2014

    While the situation in Iraq continues to intensify on both the political and military fronts, yesterday's out-of-the-blue decline in the stock market took many investors by surprise. The retreat in prices ended a string of relatively weak advances and has a lot of folks once again calling for the start of the meaningful correction that just about everyone on the planet has been looking for.

    Why The Dive?

    The pullback appeared to be triggered initially by a punk 2-year note auction as the first big wave of sell algos were aligned with the release of the auction results. From there, the algos took over and a "key reversal" day was manufactured by the big banks/hedge funds and their computers.

    Regardless of the excuse provided by the media for the nastiness, the bottom line is that such a move was due. Remember, stocks came into Tuesday with an overbought condition, sentiment readings that had reached extreme levels, waning momentum, and a very high level of complacency. In other words, the table had been set for the bears to have a day or three in the sun.

    It's Not a Breakout...

    The question, of course, is if yesterday afternoon's tank-job was another in a long string of one- or two-day wonders or the start of something serious - meaning a decline of -5 to -10 percent.

    On this subject, one of my favorite Wall Street clichés may be applicable. Although the phrase, "It's not a breakout if you're the one breaking it out" refers to upside breakouts, the reverse may work here.

    You see, yesterday's triple-digit decline in the DJIA wasn't accompanied by any obvious catalyst. No, this appeared to be a case of the big boys and girls playing with their computer toys. An "ignition algo" is run to try and get the trend-following algos' attention. Then once a significant trend develops on an intraday basis, everybody jumps into the pool so to speak. From there, the algos chase each other in one direction until either (a) a reversal occurs or (b) the closing bell rings. Boom - you've got instant volatility on your hands.

    In short, this appears to be what happened yesterday as the reversal day looked to be "manufactured" by a series of sell programs and algos chasing their tails.

    Something Meaningful?

    In order to try and determine whether or not yesterday's dance to the downside was something to be concerned about or just a case of hedge fund folly, let's turn to the charts. You can't always tell exactly what's going on in the markets from looking at charts, but it is usually a good place to start.

    First up is the S&P 500...

    S&P 500 - Daily

    There are four lines drawn on this chart. There is the long-term uptrend line which began in February, the intermediate-term uptrend line, which began in April, and the shorter-term uptrend line, that began in mid-May. The first point is that all three trendlines remain intact on the S&P.

    The next point to make is that the venerable S&P finished at a very important juncture yesterday as denoted by the red oval on the chart.

    In short, the S&P closed right on the near-term uptrend line as well as the old high at around 1950. Therefore, both the uptrend and the breakout are currently at risk and the near-term action should tell us a lot.

    Now let's take a peek at the rest of the major indices in order to get a feel for whether or not the bulls are still in control...

    DJIA - Daily

    While the S&P chart is in pretty good shape, the chart of the Dow is less so. From a short-term perspective, it appears that a double-top has been formed. This would be confirmed by a meaningful close below 16,700ish, which, as it happens, would also put the intermediate-term uptrend at risk. Thus, the 16,700 area is a very important line in the sand for the DJIA.

    NASDAQ Composite - Daily

    Although the chart of the NASDAQ remains in an uptrend from a short- and intermediate-term perspective, there also appears to be a longer-term, potential double top forming.

    We will be watching to see if the bears can create a "lower low" on the chart and view the 4285 level as very important. In our view, a break below this level would indicate that the bears have gained the upper hand.

    Russell 2000 - Daily

    Finally, there is the chart of the Russell 2000 small-caps. Recall that this is where the majority of the damage from the "momentum meltdown" occurred. As such, this remains an important battle ground for our two teams.

    In looking at the chart, it becomes clear that an intermediate- to longer-term downtrend remains in play. Therefore, the important areas to watch are yesterday's high and 1154. The key is that a break in either direction would be telling and be a clear indication of which team was in control of the action.

    In sum, while the charts definitely don't "tell all," they can give us clues about what to expect next and to help identify what moves/levels are important.

    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...

    This morning's market is all about two things: The situation in Iraq and the punk economic data in the U.S. In Iraq, the Prime Minister is defying the West as well as members of his own party and has come out against calls for the formation of a new government. This creates more uncertainty and a more intense focus by the market on the news flow. Here at home, the final revision to Q1 GDP was a big disappointment. It turns out that Obamacare didn't provide the economic boost that had been anticipated. In addition the Durable Goods report was below expectations. As such, the bears may have another opportunity today.

    Pre-Game Indicators

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

    Major Foreign Markets:
    - Japan: -0.71%
    - Hong Kong: -0.06%
    - Shanghai: -0.39%
    - London: -0.87%
    - Germany: -0.72%
    - France: -1.20%
    - Italy: -0.81%
    - Spain: -1.60%

    Crude Oil Futures: +$0.05 to $106.08

    Gold: -$3.50 at $1317.70

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

    10-Year Bond Yield: Currently trading at 2.542%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -3.48
    - Dow Jones Industrial Average: -25
    - NASDAQ Composite: -5.11

    Thought For The Day...

    Happiness is not something you postpone for the future; it is something you design for the present.

    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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Comments (2)
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  • Mr. Bear
    , contributor
    Comments (639) | Send Message
     
    I agree with you, looking at the charts is a good place to start. And, based on what I see, the charts are telling us that hope and speculation continue to be the main drivers of today's stock market.

     

    Thank you Mr. Moenning.
    25 Jun 2014, 02:49 PM Reply Like
  • David Moenning
    , contributor
    Comments (603) | Send Message
     
    Author’s reply » Good assessment. The key is to recognize that and be ready when things change!
    27 Jun 2014, 10:08 AM Reply Like
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