Seeking Alpha

David Moenning's  Instablog

David Moenning
Send Message
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
My company:
StateoftheMarkets.com
My blog:
Daily State of the Markets
  • Time To Rethink The Thesis? 1 comment
    Apr 10, 2012 8:31 AM

    Daily State of the Markets
    Tuesday Morning - April 10, 2012

    Good Morning. We had an interesting discussion in the office yesterday about what is, has been, and will be driving the stock market. To my surprise, there was some lively discussion and differing opinions on what has been the impetus behind this year's joyride to the upside. To me, this is an easy one as I'm of the mind that it's been the better-than-expected economic data combined with the grossly underinvested positions of the hedgies driving stock prices higher for the past four months. And yet the topic of QE3 seemed to get a lot of attention in our impromptu strategy session.

    I said, "Hey, I know the bulls have really had it going on, but you can't argue BTE (better than expected) and QE at the same time - well unless you've got one of those really rare markets like 1999 where nothing really makes sense, that is." I explained that while both BTE and the expectations for more QE can indeed act as drivers, they really can't exist at the same time or drive prices higher from the same levels. "It just doesn't work that way," I added.

    This one created a blank stare or two so I continued. "Look, while Bernanke clearly doesn't want to take any chances with the economy and will likely err on the side of caution/stimulation, the rest of the Fedheads in the room have made it clear that they are not going to continue buying bonds on the open market just for the heck of it." I suggested that there needs to be a reason for the Fed to take action at this point in time and the market currently takes this to mean weak economic data. "So, you can't have it both ways right now. It's either QE or BTE, but not both - well not at the same time, anyway," I concluded.

    The point is that if the economy does start to soften or if Friday's jobs report was even remotely accurate (clearly a question in my mind), then Bernanke's Bunch may have something to justify another round of stimulative action. And to be sure, the market has responded favorably to the QE and Operation Twist programs in the past. However, it seems logical to me that if we get data weak enough to cause the Fed to act, stocks would likely correct lower BEFORE celebrating the Bernanke Cavalry's latest ride.

    Thus, the question I posed was "Just how weak does WTE (weaker than expected) need to be?" For example, yesterday's not-so closely followed Employment Trends Index dipped 0.2% in March, which was the first decline in 10 months. The primary reason the overall index pulled back was the fact that the percentage of firms with positions they couldn't fill has been rising. Then the Conference Board noted that "employment growth in December to February, averaging almost 250,000 a month, may not be a sustainable trend." Thus, while employment may not fall off a cliff, it might be reasonable to expect some moderation in the rate of hiring growth during the second quarter.

    So, I wondered aloud, "Will a 'moderation' in the growth of jobs do the trick to get Bernanke back on the QE trail? Or is this just another argument that we should plunk into the bear side of the ledger?"

    The bulls seem to be suggesting right now that both the ongoing buy-the-dip mentality and the prospects for the Fed to "come in" will provide support to any corrective action that might be caused by a period where WTE takes over. The thesis seems to be that the current pullback could easily last a while longer than the one to three-day affairs we've been seeing since mid-December. However, the key is that our heroes in horns aren't looking for anything more than a garden-variety corrective phase over the next couple of months and for the rally will to resume once the selling subsides.

    The problem - at least in my mind - is, as I mentioned in our meeting, you can't have it both ways. Thus, the thesis being forwarded by the bull camp assumes that the WTE won't be weak enough to deter the dip buyers, who, in turn, will be buying in the expectation of more QE. Hmmm... I may need to noodle on that one for a while and maybe even reconsider this entire thesis.

    Turning to this morning... Although European bourses are playing catch up after being closed since Friday and Italy is getting smashed, the futures in the U.S. are close to breakeven at this hour.

    On the Economic front... The NFIB Small Business Optimism Index pulled back 1.5% in March, registering the first decline in the last six months.

    In addition, we'll get the report on Wholesale Inventories at 10:00 am eastern.

    Thought for the day... Don't forget, ego is the real enemy in this game...

    Pre-Game Indicators

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

    • Major Foreign Markets:
      • Australia: -0.65%
      • Shanghai: +0.88%
      • Hong Kong: -1.15%
      • Japan: -0.09%
      • France: -1.69%
      • Germany: -1.13%
      • Italy: -3.02%
      • Spain: -1.63%
      • London: -1.01%
    • Crude Oil Futures: -$0.70 to $101.76
    • Gold: +$0.80 to $1644.70
    • Dollar: higher against the yen, euro and pound
    • 10-Year Bond Yield: Currently trading at 2.057%
    • Stock Futures Ahead of Open in U.S. (relative to fair value):
      • S&P 500: -1.50
      • Dow Jones Industrial Average: -7
      • NASDAQ Composite: +1.50

    Positions in stocks mentioned: none

    For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com


    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 with the U.S. Securities and Exchange Commission 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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Back To David Moenning's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (1)
Track new comments
  • Unconventional Wisdom
    , contributor
    Comments (117) | Send Message
     
    my gut tells me that the retail investors got long and bullish in oct-nov, and are now the dip buyers... i'm afraid they may be wiped out once again by the next crisis to take center stage e.g., a resurgent and more catastrophic euro-crisis or a sharp slowdown in growth in china. you need not look further than seeking alpha's 'stocktalks' to see that the average investor is bullish...
    10 Apr 2012, 03:46 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.