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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
  • It's Not The Economy, Stupid 1 comment
    Aug 17, 2012 8:35 AM

    Daily State of the Markets
    Friday, August 17, 2012

    Publishing Note: I am traveling Monday (we are returning our youngest to her college campus) and will not publish an early report. Daily State will return on Tuesday morning.

    Good morning. In Wednesday morning's missive, I wondered aloud whether the character of the stock market might be changing. More specifically, I asked readers to consider if the market might be morphing from an uber-volatile, news-driven environment to the type of one-way, low volatility market we saw prior to QE2 in 2010 and from mid-December 2011 through April 2012. And while one day does not a trend make, it does appear that the bulls were able to break out of the recent malaise with some enthusiasm on Thursday. So, at this stage, I'm going to suggest that character of the market does appear to have changed (well, for now, at least).

    However, despite Thursday's enjoyable ride to the upside, those in the bear camp refuse to yield. I was told by a colleague dressed in fur yesterday that the current rally will "undoubtedly end badly due to the macro backdrop." On that note, I also received written notification from another saying, "Dave, in my heart of hearts, it is tough to ignore the bear arguments of: 1) Europe is surely going into recession, 2) the unemployment numbers are a tragedy on a human level, 3) forward guidance and current quarter revenues are discouraging, 4) many analysts are saying 1st Qtr. 2013 could see negative GDP, 5) the ongoing foreclosures in real estate, 6) the unemployment situation (especially age 50+ and youth), and 7) the can't-give-away retail/office space market."

    In rebuttal, I have three thoughts this fine Friday morning for my furry friends. First and foremost, it is important to remember that markets look forward not backwards. Second, because of the first point, fighting the last war is rarely profitable. And finally, I wish everyone would understand that the stock market doesn't always trade based on the economic data.

    Yes, it is true that the current macroeconomic backdrop isn't a bowl of cherries. And it is also true that the stock market has been exceptionally sensitive to economic data of late. But the bottom line is that the economic stats don't always drive prices. So, if anyone finds themselves confused by the fact that the S&P 500 made a brand new high for the current bull market cycle yesterday while the economic news remains weak, remember it's NOT about the current state of the economy.

    Well, okay, so as to not be misunderstood, I guess I should probably clarify that point a bit. The key here is that stocks look forward. And given that the current macro backdrop has been with us for many months (if not years), it isn't exactly surprising that traders may have discounted the current macro misery and are looking to better days ahead.

    Think about it; Ben Bernanke's bunch has made it abundantly clear that the Fed stands ready to act in order to improve the U.S. unemployment situation. And it appears that as long as the German high court doesn't say "Nein!" to the ESM/Fiscal Compact on 9/12, then Mario Draghi will soon take up the fight with the bond vigilantes in the region. Oh and if I'm not mistaken, Chinese Premiere Wen Jiabao said just yesterday that the his government may soon be ready to loosen monetary policy a bit more in order to stimulate growth. As such, with the Fed, the ECB, and the Chinese all doing their darndest to get some growth going, the phrase "don't fight the Fed (especially when they are on a mission)" would seem to apply.

    So, given that interest rates are low, inflation remains in check, and valuations aren't half bad (remember, corporate earnings moved to record highs while stocks went sideways last year) there is clearly room for stocks to advance from here if traders continue to see the potential for things to get better going forward. I can't/won't say how long this type of environment will last because the market's focus can change at the drop of a hat. However, I will stress to anyone pointing to the current economic data as a reason to be bearish right now that it's about what lies ahead - and not what has already transpired.

    Turning to this morning... Overseas markets followed Wall Street's lead overnight with Asian and European markets sporting green screens. Here at home, it is an options expiration Friday with some economic data due out around 10:00 am eastern this morning. As such, futures are slightly below fair value at this point.

    On the Economic front... We will get reports on the University of Michigan Consumer Confidence index at 9:55 am and then the LEI at 10:00 am eastern.

    Thought for the day... Regardless of the color on the screens, try embracing an "attitude of gratitude" today...

    Pre-Game Indicators

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

    • Major Foreign Markets:
      • Australia: +0.19%
      • Shanghai: +0.13%
      • Hong Kong: +0.77%
      • Japan: +0.77%
      • France: -0.02%
      • Germany: +0.19%
      • Italy: +1.60%
      • Spain: +1.89%
      • London: +0.10%
    • Crude Oil Futures: -$0.27 to $95.33
    • Gold: -$0.40 to $1618.80
    • Dollar: lower against the yen, higher vs euro and pound
    • 10-Year Bond Yield: Currently trading at 1.819%
    • Stock Futures Ahead of Open in U.S. (relative to fair value):
      • S&P 500: -0.81
      • Dow Jones Industrial Average: -2
      • NASDAQ Composite: +1.26

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave

    Download our Special Report on our New "Adaptive" Active Risk Management System for the Stock Market


    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.

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  • wmateri
    , contributor
    Comments (529) | Send Message
     
    I appreciate your comment that it's about what lies ahead and used to believe that the market looked about six months ahead. Now I think the forward-looking span is about two days (tops!). This market is clearly only staying up on the hope that the powers that be will find a way to avert the many disasters that are looming like they have so far. In fact, it is looking backward already at how things have been prevented from falling apart over the past year and doing a straight-line extrapolation (is there any other kind) that shows it will continue okay for the foreseeable future. While we are all tired of hearing of the potential problems, ignoring them is not the same thing as having them priced into the market. Although the bears have had a very tough time of it lately, the truth is a number of very real events could threaten either Fed or ECB intervention in the near future. Clearly, this would be negative for the markets. Today the possibility of California defaulting on its debt payments has reared its ugly head as yet another possible (surprise!) event with negative consequences. I don't believe that all the possible black swan (or even grey swan) events have nearly been taken into consideration in this market, just ignored in the hope they will go away. The current hope in the market is about as much protection as hiding your head under the covers when someone has a gun pointed at you. Just because you don't see it, doesn't mean it isn't there.
    17 Aug 2012, 06:04 PM Reply Like
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