Once More For Emphasis
Portfolio Strategy, ETF investing, Long/Short Equity
Seeking Alpha Analyst Since 2009
David Moenning is founder and Chief Investment Officer at Heritage Capital Research, a Registered Investment Advisor. Heritage is an independent, privately owned, investment management firm located in the Denver area. Mr. Moenning has more than 33 years of portfolio management experience and focuses on a risk-managed approach to capital markets via modernized portfolio development and dynamic adaptation to ever-changing macro environments. Most recently Chief Investment Officer for a $1.3 billion RIA firm.
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Daily State of the Markets Good morning. If you were at all mystified as to the driver(s) behind Wednesday's dance to the downside in the stock and commodity markets, I'm going to suggest that you may not be paying enough attention to your "Daily State of the Market" reports :-) While there were certainly several other stories that may have captured traders' attention yesterday, the bottom line is that this move was - everybody join in now - all about the buck! I know, I know... I have been banging this drum for some time now. But yesterday's action confirmed that these big intraday spikes are more often than not, tied to the movement in the dollar. For those of you that remain skeptical on this topic, let's take a look at some charts to drive the point home. And to make things perfectly clear, let's look at the following charts on a 1-minute basis (yes, the game has come to that - if you don't have a 1-min chart up on your screen, you may not be "seeing" the true picture): FXE, UUP, and SPY. The first thing you may notice is that yesterday's chart of the FXE (CurrencyShares Euro ETF) looks remarkably similar to the SPY (SPDR S&P 500 ETF) and that both appear to be inversely correlated to the UUP (PowerShares US Dollar Index ETF). In short, this is because the dive in the Euro, which included a break of important support (the $142 level on the FXE), triggered dollar buying, which, in turn, triggered computerized sell programs in stocks. Simple, right? Surely there is more to the game than this from a big-picture standpoint. But the bottom line here is that stocks didn't dive because of concerns about Europe, China, corporate earnings, the Fed, interest rates, the end of QE2, or even the economy. No, stocks dove because the fast-money's computerized trades were programmed that way. In my humble opinion, Wednesday's rout wasn't a case of macro concerns, but rather the way the game is played at the micro (in this case the "super-micro") level. Look at the charts... Once the Euro broke down at around 11:45 am eastern, the dollar surged and stocks tanked. Any questions as to the drivers here? In the old days, the players and their strategies were easy to understand. You had the pensions, the banks and insurance companies, the mutual funds, and the public - all of which were primarily "long only" investors. And while these players still exist to varying degrees today, you also have hedge funds, sovereign funds, and the dark pools to take into account. Nowadays, the hedgies run, often at the speed of light, at least a couple trillion dollars (before leverage!) and the high-frequency gang accounts for something like 60% of all NYSE trading on a daily basis. As such, it is the "fast (I mean, REALLY fast) money" that can dominate a market in the short run. And the key thing to understand right now is that "the trade" the fast-money crowd is focused on and implementing on a daily basis involves the dollar, stocks, and commodities. Now that I've climbed down off of my soapbox, I should point out that there were a couple other factors at work yesterday. For example, there may have been some commodity-demand concerns brewing due to the demand destruction beginning to show up in oil (gasoline demand has dropped -2.3% over the past year) and the potential slowdown in places like China. In addition, the concerns about Greece as well as worries about inflation in Poland and England may have contributed to the selling of the Euro, which triggered the buying in the dollar, which, well, you get the idea. So once more for emphasis, I'd like to suggest that while the stock market's primary trend is clearly up, anything that causes the dollar to rally is likely going to be a problem for stocks - at least in the short-term - for a while longer yet. Turning to this morning... Overseas markets are mostly lower in response to the action on Wall Street. In addition, the Chinese continue to tighten monetary policy via the announcement of another hike in bank reserve requirements overnight. Closer to home, U.S. futures are below fair value but off their worst levels. On the Economic front... The Labor Department reported the Producer Price Index (an indication of inflation at the wholesale level) for April rose by +0.8%, which was above the consensus estimate for +0.6% and March’s +0.7%. When you strip out food and energy, the so-called Core PPI came in at +0.3%, which a tenth above the consensus for +0.2% and below March’s +0.3%. Next up, the Commerce Department reported that Retail Sales rose in the month of April by +0.5%. This was below the consensus for +0.7%. When you strip out the sales of autos, sales were up +0.6%, which was below the consensus for an increase of +0.7%. And finally, Initial Claims for Unemployment Insurance for the week ending 5/7 fell by 44K to 434K. This was above the consensus estimate for 424K but below last week’s total of 478K. Continuing Claims for the week ending 4/30 came in at 3.756M vs. 3.700M and last week’s 3.751M. Thought for the day... Regardless of the colors on the screens, make the decision to enjoy your day... Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell...
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