The Freak-Out Fakeout

Jun. 21, 2012 8:42 AM ET
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Portfolio Strategy, ETF investing, Long/Short Equity

Contributor 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.

Daily State of the Markets
Thursday, June 21, 2012

Good morning. Most everyone I talked to yesterday was sitting on the edge of their seats at 12:30pm and 2:15pm eastern time. For anybody who has been in or around this game for any length of time knows that "Fed days" tend to be wild days. And with the stock market (SPY, DIA, QQQ) having been on a joyride to the upside over the past two weeks (the DJIA had put on 725 points since June 4th), no one could be blamed for feeling a little skittish going into the all important Fed announcement.

On Wednesday, even the news out of Europe was secondary. The headline exclaiming that Greece had finally (FINALLY) been able to cobble together a government that would not send the country back to the drachma, was met with a yawn. Word that yields in Spain (EWP) actually improved was hardly worth tweeting about. And while there was one brief buy program when Germany's (EWG) Angela Merkel said that the ESM (the new bailout fund that, by the way, hasn't even been approved yet, and doesn't have any funding) just might be able to buy some bonds (the obvious question in response to this headline was, "What else would it do?"), it was clear that all eyes were on one Ben Bernanke on Wednesday.

Given that (a) stocks had rallied strongly going into the FOMC meeting and (b) the chatter seemed to indicate that another QE fix was the baseline assumption, it seemed that stocks were predisposed to disappointment. And if one objectively looked at the economic data, the Fed's history, and the recent Fedspeak, it felt like anything short of more outright bond buying would result in a hissy fit - aka a series of intense sell programs. Thus, more than a handful of bears I'm acquainted with were licking their chops going into the 12:30 FOMC statement.

The tension continued to build into the statement as the "risk trade" components weren't acting well. While the talk of the town was all about QE expectations, bond yields (TLT, IEI, IEF) were rising, the dollar was rising, and commodities (DBC) - especially gold (GLD) - were falling. As such, Ms. Market seemed to be suggesting in a rather loud fashion that QE wasn't gonna happen.

As usual, the computers were primed and ready at the clock struck 12:30. And the first reaction to the announcement that the Bernanke's bunch had decided to keep on twisting until the end of the year (recall that Operation Twist had been scheduled to end in 10 days) wasn't exactly pretty as the S&P fell 7.5 points in less than two minutes. In response, a colleague tweeted, "Ruh Row Reorge!" (Twitter is both informative and oftentimes quite humorous throughout the day).

After confirming that there was no QE coming, my first reaction was to check my sell stop trigger points for our STTF (short-term trend-following system) again. While the S&P had started the day with a healthy cushion above my 1335 stop, I figured that a freak-out just might be underway and I'd best be prepared.

However, a funny thing happened on the way to the disaster - the freak-out turned out to be a fakeout. Sure, it got interesting after the buy programs that followed the sell programs (it seems there is always at least one fakeout move on Fed days) gave way to, yep, you guessed it; more sell programs. But then the buy programs were run into the close and the end result for the day that many had feared (in both directions, btw) turned out to be a loss of 13 points on the Dow and a tiny gain on the Nasdaq (QQQ).

As the closing bell rang, the technicians I occasionally chat with were quick to point out that Wednesday had been an "inside day" (this occurs when the high of the day in question is below the high of the previous session and the low is above the previous low - thus today's bar is "inside" yesterday's). I was informed in an almost gleeful manner that this meant the bulls retained possession of the ball and we "should" (oh how I detest that word in this game) move higher from here.

I nodded my head politely at this assertion and did my best not to roll my eyes (as you know, I'm not big on predicting much of anything in this business except for when the opening bell is going to ring the next day). But inside my head I was merely happy that the freak-out many had expected/predicted had turned into a fakeout. Well for now, anyway; after all today's another day.

Turning to this morning... Despite higher yields at the latest Spanish bond auction and another batch of weak preliminary PMI numbers out of Europe (well, actually the numbers in France perked up a bit) and China, European bourses and U.S. futures have moved modestly higher. However, there is a boatload of U.S. economic data to come this morning.

On the Economic front... Initial Claims for Unemployment Insurance for the week ending 6/16 were reported at 387K, which above the consensus estimate for 382K but a bit below last week's revised total of 389k (up from 386k). Continuing Claims for the week ending 6/9 came in at 3.299M vs. consensus of 3.266M.

In addition, we've got a slew of data after the bell with Bloomberg Consumer Comfort at 9:45am and then FHFA Housing, LEI, Philly Fed, and Existing Home Sales at 10:00.

Thought for the day... Respect yourself & others will respect you. -Confucius

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: -1.03%
    • Shanghai: -1.40%
    • Hong Kong: -1.30%
    • Japan: +0.82%
    • France: +0.19%
    • Germany: +0.37%
    • Italy: +1.45%
    • Spain: +1.44%
    • London: -0.24%
  • Crude Oil Futures: -$0.49 to $80.96
  • Gold: -$18.80 to $1597.00
  • Dollar: lower against the yen and pound, lower vs. euro
  • 10-Year Bond Yield: Currently trading at 1.658%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +2.58
    • Dow Jones Industrial Average: +29
    • NASDAQ Composite: +0.62

Positions in stocks mentioned: SPY, IEI

Follow Me on Twitter: @StateDave

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

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.

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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.

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Disclosure: I am long SPY, IEI.

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