David Moenning
David Moenning is the editor of the State of the Markets Short-Term Market Manager service. He is not a journalist or an individual that dabbles in the market in his spare time. He is a full-time money manager and the President and Chief Investment Strategist of his Chicago based SEC Registered Investment Advisory firm. He began his investment career in 1980 and has been an independent money manager since 1987. Thus, he has been live on the firing line and investing for a living for more than two decades.
I continue to get questions as the reason behind the current run for the roses in the stock market. What about Greece, they ask. Aren’t there huge problems with the bailout deal that was finally arranged on Tuesday? What if the private bond holders don’t go along with the debt swap? Isn’t there a risk that the Germans won’t approve the deal? And won’t we eventually see a default? What about the rest of Europe? And what about those big problems in Portugal? And on and on and…
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One of the great things about the stock market game is that it is always changing. Just about the time your ego tells you that you’ve got the game licked – boom – the game changes completely. One minute you may be on top of the world calling every wiggle and giggle in the market perfectly and the next, well, you’re wondering why on earth your account is red when the market is sporting a big green number. And although I’ve said this a time or twenty over the past few years, THIS is why I prefer a systems-driven approach over the subjective, manager discretion approach to managing the market.
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During the majority of last year, it seemed that all (yes ALL) the news was bad. Greece was surely going to default, which was going to trigger vast unknown quantities of CDS, which, this time, would tank the global banking system, which, in turn, would send us back to the middle ages bartering for goods and services with grains and livestock, and protecting our homes with guns. In a nutshell, the news flow and the macro outlook was a nightmare as no one could imagine anything positive ever happening again.
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After running up more than 12% since the December 19th low, stocks did something that while common last fall has been rare lately – they went down in an ugly fashion. With futures spiking higher in the pre-market on word that China was still planning on lending a hand to Europe eventually (at the right price, of course), it looked like it was going to be just another day at the office for the bulls. European bourses were up more than 1%, Asian markets had enjoyed strong gains, and our stock futures were sporting a bright shade of green.
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As we look back on the seventh consecutive session of the current sideways-is-the-new-down market, it becomes clear that Greece is still the word. While I was secretly hoping that we could finally be done paying attention to absolutely everything that is uttered by politicians on the other side of the Atlantic, yesterday’s session made it clear that this is simply not the case. Yep, Greece still matters whether we like it or not.
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The stock market has confused and confounded a great many investors so far in 2012. While the macro negatives are seemingly monumental and there are no easy answers available, the S&P 500 index is up +7.5% so far in 2012, +12.1% from the December 19th low, +16.7% from the November 25th low, and nearly +23% from the October 3rd low. This action has the bears crying foul and has left lots of folks scratching their heads.
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In light of the fact that the current stock market seems to be all about the macro outlook, it would be logical to assume that investors will need to get the economy right if they are going to be correctly positioned this year from a big-picture perspective. While this is most definitely not the approach I take to investing in the market (and no, I am not going to go off on another rant this morning), a great many investors do utilize such a macro-based strategy.
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When the market does something confounding, such as rally for the better part of eight straight weeks in the face of an ongoing crisis, it is soooo tempting to form an opinion of the action and to base your investing strategy on that opinion. For example, one of my colleagues pinged me yesterday with a note saying “This rally is suspect, I don’t believe in it.” My response was short and straight to the point, “I don’t judge market moves, I just try to stay in tune with them.”
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One of the bear camp’s big gripes about the current rally – other than the idea that it came out of nowhere and caught the nattering nabobs of negativism flat footed, of course – is the fact that volume has been lacking. As any chartist worth their salt will affirm, a market doesn’t need volume to fall but a strong, sustainable rally should be accompanied by increasing volume. In short, rising prices being accompanied by rising volume represents strong demand. As such, our furry friends contend that the current joyride to the upside isn’t long for the world.
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Although our models told us to hop back on the long side of the market six weeks ago, there are a great many investors out there – individuals and professionals alike – that have missed the current rally. For example, I personally know three investors who make their living in the market that have been either short or entirely in cash during the current joyride to the upside.
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The stock market has put up weekly gains for five consecutive weeks now and has finished in the green in eight of the last ten. The DJIA closed Friday at its highest level since the market bottomed on March 9, 2009. The NASDAQ finished last week at its highest level in eleven years. And January was one of the best in years. But with the news shows still droning on about all the macro risks, investors may be wondering if any of the above is meaningful.
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Up until just recently, the bulls’ battle cry had been three simple words: “Better than expected!” In short, for the better part of the last month, the economic data for the good ol’ USofA had been coming in above consensus expectations. To anyone paying attention to such things, this steady stream of strong reports suggested that the country’s economy might actually be better than the bears had led everyone to believe. And as a result, stock prices have been adjusted to higher levels.
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With stocks having effectively moved sideways for the past eight sessions, the question of the day is which way we go from here. The bulls will argue vehemently that the bears have had ample time and opportunity to get something started to the downside – and have simply failed to do so. Yet on the other sideline, our furry friends are quick to counter with the argument that yesterday’s economic reports poke a big fat hole in the bull camp’s thesis.
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I wrote last week that, in my humble opinion, the Fed’s intention to keep rates at “exceptionally low levels” for a length of time that surprised just about everyone, was aimed primarily at helping to build confidence in the American economy. Bernanke appears to have learned that when consumers are confident, they buy more stuff. And when more stuff gets bought, companies tend to hire more people. And when companies hire more people, everybody is happy.
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Investors dressed in fur these days have likely been both surprised and dismayed by the S&P 500′s recent 6-week joyride to the upside. For those keeping score at home, the venerable stock market index has now finished higher in 7 of the last 9 weeks. Since the most recent uptrend began on December 20th, the S&P 500 is up 9.2%. And since the crisis low of October 3rd, the market is up an impressive +19.75% as of Friday’s close. Not bad for a market where the sky was supposed to be falling!
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Anyone who takes the study of the stock market seriously undoubtedly spends at least some of their time with sentiment indicators. For example, sentiment models and indicators account for 15% of our daily risk management work and 10% of our weekly work. So, while market sentiment is obviously not nearly as important as trend, momentum, breadth, or fundamental indicators, it is something to pay attention to – especially when the mood of the market reaches an extreme.
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Anyone holding short-term interest-bearing investments over the past few years knows all too well that cash has been trash as far as trying to generate any kind of income or growth goes. With interest rates at historic lows, the incentive has been to borrow money as opposed to saving money in traditional vehicles such as savings accounts (do banks still offer such a thing?) and certificates of deposit. However in all fairness, the Fed has felt that trying to avoid a global depression probably outweighed the fact that savers and folks living off of interest-bearing investments have had a tough time lately.
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It is safe to say that investors of all shapes and sizes found 2011 to be a very frustrating year. It didn’t matter whether you employed a buy-and-hope approach or an active trading strategy; the bottom line is it was a rough ride. And although the action in 2012 appears to be diametrically opposed to that seen during the last six months of 2011, there is a certain contingency of investors that remain frustrated all the same.
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Although the stock market is overbought and due for a pullback, my current working thesis involves the idea that the market made a costume change on December 20th. Suddenly and without warning, the uber-violent environment in which intraday moves of 3% were common stopped. And then starting on December 21st, something that investors hadn’t seen in nine months returned to the corner of Broad and Wall – some sanity. Thus, it appears that the Dr. Jekyll and Mr. Hyde market that ran amuck for the better part of 2011 has morphed into a good old fashioned, non-news-induced, non-HFT, fund-buying-driven uptrend.
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Stocks finished with impressive gains last week and have now been higher in six of the last eight weeks. Don’t look now, but the DJIA is less than 100 points from last spring’s high water mark for the current bull cycle, which began on 3/9/09. The steady uptrend stands in stark contrast to the uber-violent, up-one-minute-down-the-next environment that had existed for the prior five months. And for those of you keeping score at home, the much-vaunted VIX has fallen 62% from its recent panic-induced highs. As such, the question of the day is if one can actually believe in the bull’s latest joyride to the upside.
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There seems to be some confusion about the idea of the U.S. “decoupling” from the European debt crisis. The bears argue that there is simply no way in this globally connected world, for the U.S. economy to effectively decouple from the rest of the world should a global recession rear its ugly head again. But on the other side of the aisle, the bulls contend that their counterparts are focusing on the wrong issue.
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With the exception of the very first trading day of the year, each and every session in 2012 has continued to take on an eerily similar pattern. As I mentioned on Tuesday, it appears that the new trend is for traders to simply go opposite the direction indicated at the opening bell, regardless of what the futures market had been doing prior. Next, the bears make some menacing moves for about an hour and stocks react by doing their best imitation of water falling off a cliff. But just about the time the closing bell rings in Europe, the dip-buying bulls arrive and the indices proceed to march steadily higher for the next five hours.
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Anyone who has read this column for any length of time knows that I don’t believe in making predictions about the stock market. No, I believe it is critical to check your ego at the door each morning and to spend your time paying attention to what “is” happening in the market as opposed to what you think ought to be happening. You see, I learned a long time ago that Ms. Market doesn’t give a hoot about what I think “should” be happening in her game or what “could” happen next. And it is for this reason that I do my darndest to avoid the use of the words “should”, “could”, or “would” in this business.
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Yesterday’s market headlines from the biggest of the big news websites read: “Stocks Finish at Five Month Highs,” “Stocks Notch Another Win,” and “Banks Lead Rally.” All of which would seem to indicate that the bulls are on a roll right now. And while I think our Market Wrap headline, “Bulls Breakout But Momentum Lacking” may have been a bit more accurate, a picture of the Wall Street bull did indeed adorn the article.
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For the fourth consecutive day, stocks followed a nearly identical pattern. In case you don’t pay attention to the tick-by-tick action of the major indices, stocks have tended to open higher recently only to be met, almost instantaneously, with a bout of selling. From there, things tend to settle for a bit before the next batch of sell programs are run. And then, just about the time things start to look and feel ugly (which is usually right around the time Europe closes), the S&P bottoms. After that, the days have belonged to the bulls as the buyers have then come in and helped the averages spend the majority of the day clawing their way back to breakeven (well, until the last-minute sell programs are run, that is).
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All eyes will likely be on the action across the Atlantic again today and likely the rest of the week, month, and perhaps quarter. Lest we forget, we have yet another purportedly “big meeting” with Team Merkozy today as the leaders of France and Germany are once again trying to figure out what to do about all the debt problems in the Eurozone and how to turn things around. However, I thought I’d take a timeout from the Eurozone death watch this morning and take a gander at something that used to matter to the stock market: earnings and valuation.
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I fully recognize that unless you are a member of the fast-money set, drawing meaning from something that has occurred only two consecutive times in the stock market can be dangerous. And while I have been publicly accused of being a little too optimistic in my morning missives of late (the shame!), I will have to say once again that the action so far this year hasn’t been half bad.
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I’ll be honest; I was not a happy camper at about 8:30 am mountain time Wednesday morning. Stocks were reacting badly to a renewed stream of negatives from across the pond and frankly, it felt like the bad old days had returned. Deep down, I knew that we had enjoyed a respite from the news-driven nightmare during Santa’s visit to the corner of Broad and Wall last week. But it was still discouraging to see the market tick to fresh new lows after each and every miniscule bounce in the early going yesterday.
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Back before you needed to know the debt-to-GDP ratio and the corresponding level of interest rates in every European country, investors focused on such relatively mundane issues such as corporate profits, inflation, the direction of interest rates, and the state of the economy. But, as you are no doubt aware, these data points have largely taken a back seat over the past year as worry has become the watchword and just about any headline was a reason to run a sell program or three.
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Welcome back to the game. To say that 2011 was challenging for active managers (especially the second half) is likely the understatement of the year. Although active managers have outperformed the buy-and-hope crowd over the past twelve years by gi-normous amounts (lest we forget, the Lipper Growth Fund Index is down -28.44% from 12/31/1999 and the S&P 500 cash index is off -14.4% while even something as simple as a 15-month moving average produced gains of +103% over the same period), unfortunately 2011 was not a good year for anyone trying to actively manage the market’s ups and downs.
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I don’t know about you, but I really enjoy this time of year. Obviously the time with family is the highlight during the holidays. But I’m guessing you don’t need me to tell you that. So, what I’m really referring to here this morning is this is the time of year when you review your positions and plot your strategy for the coming year in the markets.
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Although this market can turn on a dime (or in this case a headline or rumor), I will admit that the bulls deserve some credit after Wednesday’s effort. In short, with the holiday season underway and Tuesday’s big blast creating an overbought condition, short-term profits were ripe for the picking. So, after Oracle’s report stunk up the joint and traders began to “sell the news” that European banks had indeed borrowed a boatload of euros from the ECB, it wasn’t exactly surprising to see stocks take a hit yesterday morning.
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I was asked a very fair question yesterday morning right about the time the market opened. The caller, who is a financial advisor as well as a longtime friend, wanted to know why on earth stocks had opened up more than 180 points in the first couple of minutes (the first three minutes to be exact). He made a somewhat exasperated reference to the bear case that he thought was well entrenched and wanted to know what the heck was going on. My response was short and sweet, “That was yesterday’s news; today it’s all about the yields.”
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I have to give credit for this morning’s theme to my son, who has been working with me for five years now. About 10:00 am yesterday morning, he pinged me with the following: “So… we can’t go up because of the Europe mess (which seems to find a new way to disappoint each and every day) and we can’t go down because of the better-than-expected economic data here in the U.S. I guess we’re stuck in the middle then until something breaks.” To which, I replied, “Exactly!”
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There is little doubt that the stock market “feels” like it wants to go higher. And why not, we are entering a time of year that is traditionally filled with joy and good tidings (to the tune of about +1.8% on average on the S&P 500 from now until New Year’s eve), there is hope that 2012 will see better days (oh, and the prospect of hitting the “reset button” isn’t hurting anybody’s feelings right now), and then the economic data here in the U.S. has been nothing short of surprising. What’s not to like, right?
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Yesterday’s headlines certainly sounded encouraging: “Stocks gain on U.S. Economic Data.” At first blush, there are two positives in that headline. First, the “stocks gain” part is certainly welcome to anyone owning equities in their brokerage accounts, 401(k) plans, or mutual funds. And what’s this, “positive economic data?” Is that even allowed in this dour, the-world-is-coming-to-an-end environment? But hey, it certainly sounds like a good thing.
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I have been in the business of the markets since I graduated college in mid-1980 and I have been managing “other people’s money” since 1986. I have seen strategies, themes, fund types, and even asset classes come and go. But it wasn’t until this year that I had heard the phrase “risk on/risk off” used.
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Long time readers know that I am a stout believer in the idea that there is usually a reason behind a good-sized market move. I’m not talking about 50 point swings in the Dow that can happen at any point of any day for little or no reason other than somebody clicking a button. No, I’m talking about a move of at least 1% or more (in either direction) within a short period of time – you know, something that gets your attention.
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Let me get this straight. Stocks rallied early last week because traders assumed that the EU was going to create a fiscal compact. It was assumed (for good reason, by the way) that this compact would allow the ECB to start buying bonds with both hands. But then traders threw a temper-tantrum that reminded me of what it was like to have a two year-old again on Thursday after Super Mario said that the ECB wasn’t going to buy any more bonds right now. And then stocks rallied anyway on Friday on word that the EU leaders had agreed to a fiscal compact. Hmmm…
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With just fourteen trading days left in what is currently being called the “Nightmare on Wall Street” (lest we forget, reports from HFR show that hedge funds are having their second worst year on record and another report I saw over the weekend said that 3 out of 4 mutual fund managers are underperforming their benchmarks), the question of the day is: Do you believe?
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Well, here we go again. It’s another month, it’s another Friday, and yes, we’ve got yet another make-or-break EU Summit meeting on our hands. To hear the EU leaders tell it, the meeting holds huge promise as this time – yes, this time – the powers-that-be have a plan to put an end to this sovereign debt crisis that is now more than 18 months old. This time, really? Haven’t we heard this a time or two (or, maybe four) times before? And yet, like moths drawn to a flame, investors continue to buy into the hype.
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Let’s start this morning with a couple questions. First, are we having fun yet? And second, is this headline/rumor/HFT-driven, up-one-minute-down-the-next market environment ever going to end? As to the first question, if you are one of the multi-billion dollar banks or hedge funds that utilizes high-frequency-trading in your day-to-day operations, I’m guessing the answer is yes. But if not, well, the answer is likely a resounding no. And as for the second question, the answer is probably best found in another question: Will EU leaders find a solution before or after a major European bank fails?
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The latest grand plan to save the Eurozone would have the 17 member states becoming an increasingly close knit family. Here’s my take on how the latest episode of “All in the Family” is likely to play out. And I’ll apologize in advance if you’ve seen this one before as this show has been in reruns for quite some time now.
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Of the time I commit each day to market analysis, the vast majority is spent attempting to identify and understand the drivers of the action on both a short- and longer-term basis. As I’ve said a time or twenty, if I can get a handle on “why” the market is doing what it is doing in the short-term, I shouldn’t get fooled by market moves over the long-term. And as anyone who has been around this game awhile will likely attest, avoiding big mistakes is really the key to longevity.
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One of the biggest keys to successful stock market investing is to understand your timeframe. In short, there are lots of ways to beat the market – but almost nothing works across all timeframes. Heck, my research shows that something as simple as a “golden cross” can be a very effective tool and will help you outperform the market over the long term. However, it is critical to recognize that strategies proven to be market beaters in the long term may make you look and feel like a fool in the short term. Thus, you’ve got to decide whether you are playing for the next 10 minutes, the day, week, month, quarter, year, or decade – and then understand what to expect from your system, strategy, and/or indicators.
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I was speaking with a colleague yesterday afternoon and was asked, “Are you doing anything differently in your portfolio systems these days about Europe? It seems that this thing could get solved soon. But, if they don’t get this mess straightened out in the near future, we may be in for big-time trouble.” The response that came out of my mouth was a combination of stuff I’d put in the “Duh” category and then, surprisingly, a rather concise and simple outlook. So, I thought I’d share.
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The good news is that the next EU Summit begins in just seven days. And this time, they tell us, they have a plan to fix the sovereign debt crisis once and for all. The bad news, of course, is that investors will have to play the waiting game for eight more days before anyone learns whether or not it is time to unleash the bazooka on those nasty bond vigilantes who keep driving up rates for the fine folks in Greece, Italy, Portugal, Spain, Ireland, etc.
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I will admit that the title of this morning’s missive may be a little clichéd and perhaps a bit over the top. But then again, with the very future of the Eurozone on the line, maybe “To be or not to be?” is an appropriate question after all – well, for the ECB anyway. You see, with all the talk about whether or not the Euro will implode in the coming weeks (there were reports in the market yesterday that banking regulators are currently running tests to see if their systems can handle a rash of new – er, old – currencies), it appears that the situation has come down to whether or not the European Central bank wants to be (or not to be) the lender of last resort.
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I’ve been writing a fair amount lately on the subject of how difficult this market has become to try and work with, and I believe that Monday’s action was a perfect example of why. In short, if you are one of those folks who likes to ease into the week come Monday morning with some water cooler conversation and/or a leisurely cup of coffee with colleagues, you missed the day’s entire move.
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Perhaps the story of the year in the stock market isn’t about the trouble in the Middle East, the triple tragedy in Japan, or even the European sovereign debt crisis. Understand that I’m not talking about market-moving stories because obviously Europe has been the driving factor for much of the past 18 months. No, I’m referring to the way the market has been moving. Dubbed a “risk on/risk off” environment, the big story is the record level of correlations between stocks as well as asset classes to the S&P 500.
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