David Moenning's  Instablog

Daily State of the Markets
Wednesday, May 23, 2012

Good morning. We need to call a spade a spade here. So many analysts, managers, and pundits come on TV to tell us - with absolute certainty, by the way - (a) what the market is going to do next, (b) what will happen next to the economy, (c) what the Fed will do and when, and (d) what will happen in Europe. However, the bottom line is that nobody can predict any of this stuff because all of the above intertwined as well as tied to data that we don't have yet and events that haven't occurred yet. So, as investors, we all need to collectively stop pretending we know what is going to happen next.

As I've written a time or twenty, I am a firm believer that the key to this game over the long term is to keep your accounts positioned on the proper side of the important trends as much as is humanly possible. The problem is that too many investors have unrealistic expectations about this concept. So here's a tip: You can't be in the market every day the indices are up and out of the market (or short) every day they are down. No, the best you can do is to try and get the big moves right.

Speaking of getting the moves right, the market once again finds itself joined at the hip to the goings on in Europe (yes, for the third summer in a row). But instead of pretending that we know what is going to happen in Greece, in Spain (EWP), in Portugal, and/or in Ireland (EIRL - btw, the Irish vote on the new EU referendum on May 31), we are going to attempt to understand what IS happening across the pond on a daily basis and do our darndest to interpret how the market reacts.

On that score, while an oversold bounce was to be expected after the extended bout of selling seen recently, we feel it is worth noting that the sudden bounce was not triggered by any specific news story or data. No, it appeared that stocks began to rebound on the idea that France (EWQ), Italy (EWI) and some others are going to try and present a united front at today's "informal" EU Summit in order to try and get Angel Merkel and the rest of the Germans (EWG) to agree to something besides more austerity.

Thus, we will submit that the recent improvement in the SPX can be attributed to the hope that France's new President will be successful in his pitch for new growth strategies (which, of course is econo-speak for borrowing money you don't have and spending it on stuff to stimulate growth) in the Eurozone (EZU) and/or the introduction of jointly issued Eurobonds. The only problem here is that the Germans (who would be on the hook for the majority of any new Eurobonds and would see their own borrowing costs rise) are unlikely to suddenly and without warning flip to the other side of either one of these issues.

However, as long as traders can make the case that any of the above is possible, they can pretend that things will be fine and that it is time to buy - or at the very least, cover your shorts. They can then talk about the great values that have been created by the $100 decline in AAPL (ok, that one might be true) and all the other trader fav's. And since they are able to predict where the economy and earnings will be in the coming quarters, they can make very convincing cases that investors need to drop what they are doing and start buying what they are selling... like Facebook (FB).

Or... We could all simply stop pretending that we've got a fully functional crystal ball and instead work as hard as we can to manage risk on a daily basis and try stay on the correct side of the big moves. But then again, you don't get a lot of headlines or TV time without all the pretending!

Turning to this morning... Fear relating to Greece's potential exit from the Eurozone has returned this morning as foreign markets are down more than 1%. Not surprisingly, the U.S. futures have followed suit and are pointing to a lower open at this time.

On the Economic front... We'll get the FHFA Housing Price Index as well as the report on New Home Sales at 10:00 am.

Thought for the day... Consider following your heart, it just might know where its going...

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -1.31%
  • Shanghai: -0.42%
  • Hong Kong: -1.33%
  • Japan: -1.98%
  • France: -1.86%
  • Germany: -1.46%
  • Italy: -2.54%
  • Spain: -2.09%
  • London: -1.68%
• Crude Oil Futures: -$0.70 to $91.15
• Gold: -$16.10 to $1560.40
• Dollar: higher against the yen, euro, and pound
• 10-Year Bond Yield: Currently trading at 1.748%
• Stock Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: -8.78
  • Dow Jones Industrial Average: -82
  • NASDAQ Composite: -18.55

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.

Daily State of the Markets
Tuesday, May 22, 2012

Good morning. Although it took MUCH longer than just about anybody expected, the bulls finally got some relief from the corrective process yesterday as the triple-digit gain likely brought a smile to the face of anyone still long equities. However, it is important to note that such countertrend rebounds, which are also referred to as 'dead-cat bounces' in some circles, cannot be counted on as marking the bottoms of stock market corrections. Thus, we thought this might be a good time to review the way corrections typically play out.

While this time it could certainly be different, more often than not, the type of energetic bounce seen on Monday tends to be short-lived during meaningful corrections. Once the stock market becomes oversold enough and sentiment becomes negative enough, traders usually find something to trigger the urge to take profits on their short bets. Typically it's a piece of good news that causes the bears to rethink their negative thesis (at least for a day or two). But in this case, I'd be willing to bet that it was the weekend report showing that short positions on the euro had hit an all time high.

To anyone paying attention, this little tidbit of information told you that the short side of the game was getting a wee bit crowded - especially after the grinding decline that had seen just one green bar out of the last thirteen on the DJIA. Now toss in the comments from Premier Wen Jiabao which supported growth efforts in China as well as all the platitudes coming out of Camp David over the weekend and I'm guessing anyone with big short positions came into Monday looking to take profits.

The bulls will tell you that the pro-growth commentary being espoused by global leaders (well, most global leaders anyway, Germany (EWG) is still pretty intent on countries spending only what they make) will lead to a change in market sentiment. Our heroes in horns will also tell us that valuations have come in and point to yesterday's M&A deal as proof. And finally, the gang wearing the rose-colored Revo's will likely pronounce that Monday's action means that the correction is now over.

However, anyone who has been in the game for the last three years has certainly seen this movie before (as in the summers of 2010 and 2011). And anyone who has been investing for a living for a couple decades or more will tell you that yesterday's "bounce" is to be expected at this stage of the game during a market correction. So, unless investors suddenly and without any new inputs have decided that everything is going to be hunky dory everywhere on the planet, we might want to take a peek at the correction playbook and review what is likely to come next.

But before we get to the specifics regarding what we expect to see happen, there is one important caveat to offer up. In short, we must keep in mind that this remains a news-driven environment (think yields in places like Spain (EWP) and Italy (EWI), and bank withdrawals in Greece) and as such, anything can happen when headlines are made.

Getting to the matter at hand, now that the market has pulled back in earnest, creating an oversold and an extreme sentiment environment along the way, a frenetic bounce tends to occur. These blasts tend to come out of nowhere and are indeed impressive. The moves tend to be short and sharp as shorts scramble for cover. And it is important to note that the high-fliers live up to their monikers here as the likes of Apple (AAPL) suddenly catch fire again. However, the initial rallies also don't tend to last more than two or three days.

After the sigh of relief bounce, the reasons the correction began tend to resurface and a "retest" of the lows usually takes place. This decline discourages anyone hoping that the corrective phase had ended and basically causes those still looking to sell to do so. This phase will also be accompanied by a "washout" where the selling becomes intense and sets up the ultimate recovery.

If the correction is news-driven, then a piece of news might do the trick to turn things around. Otherwise though, stocks will tend to go through a period of backing and filling before a sustainable rally can begin. It is for this reason that one of my trading rules after a decline tells me to ignore the first buy signal and wait until things calm down before jumping back into the pool (or back in those SSO's or UPRO's).

Turning to this morning... Despite Fitch's downgrade of Japan and the OECD's cut in its global growth forecast, stock futures have turned higher on more talk of growth measures and Eurobonds (Keep in mind that there is an informal EU summit on Wednesday.). Thus, traders will be watching closely to see if the indices can follow through on yesterday's gains.

On the Economic front... We'll get the report on Existing Home Sales at 10:00 am eastern.

Thought for the day... What are you striving for?

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +1.19%
  • Shanghai: +1.06%
  • Hong Kong: +0.62%
  • Japan: +1.10%
  • France: +1.13%
  • Germany: +0.90%
  • Italy: +2.44%
  • Spain: +1.10%
  • London: +1.14%
• Crude Oil Futures: -$0.13 to $92.44
• Gold: -$8.10 to $1580.60
• Dollar: lower against the yen, higher vs. euro, and pound
• 10-Year Bond Yield: Currently trading at 1.785%
• Stock Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: +5.66
  • Dow Jones Industrial Average: +34
  • NASDAQ Composite: +9.37

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.

Daily State of the Markets
Monday, May 21, 2012

Good morning. With the market now down twelve of the last thirteen sessions, it is fairly obvious that we've got a corrective phase on our hands. Although the S&P is down "just" -7.8% during the current pullback, the fact that this move has been almost completely devoid of any upside makes things feel worse than they actually are. For there is little doubt that anyone still on the long side of the game fears a replay of last August's 17% dive over 17 days or the summer of 2010's correction of -16%.

In addition, there appears to be little-to-no hope available to owners of equities at this time. It seems that we are treated to some new problem on a daily basis. Europe is clearly the name of the game right now as Greece remains a sea of misery followed quickly by fears that Spain (EWP) is about to implode. Good economic data in the U.S. is either (a) ignored or (b) followed by data that is weaker than expected. Then there is the JPMorgan (JPM) fiasco, which looks to be getting worse by the day as traders are not going to let "the London Whale" out of his positions anytime soon. Heck, even Facebook's (FB) much ballyhooed IPO wound up being a disappointment and Apple (AAPL) suddenly looks like the SPY of late.

Make no mistake about it though; Greece is the word right now. While it is indeed mind boggling that a country with a GDP the size of Houston's can hold the world's equity markets hostage, this is EXACTLY what is happening at the present time. And although traders had put the thought of Greece leaving the Eurozone behind them during the first quarter of the year, it now appears that the odds of the Greeks walking on their obligations and returning to the Drachma are a coin flip.

Why do we care what Greece does? Does it really matter to the global economy if the Greeks default on everything? In short, no. However, the issue here really isn't about Greece, it's about the question of who's next? When Bear Stearns went under, the fear wasn't really about the losses created by the brokerage firm going down; it was about which firm would be next. And as we found out after Lehman finally went bust, the answer was everyone.

So, while I am clearly guilty of restating the obvious, the real issue here is contagion. Yields and spreads in Spain are soaring again and their economy is not in good shape. And the real problem is that Spain is simply too big to be propped up by the EU, the IMF, and/or the ECB. So, if Greece walks away from the EU, traders fear that the entire currency zone could unravel.

The key word here is fear. As is the case during any waterfall decline, fear is the driving factor. And with the election in Greece nearly a month away, fear is likely to remain front and center for the foreseeable future. And THIS is why the buyers are simply sitting on their hands right now. Why buy now when the situation isn't likely to be resolved for a month? No, it appears that reducing risk is the watchword during each and every session.

It is during these one-way affairs that emotions tend to dominate. And yet at some point, something good tends to happen which causes everyone to realize that the sky isn't falling and that the likes of McDonald's (MCD), Panera (PNRA), Chipotle (CMG), and Google (GOOG) aren't going out of business anytime soon. So, if history is any guide here, Greece won't leave the EU, Spain, Italy, et al won't collapse, and the EU will stay together. And when something good actually does happen, stocks are going to rebound furiously.

What will that "something good" be, you ask? How about the ECB doing another LTRO? What about Mr. Bernanke starting to hint at another Operation Twist? Or what if Germany starts to concede on the idea of doing something about growth in the region or the G-8 talking about banding together to insure that this situation doesn't get out of hand? Then there is the idea of Eurobonds that is being openly kicked around this morning. In short, any or all of the above will likely send the shorts scurrying for cover and bring the buyers back - in a hurry.

In other words, the bears have enjoyed a stellar move based on fear. But with the market as oversold as it is and the emotions running as high as they are, I'd be willing to bet that something good is about to happen at some point soon.

Turning to this morning... Talk of Eurobonds and support for Greece from the G-8 seems to be giving the bulls a lift in the early going. However, the key today will be where the market closes - not where it opens.

On the Economic front... There are no releases scheduled for today.

Thought for the day... "Be the ball, Billy"...

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.62%
  • Shanghai: +0.16%
  • Hong Kong: -0.16%
  • Japan: +0.26%
  • France: +0.75%
  • Germany: +0.97%
  • Italy: -0.76%
  • Spain: -1.03%
  • London: +0.73%
• Crude Oil Futures: +$0.30 to $91.78
• Gold: +$0.90 to $1592.80
• Dollar: lower against the yen, higher vs. euro, and pound
• 10-Year Bond Yield: Currently trading at 1.752%
• Stock Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: +4.48
  • Dow Jones Industrial Average: +47
  • NASDAQ Composite: +6.27

Positions in stocks mentioned: AAPL, CMG

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.