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Daily State of the Markets Good Morning. The primary purpose of my morning missive is to try and identify the current drivers of the stock market action in an attempt to help me stay in tune with the prevailing trend. As long time readers know, I’m a big believer in the idea that understanding the drivers can go a long way towards getting the short-term market trend right. And if you can get the short-term even halfway right, you are unlikely to be surprised when the market’s character changes or when a big move occurs. To be sure, part of this task can be pure “feel” as we watch the intraday action closely and attempt isolate the appropriate correlations. For example, there are times when the stock market trades in lock step with the euro/dollar. But then there are other times when it’s all about the news, the economic data, the latest rumor etc. Thus, keeping up with what traders are watching and reacting to is an important part of the game; especially from a short-term perspective. However, while “trading feel” certainly plays a role in identifying the current market drivers, I believe the real key to staying in tune with the market’s important trends lies in listening to the message from your market models and indicators. This is also known as looking at the weight of the evidence. And given that I’ve been on the road and out of the office a fair amount over the past two weeks, I figured that a review of our primary models and indicators might be a great way to get my head back in the game on this fine Monday morning. We utilize two different groups of indicators or market models in our work. The first of these is our Weekly Timing Model, which consists of seven model-of-models and three trend indicators. The model takes a “weight of the evidence” approach in an attempt to keep us in tune with the intermediate-term (defined as three to thirteen weeks) trend. In short, we know that when the model is positive, the odds favor the stock market moving higher. And conversely, when the model is negative, history has shown that the market has not fared well. The components of the weekly timing model include a breadth model, a market liquidity model, two seasonality models (only one is employed at a time), a volatility model, a sentiment model, a volume model, an economic model, and custom indicators to gauge the short-, intermediate-, and long-term trend of the S&P 500. While each component model and/or indicator have proven to be successful in their own rights, the combination of the models and indicators provides us with the “weight of the evidence” we like to have in order to feel good about a position. For example, since the end of 2008, if one had implemented a strategy where you went long the S&P 500 when the weekly model was positive, you were short the S&P when the model was negative, and you stayed in cash when the model was neutral, you would likely have been pleased with the results. Although no management fees were taken out, no commissions were paid, and no interest was earned on money that was in “cash” during this test, the strategy would have produced a return of +93.62% (without the use of any leverage), which easily exceeds the S&P’s gain of +51.7% over the same period (12/31/2008 – 3/9/2012). So, what is the weekly model telling us now, you ask? Not much, actually. Although stocks are near their highs for the current bull market cycle, the weekly model reading is only neutral. Here’s a quick rundown of the model/indicator readings: Breadth – neutral, Liquidity – neutral, Seasonality – neutral, Volatility – positive, Sentiment – negative, Volume – neutral, Economic – negative, Short-Term Trend – neutral, Intermediate-Term Trend – positive, Long-Term Trend – positive. Thus, with two negatives, three positives, and five neutral readings, the bottom line for the overall model is a neutral reading. There is one other way we can look at the weight of the evidence from our weekly model. We can break the models components into three indicator categories: Trend, Momentum, and Market Externals. In doing so, we find that the trend indicators are positive, momentum is neutral, and the external indicators are moderately negative. The takeaway from our quick-and-dirty “weight of the evidence” analysis this morning is that while the trend is still your friend (and as such, the bulls should be given the benefit of the doubt here), there are reasons to be cautious at the present time. For us, this means that this is not the time to put the pedal to the metal or play the game in an overly aggressive fashion. It also means that we will not hesitate to take defensive measures if our models weaken. Turning to this morning… A weak trade deficit number (the biggest deficit in 12 years) has traders concerned again about the outlook for growth in China. With no economic data and the Fed on tap tomorrow, futures are pointing to a modestly lower open on Wall Street. On the Economic front… There are no important economic reports scheduled for release today. Thought for the day… Remember that happiness is a choice. What will you choose today? Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell… !========>
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. !========> |
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