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Daily State of the Markets Good Morning. 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, 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. But I’ve digressed already – shocking, I know. The key point this morning is that what the market “cares about” in the short term (which I define as 1-3 weeks) will likely differ dramatically from what will drive the market in the long term. As such, unless you are a true quant who does whatever your computer tells you to do, regardless of the news or market environment, you will need to be on the lookout for a character change as we progress into the New Year. In the near-term, this market has been and will likely continue to be all about Europe’s sovereign debt mess. More specifically, the recent short-term drivers have been any and all issues relating to credit contagion. Recall that in early October, traders concluded that the “grand solution” that was to be presented at the next EU summit was to put an end to soaring rates in the PIGIS. However, as rates continued to rise dramatically in Italy, Spain, and then France, the market proceeded to tank in November on the fear that there was nothing the EU leaders could do to stop the contagion. However, the latest grand plan, which will effectively create a United States of Europe (via a fiscal compact replete with an enforcement agency for budget busters) seems to have caught the fancy of the bulls. In the process, rates actually fell in places like Spain and Italy late last week. But, I’m not completely sure that three days of declining rates can be considered trend – even from a short- to intermediate-term point of view. The key here is that the stock market is currently focused on the level and direction of interest rates across the pond. If rates decline, stocks go up. Yes, it is that simple. And if the markets can be convinced that the latest and greatest grand plan – which is supposed to convince the ECB to start buying up every bond in sight in order to keep rates heading in the proper direction – will indeed be approved and implemented in short order (meaning by Friday at the latest), then Santa and his reindeer may make an appearance at the corner of Broad and Wall again this year. However, once the EU has announced their new fiscal union plans, the question is likely to become: What’s next? In my humble opinion, if (and this is a decent-sized if) stocks can continue to rally on the idea that the credit contagion has been contained, then the market will likely shift gears and begin to discount the outlook for the future. And don’t look now fans, but that could be a problem. The bulls would have us believe that stocks have an outsized amount of upside potential due to the idea that the U.S. is not in recession. Our heroes in horns point out that this summer’s short, yet sharp, bear market provided enough downside discounting to account for just about everything bad that could happen except a recession. So, using history as a guide, the thinking is that if the U.S. avoids a recession, a new cyclical bull market should be at hand. This brings me to the title of this morning’s missive: Can we got it alone? Another part of the bull case is that the U.S. will be able to continue to grow once all the silliness in Europe is solved. However, the fly in the ointment is the concept that the world is now one gigantic global economy that moves primarily in one direction. And given the recent indicators, that direction appears to be down. Although PMI’s are not perfect predictors, it is important to note that the PMI’s of the UK, Germany, France, the Eurozone, Japan, and yes, even China, have all moved into the economic contraction zone recently. And with European countries all focusing on fiscal austerity measures due to massive debt loads, most economists I trust suggest that a recession in Europe is already underway – and is unlikely to end quickly. Connecting the economic dots, this means that China’s economy is also likely to continue to contract due to the large degree of exports traditionally sent to Europe. So, how is it exactly that the good ‘ol USofA is going to just skip merrily down the path of economic recovery with pathetic job growth and the rest of the developed world slowing? While the market may be able to continue to rally furiously in the short-term on the hope that there is a fix coming to a European bond market near you, the longer-term question for next year is if the U.S. can go it alone. Turning to this morning… Hope that the Eurozone sovereign debt crisis can be resolved this week is being lifted by reports of the ECB planning a EUR1 trillion initiative to be announced at Thursday’s regular meeting. In addition, “Team Merkozy” is meeting today in an attempt to hammer out details of a “fiscal union” that would allow the ECB to jump headlong into the fray. Hope for a resolution to the crisis is overshadowing weaker than expected data out of China and the Eurozone this morning. U.S. futures are pointing to a continuation of last week’s rally. On the Economic front… We will get reports on U.S. ISM Non-Manufacturing and Factory Orders at 10:00 am. Thought for the day… Try sending positive thoughts to someone who could use an upbeat vibe today – you neve know, it just might help… 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. Stocks 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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