Daily State of the Markets
Wednesday Morning – January 11, 2012

Good Morning. 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.

My trusty spreadsheets also tell me that there is no doubt about it; our heroes in horns are winning the game so far in 2012. Stocks were up nicely on Monday, are up on the year, and did finish at the best levels since the summer smashing. Assuming the formulas are still correct, the Dow Jones Industrial Average is up +2.00% so far on the year, the S&P 500 has advanced +2.74%, Smallcaps have increased +3.42%, and the NASDAQ is up +3.74%. Not bad, not bad at all.

So why then are so many of my colleagues (people in the business of investing) frustrated these days? Why am I taking calls and explaining the bull case? And why are so many folks complaining about the current trend – especially when these same folks are basically in the bull camp? While I could certainly be wrong, my thinking is that the dissatisfaction with the market is due to the new trend of the market’s trend.

Upon further examination of the calls I took yesterday, it occurred to me that while each was, to a caller, bullish, they were also all looking to add long exposure to their portfolios. And in short, there have been few opportunities to do so this year as the point moves seen in the indices have almost all come before the open. Sure, there have been some dips to be bought. But if you were buying at the open on the “good days,” you were generally disappointed by the close.

Yes, I know, this is exceptionally short-sided thinking. However, I do find it odd that the stock market’s gains are now occurring when the stock market itself is closed. So, unless you are awake at 2:00 am and can click a mouse faster than a computer can execute a trade instruction, you can’t get in on these moves. In fact, the trend of the new trends is that the market actually trends lower after the initial joyride to the upside at the open.

My question is where is the follow-through? Or perhaps put more accurately, where are the buyers once the opening bell rings? Why are traders selling into the advances? And finally, is this really the new trend?

My working theory is that the new trend in trends isn’t likely to last and can be attributed to the overtly negative macro view amongst so many of the big hedge funds. According to research report from International Strategy & Investment Group, their proprietary gauge of bullishness within the hedge fund community remains at the lowest level since 2009. The report shows that hedge funds, which had a horrible year in 2011, continue to cut their exposure to equities, likely in response to the dour macro outlook in Europe. And although these are supposed to be the most nimble investors around, the hedgies haven’t increased their long exposure since the October low.

Thus, I believe it is safe to assume that the intraday selling we’ve been seeing this year is coming from those folks with a less-than optimistic macro view of the investment world. The good news is that the bulls have been able to prevail thus far. And then the even better news is that if the nattering nabobs of negativism were to find a reason to see that there actually is water in the glass, we might have one heck of a ride to the upside.

So, as someone who is leaning long at the present time, here’s to hoping that the new trend in trends doesn’t catch on.

Turning to this morning… Markets had been leaning green until the head of Fitch Ratings came out and said the ECB needs to do more to avoid a collapse of the Euro. In addition, Angela Merkel has just announced that leveraging the EFSF bailout fund has proved tougher than expected. European markets and the U.S. futures have moved a bit lower in response.

On the Economic front… We will get a report on the Beige Book this afternoon.

Thought for the day… Are you as good as you can be?

Pre-Game Indicators

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

  • Major Foreign Markets:
    • Australia: +0.86%
    • Shanghai: -0.42%
    • Hong Kong: +0.78%
    • Japan: +0.30%
    • France: -0.37%
    • Germany: -0.43%
    • Italy: +0.09%
    • Spain: -0.72%
    • London: -0.68%
  • Crude Oil Futures: -$0.96 to $101.28
  • Gold: +$4.60 to $1632.10
  • Dollar: lower against the Yen and Pound, higher vs. Euro
  • 10-Year Bond Yield: Currently trading at 1.940%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -7.18
    • Dow Jones Industrial Average: -49
    • NASDAQ Composite: -7.93

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.