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Daily State of the Markets Good Morning. One of the most important aspects of long-term success in the stock market is being able to identify and understand the current market environment. From there, one can implement the appropriate strategy for the type of market that exists at the time. Obvious examples include the go-go growth period of the late 1990’s, where an aggressive long approach to the highest beta stocks was the key to success. However, if one failed to switch gears by the summer of 2000, there was a great deal of pain to be endured. So, my first point this morning is that based on the above example, it is easy to see that adapting one’s investing strategy to the environment at hand can be a very good idea. In short, the same pedal-to-the-metal approach that can be all the rage during bull markets will unnecessarily create excessive damage when it is the bears’ turn to run with the ball. In its simplest form, this is the thinking behind our Market Environment Model. You see, we play the game differently when the model tells us that the odds favor the bulls than when the odds favor the bears. And then we play the game an entirely different way when the model tells us the environment is neutral or “iffy.” I call this an “adaptive” approach where we adjust our strategy to a given environment. With this being the last real trading day of the week and the day before we all turn our attention to the truly important matters of family and giving thanks, I thought it might be a good idea to take a step back from the blinking screens for a moment and take a look at the current environment. For starters, let’s look at the really big picture and talk about the “secular” market environment (defined as an environment that tends to exist for many years – usually 10 or more). The goal here is to attempt to ascertain which type of beast we are dealing with. So, from a secular perspective, it is important to recognize that the S&P 500 index is in about the same spot it was in November 1999. In other words, while it has been a wild ride, the blue chip index hasn’t made any progress in the last 13 years. And since there have been two massive bear markets during this period and some hair-raising corrections, I think it is safe to say that we continue to be in a secular bear market. However, within every secular bear, there are always big rallies that tend to last several years. These are called “cyclical” or “mini” bull markets and usually present excellent opportunities to profit. For example, from the lows of 2009 until the summer of 2011, the S&P enjoyed a strong run as the index doubled in value. Thus, anyone who wasn’t ready to “go the other way” after the destruction of 2008 missed out on some nice gains. From a technical standpoint, the -20% drop in the middle of 2011 qualified as a “cyclical” bear market. Therefore, we can say that we currently find ourselves in the midst of a 13-month old cyclical bull market that had produced a gain of 33% at the September 14th peak. Looking even shorter-term, the S&P has recently experienced a “corrective phase” in which the S&P gave back 7.7% as of last Thursday’s low. And then from a “micro” term perspective, it now appears that we have either a reflex rally within the context of an ongoing corrective phase or the beginning of the next leg up within the cyclical bull. So, what does this mean? Cutting to the chase, the current mix of environments would seem to suggest that one can certainly play the intermediate-term moves, but that this is NOT the time to be taking excessive risk with your positions. With all of that said however, the question posed in the title of this morning’s missive is if the current environment will ever end. What I am getting at here isn’t necessarily the secular, cyclical, intermediate-, short-, or micro-term trend, but rather the fact that the market has been classified as “news-driven” for two and one-half years now. Think about it; ever since Europe initially became the driver of the market action in April 2010, stocks have been pushed and pulled by a seemingly never ending series of big, bad events. Nearly all of these events have also had well publicized deadlines – such as any number of Eurozone meetings, the Greek elections, etc. And now we’ve got the January 1, 2013 deadline to avoid the fiscal cliff to deal with. The way the game has been played lately, the markets react violently to each and every headline, comment, and/or rumor while the big, bad events are “in play”. And then traders simply move on to the next event on their radar. I don’t know about you, but this news-driven type of environment is getting old to me. The market can do nothing for days and/or weeks and then – bam – a headline hits and the market spikes one way or the other. Moves are exaggerated by algos racing each other to get into the latest “trend” which, for the last six months or so, has lasted a day or three (again, how many milliseconds are there in a day?). I guess the good news is that we now know what to expect. But here’s hoping that this news-driven environment can finally come to an end after the current fiscal cliff deal gets done. It probably won’t because the boyz and their toyz can profit from this environment, but we can hope, right? Turning to this morning… Asian markets rallied overnight on hopes for stimulus in China. However, with no deal on the next tranche of Greek aid and no ceasefire agreement between Hamas and Israel, European markets as well as the U.S. futures are currently trading around breakeven. However the day before and the day after Thanksgiving does have favorable seasonality here in the U.S. On the Economic front… We will get reports on Weekly Jobless Claims, Flash PMI, Bloomberg Consumer Comfort, University of Michigan Consumer Sentiment, and the LEI this morning. Thought for the day… Be a good listener. Your ears will never get you in trouble. -Frank Tyger Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell…
Positions in stocks mentioned: none Follow Me on Twitter: @StateDave Download our Special Report on our New “Adaptive” Active Risk Management System for the Stock Market 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 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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