David Moenning
David Moenning is the editor of the State of the Markets Short-Term Market Manager service. He is not a journalist or an individual that dabbles in the market in his spare time. He is a full-time money manager and the President and Chief Investment Strategist of his Chicago based SEC Registered Investment Advisory firm. He began his investment career in 1980 and has been an independent money manager since 1987. Thus, he has been live on the firing line and investing for a living for more than two decades.
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.
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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%.
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Stocks have been down ten of the last eleven sessions. According to Bespoke, the NYSE Advance/Decline line is now at one of the most oversold levels seen since 1990. The talking heads on T.V. told us yesterday that the NASDAQ is now officially in “correction” territory. The S&P has fallen 6.6% since April 2nd. And the global equity markets have reportedly lost $3 trillion in value since the beginning of May. All thanks to Greece – a country whose GDP is barely larger than that of Houston, Texas.
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Greetings from Kilkenney, Ireland. For me at least, the weekend elections, as well as yesterday’s market action, raise more questions than answers. While the bulls will argue that yesterday’s impressive rebound in the U.S. indices means that the buyers are resilient at the present time and that we’ve seen the lows for this corrective phase, frankly I’m not so sure this is the case.
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The recent correction in the stock market has been attributed largely to returning concerns about the state of the European sovereign debt crisis as well as a general softening of the economic data here in the U.S. While just about every report to hit the tape in the first quarter was better than expected, since then, it appears that the economic momentum has begun to fade. And in short, this put a fairly large dent in the BTE theme. As a result, some of the exuberance was removed from stock prices.
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My digital calendar informed me this morning that the month of May has officially arrived. And according to Wall Street’s folklore, this means that it may be time to do something other than invest in the stock market for a while. But to be honest, I’ve never put much credence in the old saw, “Sell in May and go away” as stocks have only fallen during the May-October period 11 of the 32 years I’ve been in this business. But, I will have to admit that it’s been a profitable strategy of late and as such, I thought I’d dig into the data to see whether I should just extend my stay in Europe until after Halloween.
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Five days ago, the bears seemed to have everything going their way. After one of the best first quarter performances in years, the stock market was overbought, sentiment had become too upbeat (or at the very least, traders had become more than a little complacent), and hedge fund managers were falling all over themselves trying to play catch up with their benchmarks (aka the S&P 500). Thus, as I wrote on March 28th, it was time to prepare for some sort of a correction, pullback, or sloppy period.
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As you may know, my Daily State of the Markets report is dedicated to identifying the drivers of the market action. The vast majority of the time, this is a fairly easy task as the reasons behind a move are usually pretty straightforward (well, eventually anyway). But then there are days like Thursday. You see there are times when it isn’t so much about what happens in the stock market game, but rather how it happens that matters.
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Fool me once, shame on you. But fool me twice… Well, that’s the stuff that trading ranges are made of. As I’ve mentioned a time or twenty over the past couple of weeks, I’m of the mind that the stock market is stuck in a consolidation phase. And unless the bulls can get their act together in a big way, I’d also be willing to bet that this sloppy period of back-and-forth action may continue for a while.
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A good chunk of first quarter’s joyride to the upside was attributed to the performance of a little company named Apple (AAPL). What is now the world’s largest company had what has come to be known as an outsized impact on many of the stock market indices, causing one analyst to dub the U.S. stock market the N.B.A. market – Nothing But Apple (as in nothing but AAPL was needed in a portfolio).
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There are times when the phrase “market logic” is clearly an oxymoron. Such is the case when stocks rally furiously after bad economic news based on the idea that the negative data means more economic hand-holding from the Federal Reserve. And yet there are other times when the drivers behind the stock market’s moves are blatantly obvious and easy to understand. Lately we’ve seen a little of both as hopes for more Global QE have certainly driven stock prices at times this year and then on days like yesterday, it was pretty darn easy to understand what was going on.
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With yet another session spent inside the current tight little trading range on Friday, it is clear that the consolidation phase continues. The primary driver of the current phase appears to be an oldie-but-a-goodie: uncertainty. In short, traders are uncertain about what comes next on any number of fronts including earnings growth (earnings are only expected to be up 1% this quarter), inflation (which, for those of you keeping score at home, is currently above the Fed’s target zone on a year-over-year basis), Europe (Spain and Italy are getting all the attention these days), China (is 8% enough?), the economy here at home (a slowdown of the BTE theme appears to be happening) and the calendar (can “sell in May and go away” work yet again?).
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Although I run the risk of restating the obvious, it appears to me that the current market has gotten more than a little sloppy lately. Thus, unless one of our two teams can really get something going in the near term, the current consolidation phase is likely to continue. You see with earnings season just getting underway and a great deal of uncertainty remaining with regard to the situation in Europe, it may be tough for the bulls to make a concerted push higher. And yet at the same time, our furry friends in the bear camp don’t seem to be able to do much with their opportunities of late. Thus, unless something changes right quick, the consolidation will remain in play.
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“Buy! No, Sell! No wait, did I say sell? I meant Buy! Yea, that’s right, Buy! Unless… Well… Ok… No, let’s Buy…. Yea, that’s my final answer! But wait… Maybe I should…”
While it sound’s idiotic, this is the type of indecision that appears to have overwhelmed traders (oops, I mean the computers) of late. One minute Europe’s woes are back, contagion is spreading, the global banking industry is toast, China is going to bring down the world, and Apple (AAPL) is crashing. But the next – Wheee! – It’s all good, buy em!
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After defying the naysayers, a great deal of logic, as well as gravity for the past four and one-half months, the coolest company in the world has had a rough go of it over the last week. After hitting a high of $644 on April 10th, shares of Apple (AAPL) have done a pretty decent swan dive impression as the stock closed yesterday at $580.13, a cool $64 (or just about 10%) off the top – all in a matter of five trading days. But after completing a +57% run in 2012 alone, I guess a quick little dance to the downside was to be expected.
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After four months of watching the bulls march merrily higher on a daily basis, with nary a bout of volatility to be found, suddenly we’re back to what is beginning to feel like the bad old days of 2011. A market that had no memory from one day to the next. A market that gave the word volatility new meaning. And a market where investors were forced to watch any and all headlines from countries they’d only visited (or dreamed of visiting) on vacation as well as securities they’d never heard of before. (Come on, admit it; did you really watch European debt spreads against the bund before last summer?)
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In yesterday morning’s meandering missive, I opined that it might be an appropriate time for the bulls as well as the fast-money traders to take a break. Exhibit A in my thesis was the fact that the market tends to pause for a few months after new bull markets reach the six-month mark. And since the recent top in the S&P 500 on April 2nd also just happened to correspond with the new bull’s six-month birthday, it seemed reasonable to assume that we just might be entering a “sloppy period.”
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It seems that the only folks left in the stock market game these days are professional traders. Gone are the soccer moms that decided to take up day-trading in the late 1990′s. Gone are the guys that decided to quit their jobs and trade futures in their pajamas. Also gone are the millions of Americans who used to dabble in the stock market trading Apple (AAPL), Microsoft (MSFT), Oracle (ORCL) or Google (GOOG) at lunch and then spending their weekends pouring over Barron’s and plotting their next purchases. No, the two brutal bear markets seen in this secular cycle coupled with the insane volatility of the past two years has pushed the public to the sidelines.
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Although I utilize models and disciplined systems coupled with trading rules in my approach to managing the market, I do think it helps to understand what is happening in the market and why – if for no other reason than it helps you implement your signals at times. In fact, I believe that oftentimes the “why” is much more important than the “what” when it comes to staying in tune with Ms. Market’s moods.
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We had an interesting discussion in the office yesterday about what is, has been, and will be driving the stock market. To my surprise, there was some lively discussion and differing opinions on what has been the impetus behind this year’s joyride to the upside. To me, this is an easy one as I’m of the mind that it’s been the better-than-expected economic data combined with the grossly underinvested positions of the hedgies driving stock prices higher for the past four months. And yet the topic of QE3 seemed to get a lot of attention in our impromptu strategy session.
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The stock market has been largely a one-way street for the better part of the last four months. As we’ve mentioned a time or two, the impetus for the surprisingly strong market performance has been the correspondingly surprising strong economic performance of the U.S. and economy. And because of the mostly better-than-expected economic data, traders have been able to brush aside the difficulties facing Europe and the less than inspiring economic data out of China.
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I got a kick out of the reports from the popular financial press yesterday morning. It seemed all the news outlets were falling all over themselves trying to tie the market’s weakness to “disappointment” over the hawkish tone of the FOMC minutes. In short, everybody was suggesting that it was the lack of any hints about more Fed stimulus that was responsible for the triple-digit decline in the Dow futures. Never mind that interest rates and debt spreads were spiking in Spain or that the PM had said something about a bailout. Never mind that European bourses were down big. Nope, it was the idea of Bernanke pulling the punchbowl that was getting all the attention.
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It is little wonder that the individual investor is no longer in the stock market (well, except via their 401(k) plans of course) as there are times – such as yesterday afternoon – where the game makes absolutely no sense at all. As exhibit A, I submit the action in the major stock market indices immediately following the release of the minutes from the March 13th Fed meeting. In short, you need to understand a little something called market logic (an oxymoron I believe) in order to make sense of the action.
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The question I was asked most frequently yesterday was, can it continue? No, I’m not talking about the string of glorious, summer-like days with temperatures in the 80′s (btw, that streak was obliterated in Denver yesterday as shorts and t-shirts were replaced with underlayers, fleece, and white stuff falling out of the sky) or Lindsey Vonn’s dominance on the women’s world cup. No, everyone wanted to know if the bulls’ impressive start to the new year could be expected to continue ad infinitum.
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By now I’m sure you are aware of the fact that the S&P’s 12% gain in the first quarter was the best Q1 of any year since 1998. And by now I’m guessing that you are also well aware that just about everyone on the planet is looking for a pullback, a consolidation, a correction, or even a “sloppy” phase to set in. After all everybody knows trees don’t grow to the sky and as any bear will undoubtedly attest, that is exactly what appears to be happening at the present time.
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There has been an awful lot of discussion among investors lately regarding the disastrous results seen in some of the so-called volatility ETN’s such as the VXX and TVIX. As you are no doubt aware, many investors had purchased these ETN’s in an effort to hedge their portfolios against possible losses that might occur during what most felt was an inevitable market correction. However, instead of being a hedge, the ETN’s produced massive losses during a time when the volatility index or VIX actually advanced.
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By now, everybody knows that it was none other than Ben Bernanke that stoked the bulls’ fire on Monday. The Fed Chairman basically said that although the economy is improving (something the FOMC acknowledged at their last meeting), the country’s GDP is not growing fast enough to create the jobs needed to get the unemployment rate back down to more palatable levels. In short, Bernanke’s not satisfied and feels the Fed can do more.
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Like children feeling trapped in the backseat of a car, underinvested fund managers have apparently been asking the one question that parents universally dread, “Are we there yet?” (To the correction, that is.) Given that we haven’t seen a four-day decline in stocks for more than four months and have only seen one other three-day drop this year (and that one didn’t amount to much), I guess we can’t really blame those who get paid relative to their performance to the S&P 500 for getting a little fidgety while waiting for an opportunity to get in this market.
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It is fairly safe to say that nearly early every trader, chartist, and market analyst on the planet will agree that the stock market is extended and that the bulls are likely to take a break at some point in the near future. Call it a pullback, a consolidation, a correction, a “sloppy period” (this one’s my personal favorite), or whatever you’d like, but the bottom line is that most everyone is looking for the current joyride to the upside to pause soon.
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The news greeting investors on Tuesday morning clearly wasn’t good. There were problems in China, which in turn, meant problems for the global growth thesis. There were new worries about Greece (I know, how the heck is that possible?). There was a lot of chatter about Portugal becoming the next Greece and that EU leaders had best deal with this quickly before another round of debt restructuring begins. And with Shanghai, Hong Kong, and most of the European bourses down more than 1%, it looked like the bears might finally get back in the game yesterday.
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As I have mentioned on a couple of occasions recently, I believe that we are now in the throes of a new cyclical (or “mini”) bull market. As such, we should expect our heroes in horns to keep their opponents at bay for quite some time yet as the median mini bull that occurs within the context of a secular bear (i.e. a move spanning a decade or more), lasts about 500 days while the average lasts about a year. And given that this bull started on 10/4/2011, history suggests that the rose-colored-glasses gang out to remain large and in charge for another 6 to 11 months.
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As I’ve mentioned a time or twenty over the years, the primary purpose of my Daily State of the Markets column is to try and identify the driving forces behind the market’s current mood. I figure that if I can understand why things are happening in the short-term, I shouldn’t be taken by surprise by how the market acts over longer periods of time. And understanding why the market does what it does makes it a heck of a lot easier to stay in tune with the current environment.
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I continue to believe that the change in the market’s character we witnessed from last fall to the beginning of this year was one of the most confounding, yet impressive shifts I’ve seen in my more than 25 years of managing money. In a matter of a month, the stock market morphed from a violent, unforgiving beast – a market that many market pro’s had called the toughest they’d seen in 30 years – into an optimistic, glass-is-completely-full, energizer bunny that just keeps going and going and…
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You have to give the bears credit for at least being steadfast in their views. After getting their heads handed to them for much of the last twelve weeks, I was told by a card carrying member of the-glass-is-completely-empty club yesterday that stocks were no doubt going to begin a major correction in the next day or two. Exhibit A in this particular bear’s argument was the fact that the upside momentum has all but stopped in its tracks and as a result, I’d best find my hard hat.
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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.
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It came to my attention yesterday that the stock market’s decline was the first drop of at least 1% this year. And upon closer inspection, it has been 45 days since the last time the S&P declined 1% or more. While I have written about the market’s abrupt change of character that has transpired since mid-December, the question of the day (in my mind, anyway) is if the current stretch without any meaningful downside volatility has any meaning going forward.
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One of the most interesting/difficult aspects of trying to manage money in the stock market is the fact that the game is always changing. And I’m here to say that one of the most dramatic changes I’ve ever witnessed in my 24+ years in this business has occurred in the past four months. In short, never before has the importance of being flexible been more evident as this market morphed from a violent, bucking bronco that moved hundreds of points on the latest headline or rumor out of Europe into a steady-Eddie, Energizer Bunny.
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As the saying goes, “It’s not the news, but how the market reacts to the news that matters.” So, with this time honored Wall Streetism in mind, I have but one question (ok, maybe two) for the bears out there this morning: If you can’t get anything meaningful going to the downside when weak macroeconomic news shows up, when will you? If you can’t produce a triple-digit Dow decline on weak PMI numbers, what’s it gonna take?
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I continue to get questions as the reason behind the current run for the roses in the stock market. What about Greece, they ask. Aren’t there huge problems with the bailout deal that was finally arranged on Tuesday? What if the private bond holders don’t go along with the debt swap? Isn’t there a risk that the Germans won’t approve the deal? And won’t we eventually see a default? What about the rest of Europe? And what about those big problems in Portugal? And on and on and…
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One of the great things about the stock market game is that it is always changing. Just about the time your ego tells you that you’ve got the game licked – boom – the game changes completely. One minute you may be on top of the world calling every wiggle and giggle in the market perfectly and the next, well, you’re wondering why on earth your account is red when the market is sporting a big green number. And although I’ve said this a time or twenty over the past few years, THIS is why I prefer a systems-driven approach over the subjective, manager discretion approach to managing the market.
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During the majority of last year, it seemed that all (yes ALL) the news was bad. Greece was surely going to default, which was going to trigger vast unknown quantities of CDS, which, this time, would tank the global banking system, which, in turn, would send us back to the middle ages bartering for goods and services with grains and livestock, and protecting our homes with guns. In a nutshell, the news flow and the macro outlook was a nightmare as no one could imagine anything positive ever happening again.
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After running up more than 12% since the December 19th low, stocks did something that while common last fall has been rare lately – they went down in an ugly fashion. With futures spiking higher in the pre-market on word that China was still planning on lending a hand to Europe eventually (at the right price, of course), it looked like it was going to be just another day at the office for the bulls. European bourses were up more than 1%, Asian markets had enjoyed strong gains, and our stock futures were sporting a bright shade of green.
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As we look back on the seventh consecutive session of the current sideways-is-the-new-down market, it becomes clear that Greece is still the word. While I was secretly hoping that we could finally be done paying attention to absolutely everything that is uttered by politicians on the other side of the Atlantic, yesterday’s session made it clear that this is simply not the case. Yep, Greece still matters whether we like it or not.
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The stock market has confused and confounded a great many investors so far in 2012. While the macro negatives are seemingly monumental and there are no easy answers available, the S&P 500 index is up +7.5% so far in 2012, +12.1% from the December 19th low, +16.7% from the November 25th low, and nearly +23% from the October 3rd low. This action has the bears crying foul and has left lots of folks scratching their heads.
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In light of the fact that the current stock market seems to be all about the macro outlook, it would be logical to assume that investors will need to get the economy right if they are going to be correctly positioned this year from a big-picture perspective. While this is most definitely not the approach I take to investing in the market (and no, I am not going to go off on another rant this morning), a great many investors do utilize such a macro-based strategy.
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When the market does something confounding, such as rally for the better part of eight straight weeks in the face of an ongoing crisis, it is soooo tempting to form an opinion of the action and to base your investing strategy on that opinion. For example, one of my colleagues pinged me yesterday with a note saying “This rally is suspect, I don’t believe in it.” My response was short and straight to the point, “I don’t judge market moves, I just try to stay in tune with them.”
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One of the bear camp’s big gripes about the current rally – other than the idea that it came out of nowhere and caught the nattering nabobs of negativism flat footed, of course – is the fact that volume has been lacking. As any chartist worth their salt will affirm, a market doesn’t need volume to fall but a strong, sustainable rally should be accompanied by increasing volume. In short, rising prices being accompanied by rising volume represents strong demand. As such, our furry friends contend that the current joyride to the upside isn’t long for the world.
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Although our models told us to hop back on the long side of the market six weeks ago, there are a great many investors out there – individuals and professionals alike – that have missed the current rally. For example, I personally know three investors who make their living in the market that have been either short or entirely in cash during the current joyride to the upside.
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The stock market has put up weekly gains for five consecutive weeks now and has finished in the green in eight of the last ten. The DJIA closed Friday at its highest level since the market bottomed on March 9, 2009. The NASDAQ finished last week at its highest level in eleven years. And January was one of the best in years. But with the news shows still droning on about all the macro risks, investors may be wondering if any of the above is meaningful.
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Up until just recently, the bulls’ battle cry had been three simple words: “Better than expected!” In short, for the better part of the last month, the economic data for the good ol’ USofA had been coming in above consensus expectations. To anyone paying attention to such things, this steady stream of strong reports suggested that the country’s economy might actually be better than the bears had led everyone to believe. And as a result, stock prices have been adjusted to higher levels.
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