David Moenning's  Instablog

Daily State of the Markets
Monday, May 21, 2012

Good morning. 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%.

In addition, there appears to be little-to-no hope available to owners of equities at this time. It seems that we are treated to some new problem on a daily basis. Europe is clearly the name of the game right now as Greece remains a sea of misery followed quickly by fears that Spain (EWP) is about to implode. Good economic data in the U.S. is either (a) ignored or (b) followed by data that is weaker than expected. Then there is the JPMorgan (JPM) fiasco, which looks to be getting worse by the day as traders are not going to let "the London Whale" out of his positions anytime soon. Heck, even Facebook's (FB) much ballyhooed IPO wound up being a disappointment and Apple (AAPL) suddenly looks like the SPY of late.

Make no mistake about it though; Greece is the word right now. While it is indeed mind boggling that a country with a GDP the size of Houston's can hold the world's equity markets hostage, this is EXACTLY what is happening at the present time. And although traders had put the thought of Greece leaving the Eurozone behind them during the first quarter of the year, it now appears that the odds of the Greeks walking on their obligations and returning to the Drachma are a coin flip.

Why do we care what Greece does? Does it really matter to the global economy if the Greeks default on everything? In short, no. However, the issue here really isn't about Greece, it's about the question of who's next? When Bear Stearns went under, the fear wasn't really about the losses created by the brokerage firm going down; it was about which firm would be next. And as we found out after Lehman finally went bust, the answer was everyone.

So, while I am clearly guilty of restating the obvious, the real issue here is contagion. Yields and spreads in Spain are soaring again and their economy is not in good shape. And the real problem is that Spain is simply too big to be propped up by the EU, the IMF, and/or the ECB. So, if Greece walks away from the EU, traders fear that the entire currency zone could unravel.

The key word here is fear. As is the case during any waterfall decline, fear is the driving factor. And with the election in Greece nearly a month away, fear is likely to remain front and center for the foreseeable future. And THIS is why the buyers are simply sitting on their hands right now. Why buy now when the situation isn't likely to be resolved for a month? No, it appears that reducing risk is the watchword during each and every session.

It is during these one-way affairs that emotions tend to dominate. And yet at some point, something good tends to happen which causes everyone to realize that the sky isn't falling and that the likes of McDonald's (MCD), Panera (PNRA), Chipotle (CMG), and Google (GOOG) aren't going out of business anytime soon. So, if history is any guide here, Greece won't leave the EU, Spain, Italy, et al won't collapse, and the EU will stay together. And when something good actually does happen, stocks are going to rebound furiously.

What will that "something good" be, you ask? How about the ECB doing another LTRO? What about Mr. Bernanke starting to hint at another Operation Twist? Or what if Germany starts to concede on the idea of doing something about growth in the region or the G-8 talking about banding together to insure that this situation doesn't get out of hand? Then there is the idea of Eurobonds that is being openly kicked around this morning. In short, any or all of the above will likely send the shorts scurrying for cover and bring the buyers back - in a hurry.

In other words, the bears have enjoyed a stellar move based on fear. But with the market as oversold as it is and the emotions running as high as they are, I'd be willing to bet that something good is about to happen at some point soon.

Turning to this morning... Talk of Eurobonds and support for Greece from the G-8 seems to be giving the bulls a lift in the early going. However, the key today will be where the market closes - not where it opens.

On the Economic front... There are no releases scheduled for today.

Thought for the day... "Be the ball, Billy"...

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.62%
  • Shanghai: +0.16%
  • Hong Kong: -0.16%
  • Japan: +0.26%
  • France: +0.75%
  • Germany: +0.97%
  • Italy: -0.76%
  • Spain: -1.03%
  • London: +0.73%
• Crude Oil Futures: +$0.30 to $91.78
• Gold: +$0.90 to $1592.80
• Dollar: lower against the yen, higher vs. euro, and pound
• 10-Year Bond Yield: Currently trading at 1.752%
• Stock Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: +4.48
  • Dow Jones Industrial Average: +47
  • NASDAQ Composite: +6.27

Positions in stocks mentioned: AAPL, CMG

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.

Daily State of the Markets
Thursday, May 17, 2012

Good morning. 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.

If you are anything like me, I'm fairly confident that you are tired of hearing about almost anything related to Greece, Greek debt, Greek politics, Greek unions, and/or the country's intentions of either leaving or not leaving the Eurozone. And unless you invest for a living or are planning a trip to the Greek Islands, you may not care much about Greece. But unfortunately, the markets, once again - and for the third summer in a row - do care about Greece.

In fact, Greece is just about the only thing that the markets care about right now. For example, yesterday's better than expected data on Industrial Production was ignored, as was the report on housing starts and building permit (also BTE). So, this morning I thought we should review why Greece does matter now and will likely be utterly irrelevant going forward.

The bottom line here is relatively simple. While the political situation in Greece matters little to the rest of the world, the status of the country's banks do. And when word hit yesterday that the citizens of Greece have been pulling cash out of banks at a rate of more than €600 million a day, traders started to worry about what would happen in the event of a run on the banks.

In short, Greeks are pulling their Euros out of the banks because if Greece winds up leaving the Eurozone, their Euros will suddenly be converted to Drachmas. And after that happens, the value of those Drachmas is likely to go into a free fall. Thus, if you know anything about currency conversions, you run down to your bank, pull out your Euros and wait for the Drachma to plunge - and THEN you convert.

But as a colleague asked me repeatedly yesterday, why do we care? The answer again is pretty simple: Fear of contagion. Cutting to the chase, if Europeans suddenly decide to start pulling money out of banks in places like Spain, Italy, and Portugal, the already fragile banking system will get worse - a lot worse. And remember folks, this crisis is and always has been about the state of the global banking system.

So, while the question of whether or not Greece stays in the Eurozone ultimately will matter little to the rest of the world, this Greek tragedy is indeed affecting the daily values of the likes of Apple (AAPL), Google (GOOG), Chipotle (CMG), VF Corp (VFC), and McDonald's (MCD). You see with the next election in Greece now set for June 17, this means that traders have nearly a month to worry about what will happen next.

And because of the uncertainty and the fear, we are seeing a buyer's strike in the U.S. stock market. While there doesn't appear to be a dramatic amount of selling pressure such as we saw in the summers of 2010 and 2011, the key right now is there is no reason for buyers to step in at this point in time - unless prices become enticing, of course.

And with the market back in a news/rumor-driven mode, it is probably time to once again to play the game more cautiously for a while.

Turning to this morning... Stocks are once again following the European markets, which are lower at the present time.

On the Economic front... Initial Claims for Unemployment Insurance for the week ending 5/12 were reported at 370K, which was above the consensus estimate for 365K but in line with last week's revised total of 370k (up from 367k). Continuing Claims for the week ending 5/5 came in at 3.265M vs. consensus of 3.255M.

In addition, we'll get LEI and Philly Fed later this morning.

Thought for the day... Do you believe in you?

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.15%
  • Shanghai: +1.39%
  • Hong Kong: -0.31%
  • Japan: +0.86%
  • France: -1.30%
  • Germany: -1.16%
  • Italy: -2.53%
  • Spain: -2.02%
  • London: -1.59%
• Crude Oil Futures: +$0.57 to $94.38
• Gold: +$15.50 to $1552.10
• Dollar: higher against the yen, Euro and pound
• 10-Year Bond Yield: Currently trading at 1.767%
• Stock Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: -0.85
  • Dow Jones Industrial Average: -8
  • NASDAQ Composite: -4.36

Positions in stocks mentioned: AAPL, CMG

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.

Daily State of the Markets
Tuesday Morning, May 1, 2012

Publishing Note: I am traveling abroad (my wife and I are visiting Ireland) during the next 2.5 weeks. Thus the "Daily State" report will be published as time permits.

Good Morning. 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.

The theory holds that stocks tend to do very little from the beginning of May until the end of October. A review of history actually backs up the concept. For example, since 1950, $10,000 invested in the S&P 500 during the months of May through October would have become $15,234 as of the end of 2011. Obviously a 50% return is nothing to sneeze at. However, if one had invested the same $10K in 1950 and decided to only be invested during the months of November through April, their account would be worth more than $445,200. Hmmm... I think I'll take door #2.

In looking more closely at the data on a year-by-year basis, it becomes clear that when "Sell in May and go away" is successful, it tends to be very successful. But in looking at the returns since 1950, the market has been down in the May-Oct period just 23 out of the 61 years. However, when the middle of the year turns sour, the average decline in those years winds up being -8.32%. Ouch. So there definitely appears to be something to this little cliché.

What's more, the old saw has been fairly effective since the secular bear began in 2000. Since the turn of the century, "Sell in May" has been successful exactly one-half the time with the average decline in the down years coming in at -12.1%. On the flip side, the average gains in the up years was +8.23%. So, as you can plainly see, the idea of working on your golf game until Halloween definitely has merit - especially during secular bear environments.

But before you start buying SDS on margin this morning, we should point out that the month of May tends to be pretty darn good overall. If one looks at the record of the SPY (SPDR S&P 500), May winds up tied for 4th place overall with an average gain of +1.4% during the month and has been positive 60% of the time. However, June's average gain of +0.2%, July's +0.6%, August's +0.4%, and September's -0.7% tend to be far less profitable as a group.

A similar, but far worse pattern emerges if one takes a look at the market in terms growth versus value during the much ballyhooed "Sell in May" period. The SPYG (SPDR S&P 500 Growth) has enjoyed a decent month of May (+0.6%), but then June (+0.1), July (+0.1%), August (-0.8%) and September (-0.4%) are not great times to invest in growth. And while it may sound counterintuitive, the summer months have been even worse for value oriented issues.

In looking at the SPYV (SPDR S&P 500 Value), May winds up being tied for 6th place among calendar months with an average gain of +0.9%. However, June's average result is -0.8%, July is +0.6%, August is -0.7%, and September's average is +0.2%. So for those thinking that it might be a good idea to "hide out" in value stocks during the "Sell in May" period, you may want to think again.

Finally, in looking at the total stock market index via Vanguard's Total Stock Market ETF (VTI) reinforces our point this morning. Historically May has been good, coming in tied for 4th as the best average return for the month has been +1.4%. But again, the summer rally tends to fade as June has averaged -0.6%, July sees a rebound of +0.7%, August declines -0.7% and September drops -0.4% on average.

So for all of you out there that are thinking that the calendar says it's time to sell, history actually suggests that you may want to wait another month. However, given that the seasonal patterns are hardly foolproof, we'll simply stick to our discipline and understand that things may (or may not) get bumpy in the coming months.

Turning to this morning... Most foreign markets were closed overnight for May Day celebrations. However, a larger-than-expected interest rate cut in Australia and a PMI report in London is keeping U.S. futures looking modestly higher ahead of this morning's data.

On the Economic front... There is no data scheduled for release before the bell today. However, we will get the all-important ISM Manufacturing report as well as the numbers on Construction Spending at 10:00 am.

Thought for the day... Remember, no one plans to fail...

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: +0.67%
  • Shanghai: Closed
  • Hong Kong: Closed
  • Japan: -1.78%
  • France: Closed
  • Germany: Closed
  • Italy: Closed
  • Spain: Closed
  • London: +0.42%
• Crude Oil Futures: -$0.22 to $104.65
• Gold: -$1.00 to $1663.20
• Dollar: lower against the yen and euro, higher vs pound
• 10-Year Bond Yield: Currently trading at 1.925%
• Stock Futures Ahead of Open in U.S. (relative to fair value):
  • S&P 500: +1.86
  • Dow Jones Industrial Average: +26
  • NASDAQ Composite: +5.58

Positions in stocks mentioned: AAPL, SPY

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.