A Couple Ways To Play

Daily State of the Markets 
Wednesday Morning – November 2, 2011

Good morning. Just when you thought it was safe to start analysing market metrics again (you know, looking at the advance/decline data, the volume relationships, trends, moving averages, company earnings, valuations, etc.) Mr. Papandreou comes along and hijacks the market – AGAIN. So now, instead of being able to play the odds and keep yourself on the right side of the risk/reward relationship of the market, we’re right back in a headline-driven/HFT hell again.

The bottom line here is that unless you are one of the handful of big firms that is able to buck up for not only the supercomputer, the ivy-league trained quants, AND the space right next to the NYSE computers, there are really only a couple ways to play the game at the present time. No, I’m not talking about flipping that lucky peso you’ve got in the back of your desk drawer every 10 minutes to determine buy or sell points. And no, hope is still not an investment strategy.

One of the ways to play the market during times when the computers have the headlines before you do and make trades just a tad faster than you do is to play the “macro game.” This means that you first need to identify your macro view of the market. You then decide on the most likely outcome, place your bets, use volatility to your advantage, and then monitor your positions as if your life depended on it. That last part is kind of important because if your thesis is wrong when playing this type of game you can find yourself in a sea of red ink.

However, as long as your thesis, or macro theme, remains intact, then you can use the HFT shenanigans to your advantage. For example, if you believe, as I do, that Greece just doesn’t have a choice right now, then you can use the big swings in the market to add to your long positions. And if (a) you have the stomach to ride out the volatility, (b) you can stick to your guns, and (c) you just happen to get the macro theme right, you will be a happy camper when the scenario plays out as expected.

One caveat that I probably should add is that this is a very tough game to play. First, even the best and the brightest don’t “get it right” all the time. And then just because you got one major macro theme right doesn’t necessarily mean you will get the next one right. John Paulson would probably be the poster child here as the man who made “the trade of the century” by betting against the housing bubble in 2007-08 is now getting his head handed to him this year (last I checked, his flagship fund was down close to 30%).

It is for this reason that I prefer to play the game a little differently. In short, over the years, I have developed a series of market models and indicators that are designed to keep me on the right side of the “important trends” in the market. Before I go any farther, it is important to clarify this point. I do NOT try to play/trade every wiggle and giggle in the market. Nor do I try to identify tops and bottoms in the market. No, my goal is to be there for the big moves in the market.

To be sure, this approach has its pitfalls as well. First, and most importantly, this approach will wind up on the wrong side of the market on occasion. And truth be told, this strategy will make a couple clunker moves each year and make you look/feel wrong for a while. On that note, one of the keys to this business is to understand that you are going to be wrong – it’s just part of the game. But instead of worrying about “being wrong,” I concern myself more with “not being wrong for long.” Thus, when the models say to make a move, you are supposed to make the move – regardless of how silly you think it may be at the time.

This is called disciplined investing. It won’t set the world on fire and it probably won’t ever make “the trade of the century.” However, the tradeoff is that this approach is designed to try and avoid making REALLY big mistakes. And this is a tradeoff I can live with.

So how do we apply these two “ways to play” in the current market? If you are a macro player, you’d best decide whether or not you think Europe is going to find a way to muddle through and avoid a disaster. If you think this is the most likely outcome, then, by all means, keep buying the dips (and be sure to sell a rip or two every once in a while so that you’ve got some cash on hand to buy the next dip). And if you see the Europe glass as half empty, then you will want to establish short positions into any and all rallies and take profits during the moves like we’ve seen this week.

For me, I will simply continue to keep on keepin’ on with a disciplined approach. Again, I probably won’t get it right all the time and I will definitely be wrong on occasion. But since this approach is about not being wrong for long, I do believe that once this market can establish a trend again, the indicators will tell me to hop onboard.

Turning to this morning… Word that a Chinese government official said that the country’s economic policies would remain flexible so as to deal with any difficulties that might arise has been a positive input. On the Europe front, it appears that the Greeks will try to push on with a public referendum on the EU bailout and staying in the EU. But first, PM Papandreou’s government must survive a confidence vote on Friday and then the entire parliament must approve the holding of a referendum. Thus, there are questions as to whether or not a referendum will ever be held.

On the Economic front… Challenger reported that planned job cuts were 42,759 in October, the lowest level since June.

In addition, ADP reported that the private sector job market expanded by 110K jobs during the month, which was slightly above the consensus expectations for a gain of about 107K.

Don’t forget that we’ve got the FOMC announcement and the Bernanke press conference later this afternoon.

Thought for the day… Instead of just muddling through, why not make a concerted effort to enjoy the day?

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: -1.07% Shanghai: +1.38% Hong Kong: +1.88% Japan: -2.04% France: +1.13% Germany: +1.28% Italy: +1.32% Spain: -0.09% London: -0.32%
  • Australia: -1.07%
  • Shanghai: +1.38%
  • Hong Kong: +1.88%
  • Japan: -2.04%
  • France: +1.13%
  • Germany: +1.28%
  • Italy: +1.32%
  • Spain: -0.09%
  • London: -0.32%
  • Crude Oil Futures: +$1.25 to $93.44
  • Gold: +$20.20 to $1732.00
  • Dollar: higher against the Yen, lower vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading at 2.043%
  • Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +16.22 Dow Jones Industrial Average: +122 NASDAQ Composite: +17.83
  • S&P 500: +16.22
  • Dow Jones Industrial Average: +122
  • NASDAQ Composite: +17.83

Wall Street Research Summary

Upgrades:

  • CBL & Associates (CBL) – Bank of America Merrill Lynch
  • Forest Oil (FST) – Bank of America Merrill Lynch
  • Anadarko Petroleum (APC) – Target increased Barclays Capital
  • Oshkosh (OSK) – Benchmark Company
  • EOG Resources (EOG) – Bernstein
  • FXCM Inc (FXCM) – Citi
  • Sohu.com (SOHU) – Deutsche Bank
  • Leap Wireless (LEAP) – JPMorgan
  • MetroPCS Communications (PCS) – JPMorgan
  • Parexel (PRXL) – Piper Jaffray
  • Corinthian Colleges (COCO) – Piper Jaffray
  • Ritchie Bros (RBA) – RW Baird
  • Gap (GPS) – Susquehanna

Downgrades:

  • EnCana (ECA) – Bank of America Merrill Lynch
  • Diamond Foods (DMND) – Bank of America Merrill Lynch, Janney, RBC
  • OpenTable (OPEN) – Bank of America Merrill Lynch
  • Baker Hughes (BHI) – target cut at Barclays Capital
  • Intel (INTC) – BMO Capital
  • GeoEye (GEOY) – Canaccord Genuity
  • Corning (GLW) – JPMorgan
  • US Cellular (USM) – Morgan Stanley
  • AsiaInfo-Linkage (ASIA) – Morgan Stanley
  • Treehouse Foods (THS) – Wells Fargo

Yesterday’s Earnings After The Bell
Company

Symbol

EPS
Reuters
Estimate
Applied Micro AMCC $0.02 $0.02 Atmel ATML $0.26 $0.20 Bio-Rad Laboratories BIO $1.61 $1.53 CF Industries Holdings CF $4.73 $4.65 Cognex CGNX $0.42 $0.37 Charles River Laboratories CRL $0.57 $0.58 Discovery Communications DISCA $0.59 $0.54 Genco Shipping & Trading GNK $0.04 ($0.02) Hain Celestial HAIN $0.29 $0.28 World Fuel Services INT $0.74 $0.66 JDS Uniphase JDSU $0.18 $0.13 Pitney Bowes PBI $0.56 * $0.54 Peet’s Coffee PEET $0.28 $0.27 Powerwave PWAV ($0.87) ($0.09) Pioneer Natural PXD $1.14 $0.87 Boston Beer SAM $1.19 $1.10 Sanmina-SCI SANM $0.47 $0.41 Stone Energy SGY $1.06 $0.79 TECO Energy TE $0.42 $0.40 Texas Roadhouse TXRH $0.22 $0.19 Unum Group UNM $0.74 $0.75
Today’s Earnings Before The Bell
Company

Symbol

EPS
Reuters
Estimate
AOL AOL ($0.02) ($0.02) Clean Harbors CLH $0.70 $0.51 Comcast CMCSA $0.33 $0.39 cognisant Technology CTSH $0.73 $0.71 DST Systems DST $0.90 $1.01 Devon Energy DVN $1.54 $1.46 El Paso EP $0.18 $0.26 FTI Consulting FCN $0.70 $0.61 Foster Wheeler FWLT $0.33 $0.44 Garmin GRMN $0.71 $0.50 Hyatt Hotels H $0.16 * $0.06 Huntsman HUN $0.45 $0.43 IntercontinentalExchange ICE $1.87 $1.77 Level 3 LVLT ($1.16) ($1.51) MasterCard MA $5.63 $4.81 Marsh & McLennan MMC $0.24 $0.24 MSCI Inc. MSCI $0.49 * $0.44 Par Pharmaceutical PRX $0.74 $0.74 Quanta Services PWR $0.25 * $0.25 RR Donnelley RRD $0.51 $0.51 Molson Coors TAP $1.05 $1.25 Teva Pharmaceutical TEVA $1.25 $1.23 Time Warner TWX $0.79 $0.76 Ternium TX $0.03 * $0.60 Wellcare Health Plans WCG $2.15 $1.31 Aqua America WTR $0.30 $0.32 Wright Express WXS $0.99 $0.93* Report includes items that make comparisons to the consensus estimate questionable

Long 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.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.