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The Next Driving Force Could Be: Performance Anxiety

October 22, 2013 9:23 am
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Now that the D.C. drama has been placed on the back burner for a couple months, the intraday algos appear to have been toned down a bit and traders have turned their attention to more mundane issues such as the state of the earnings season, the state of the U.S./Global economy, and the question of when the Fed can be expected to begin tapering the stimulus being provided to the economy.

Short Answers to Key Questions

The short answers to the current dilemmas are as follows. First, corporate earnings are expected to finish the year at record highs. As was detailed in this space on Monday, corporate earnings on a GAAP basis for the S&P 500 are expected to come in at $98.28 for calendar 2013, which would be a new high and be roughly double the EPS total seen in 2000. Thus, if earnings can continue to rise, it follows that stocks can continue move up as well.

Next, the economy doesn’t appear to be any worse for wear after the recent rumble in Washington. While the government shutdown may shave 0.6 percent or so off of GDP in the fourth quarter, the current thinking is that the consumer will quickly forget about the brinkmanship, finger-pointing, and name-calling seen in D.C. over the past few weeks and start focusing on their holiday shopping.

However, it is probably a good idea to watch the important economic data such as this morning’s Job’s report, as well as reports on Consumer Confidence, Retail Sales etc. for signs of whether or not the “the economy is fine” thesis remains valid.

And finally, given that the politicians are slated to go at it again in January/February, most economists now expect the Fed to begin tapering in March 2014. The thinking here is simple. Since lawmakers don’t seem to give a hoot about how their actions affect the economy, the Fed may need to remain stimulative longer than expected – just in case the folks in Washington do something stupid early next year.

What About Stocks?

As for the stock market, the bulls are obviously on a roll at the present time. However, given that (a) the indices are now overbought from both a short- and intermediate-term basis, (b) the sentiment indicators are once again a little too rosy, and (c) there remains a gap on the charts of the S&P 500 (SPY), NASDAQ (QQQ), and Russell 2000 (IWM), it would not be at all surprising to see stocks take a break at some point in the near future.

As such, traders will likely be watching each and every piece of economic data closely for clues that the current joyride to the upside is about to end. But with the number of pages on the calendar dwindling rapidly, another factor could quickly become a driving force in the stock market: performance anxiety.

Don’t Blow The Bonus!

The concept of “performance anxiety” is based on basic human emotions. In short, fear can play an important role in a fund manager’s decision making process at this time of year. Fear of getting fired. Fear of being demoted. And perhaps most importantly, fear of missing that fat performance bonus if one fails keep up with the appropriate benchmark.

The problem here is fairly straightforward. The S&P 500 is up 21.5 percent in 2013. Yet, the Hedge Fund Research Aggregate index is up less than 6 percent (5.57 percent to be exact) on the year through Friday’s close.

They Will Be Buying The Dips

Granted, most hedge funds don’t compare themselves to the S&P 500. However, the disparity between the performance of stocks and hedge funds has rarely been so wide. So… if stocks continue to move higher, it is a safe bet that the hedgies may decide to jump on the bull band wagon into the end of the year – in order to pump up returns, of course.

Conversely, with so many managers underperforming by such a large margin, there would appear to be an incentive to try and get the indices to “come in” a bit. However, when performance anxiety sets in, history shows that these types of dips are made to be bought.

However… if the economic data starts to stink up the joint, all bets will be off. But understanding the power of performance anxiety can help one make sense of the way the markets tend to perform into the end of the year. So, while there is no guarantee that stocks will rise as 2013 draws to a close, don’t be surprised if that’s exactly what happens. Remember, there is nothing more reckless on the buy side than a fund manager with his/her bonus on the line!

Click Here For More of Dave M’s “Daily State of the Markets” Commentary

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Earnings Season

      2. The Outlook for the U.S. Economy

      3. The State of Fed Policy

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Near-Term Support Zone(s) for S&P 500: 1720-25

  • Near-Term Resistance Zone(s): none

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend – I.E. if there is any “oomph” behind the move. Below are a handful of our favorite indicators relating to the market’s “mo”…

  • Trend and Breadth Confirmation Indicator: Positive

  • Price Thrust Indicator:Positive

  • Volume Thrust Indicator:Neutral

  • Breadth Thrust Indicator:Positive

  • Bull/Bear Volume Relationship: Moderately Positive

  • Technical Health of 100 Industry Groups: Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide “early warning signs” that a trend change may be near.

  • Overbought/Oversold Condition: The S&P 500 is overbought from a short-term perspective and is moderately overbought from an intermediate-term point of view.

  • Market Sentiment: Our primary sentiment model is Negative .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market’s “big picture” environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: Positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Thought For The Day…

Sometimes the biggest problem is in your head. You’ve got to believe. -Jack Nicklaus

Looking for Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis – Check the “Daily Decision” System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them “in” the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking – Check out The Insiders Portfolio. We buy what those who know their company’s best are buying – but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can’t afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Got Research?

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

State’s Chart of the Day – Each day we highlight a top rated stock with a positive technical setup.

The Risk Manager Report – Stay in tune with the market’s risk/reward environment.

The “10.0” Report – These are the REAL best-of-breed companies.

The Insiders Report – See what the people who know their company’s best are buying.

ETF Leaders Report – Looking for the top performing ETF’s? You’ve come to the right place.

The SOTM 100 Portfolio – The top rated stocks in each market sector.

State’s Market Models – Each week we quantify the “state of the market” with a series of models.

The Focus List – Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Mission Statement

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help – so don’t hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Wishing you green screens and all the best for a great day,

David D. Moenning

Founder and Chief Investment Strategist


For up to the minute updates on the market’s driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Positions in stocks mentioned: none

The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com 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 TopStockPortfolios 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 our websites and publications 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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