Posted |
Identifying Why Stocks Do What They Do image

Ask yourself a question. If the market makes a big move, do you care why? No, let me restate that. Do you NEED to know why? Technicians will say no, as they believe the "tape" and the price action on the charts are all one needs to follow. The macro gang also doesn't spend much time worrying about the short-term moves in the market. These guys/gals take a stance and then position their portfolios to profit when their thesis plays out. Most of the investing public doesn't care either. They invest their 401K money in a few funds and might take a peek at it once or twice a year.

However, there are those who believe it is important to understand why the market does what it does on a daily basis. There are some investors that are borderline obsessed with being able to identify why market moves occur. There are those that simply must be able to rationalize what drives the action on a daily basis. And the bottom line is, I am one of those who just have to know "why" things happen.

To be honest, I thought every serious investor was just like me. I thought everybody would want to know why things happen the way they do. After all, if an investor can understand what is happening on a daily basis, they are unlikely to be fooled by a market move on a weekly, monthly or quarterly basis. And making a habit of identifying market drivers also reduces the odds of your portfolio missing out on a really big move.

Crickets!

As I mentioned in Monday morning's meandering market missive, I had the honor of presenting at this past weekend's Trader's Forum put on by Trader's Library. During my presentation, I began to talk about the "drivers" of the market. Since I had encouraged the audience to participate in the discussion, I then called on the attendee with his hand up. His question was simple, "What do you mean by the term 'market driver'?"

I quickly explained that a "market driver" can be viewed as the issue of the day that traders are focused on. "It's the reason behind the move," I said. I cited the European debt crisis, the U.S. debt downgrade, the Fed meetings, and the "sequester" as recent examples. And to drive the point home, I asked the crowd, "Let's go real-time here... What do you think the current drivers of the market are?"

The response to my group question was interesting. I got silence. Not a single hand went up. Nothing was said. Crickets.

I quickly broke what had become an uncomfortable silence by suggesting that one of the primary drivers of the current stock market had the initials "BB." I added, "Oh, and he runs the biggest central bank in the world." That was it, the dawning moment of comprehension. Laughter ensued and everybody got it.

"It Makes No Sense"

I bring this up because I had another encounter on this subject on the way back to the airport. My son and I were sharing a car with a fairly well known newsletter writer, who, by the way, does not actually manage money. We got to chatting about the markets and I again started talking about "the drivers." This guy, who had told me less than one minute into what began as a casual conversation, that he had made millions selling DVD's and books on the stock market, said, "You know, I don't really know what's driving this market... it makes no sense."

Yet not a minute later, this newsletter writer told the limo-driver not to invest in the stock market because the current rally was going to end badly and people were really going to get burned again.

So... this guy admitted he had no idea why stocks were going up but was dead set in his stance on where the market was going next. Honestly, it was everything I could do not to make some crack about needing to borrow his crystal ball. And kudos to my son, who showed remarkable restraint during this exchange.

In Case It Isn't Obvious...

The point I am attempting to make is we endeavor to identify the market's primary drivers each and every day here in this report. And in case it isn't obvious, the current drivers are (1) the expectations of Fed policy (i.e. "the taper"), (2) the issue of who will lead the Fed come January, (3) the upcoming debt ceiling debate, and (4) the outlook for both the U.S. and the global economy.

The move up in the futures market immediately following the announcement on Sunday evening that Larry Summers was withdrawing his name from consideration to be the next Fed Chairman made it quite clear that this was an issue that traders care about. Of course, there is no telling how long the questions relating to the next Fed-head will remain a focus. The consensus seems to think that as long as it is someone like Janet Yellen or Donald Kohn (both were deeply involved in developing the current Fed policy), the market may not care again. However, if the President starts floating other names, the issue could create some new/renewed uncertainty.

The key is to understand that the drivers of the market can and do change - sometimes very quickly. As such, it is important to stay in tune with what is causing traders to do what they do.

Turning to this morning... Global market results are red across the board in the early going. With stocks bucking the traditional September trend and the Fed announcement on "the taper" due out tomorrow, it wouldn't exactly be surprising to see the current buoyant mood falter a bit today. However, in the U.S., futures are pointing slightly higher 90 minutes before the opening bell.

Positions in stocks mentioned: none


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 is for informational purposes only. No part of the material presented in this report 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 editor 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.