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It's Time to Keep Things in Perspective image

Given that (a) the crises in Greece and China now appear to be "fixed" (insert eye roll here), (b) the S&P remains stuck in its trading range, and (c) we find ourselves smack in the middle of summer, I'm going to continue my take on the big-picture and long-term investing success that I began on Friday.

As I've opined a time or twenty, it can be beneficial to regularly step away from the blinking screens and the day-to-day hysterics in order to get a solid handle on the big-picture environment you are dealing with. Remember, the really big money isn't made by betting on Google's (NASDAQ: GOOGL) earnings and chasing the latest hot-dot trade, but rather by getting the really big, really important moves in the stock market right.

On that note, when talking to advisors and clients, I continue to be astounded by the myopic view of the stock market and portfolio returns lately. It's like the only thing in the world that matters is whether or not a portfolio beat the S&P 500 during the last 6 months.

The chart below makes this point pretty well. This is a monthly chart of the S&P 500 going back into the early 1990's. As such, you are looking at more than 20 years of market history in a single chart.

S&P 500 Index - Monthly

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During the period encapsulated by the first black box, the market gained something on the order of 240%. Then the tech bubble burst and the S&P 500 lost more than -45%. Next came the inevitable recovery - and with it, a gain of around 90%. We all know what happened next as the S&P plunged more than -50% from top to bottom. And since March 9, 2009, in one of the most HATED bull markets in history, the S&P 500 has put up a gain of +220%.

Granted, getting in at the bottom and out at the top is impossible and I'm not suggesting that anyone try. No, my point is that if investors can focus on the big-picture environment and forget about the day-to-day wiggles and giggles in the market, they will likely be much better off.

A Couple Tips

Here's a couple tips from someone who has been around the block a bit. First, PLEASE stop worrying so much about the return of your portfolio over a 1, 3, 6, or 12 month period and focus instead on how the portfolio is acting relative to what it is designed to do.

Just this past week, I had to provide "talking points" for an advisor whose client had been invested in a foreign stock portfolio (a portfolio that he had asked to be invested in) for 45 days and was unhappy. My head nearly exploded when I got the request. I wanted to jump through the phone and scream, "C'mon, are you kidding me?" However, instead I politely provided an analysis of the recent action in the foreign markets and then reminded the advisor that we are money managers, not magicians.

Second, PLEASE understand that sometimes making money in the market is "easy" while other times it is insanely difficult! There are times when producing a 20% return requires nothing more than waking up and rolling out of bed. Then there are other times - such as we are seeing now - when achieving ANY gain can be challenging. This is just the way the game works and the reason that every investor isn't rich.

Remember, if you and your financial advisor have built a diversified portfolio, you are unlikely to EVER exceed the return of S&P 500 - so stop fretting about it. If you truly want the returns of the S&P, then do yourself a favor; just go buy the SPDR S&P (NYSE: SPY) and be done. But if you have told your financial advisor that you don't want the volatility/risk associated with the stock market, then please compare the return of your portfolio to its objective - and do so over a reasonable period of time (3-5 years).

Perhaps investors are so focused on near-term returns right now because they haven't enjoyed the gains of this bull market. Perhaps they waited for things to be "safe" before getting back in the game and are not being rewarded currently. Or perhaps everyone is sure that the next big, bad bear is just around the corner and they definitely don't want to go through that again.

But in any event, the point is that investors appear to have become overly focused on very small performance variations, over very short periods of time, in a market where such differences simply aren't meaningful. As such, I'd like to encourage everyone to "chillax" a bit and have some patience - markets aren't savings accounts and one never knows when enjoying big returns will become "easy" again.

Where Are We Now?

On Friday, I provided an update of the four primary long-term risk management models we monitor each week in order to give us a feel for the appropriate exposure to the risk/reward environment. To review, 3 of the 4 models have recently flashed warning signals while the 4th, which is my favorite long-term indicator, remains positive and tells us (a) to give the bulls the benefit of the doubt here, (b) to continue to maintain at least some degree of exposure, but to (c) recognize that the risk of a meaningful decline is elevated at this time.

To clarify, there is a BIG difference between our models telling us that risk is elevated and our models being overtly negative. With the former, the game plan calls for taking less risk, raising some cash, and being ready to "buy the dip." The latter tells us that bad things are happening, that the market is very weak, and that it is time to take defensive measures. But the bottom line is that this is not the case at this time.

Thus, the key takeaway from this morning's meandering market missive, is to recognize that this is not a low-risk environment and that making money in this market is challenging right now. As such, this is a time for patience and a time to remember the objectives of your portfolio.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +0.25%
    Hong Kong: -0.04%
    Shanghai: +0.88%
    London: +0.28%
    Germany: +1.00%
    France: +0.81%
    Italy: +1.59%
    Spain: +0.74%

Crude Oil Futures: -$0.02 to $50.87

Gold: -$19.90 at $1112.00

Dollar: lower against the yen, higher vs. euro and pound

10-Year Bond Yield: Currently trading at 2.354%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +2.80
    Dow Jones Industrial Average: +24
    NASDAQ Composite: +10.50

Thought For The Day:

There is a difference between knowing the path & walking the path. -Morpheus

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 Greek Crisis
      2. The State of China's Stock Market
      3. The State of Fed/ECB/PBoC Policy
      4. The State of the Earnings Season

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: Moderately Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately 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 2 years)

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:

  • Key Near-Term Support Zone(s) for S&P 500: 2080
  • Key Near-Term Resistance Zone(s): 2135

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 (Short-Term): Positive
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Neutral
  • Intermediate-Term Bull/Bear Volume Relationship: Moderately Positive
  • Technical Health of 100+ Industry Groups: Moderately 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.

  • S&P 500 Overbought/Oversold Conditions:
          - Short-Term: Moderately Overbought
          - Intermediate-Term: Oversold
  • Market Sentiment: Our primary sentiment model is Neutral .

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.

  • Weekly Market Environment Model Reading: Neutral

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

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research


Indicator Explanations

Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.

Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.

Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.

Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.

Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.

Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.

Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market 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.


Disclosures

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.

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.

David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., a registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage and HCM 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 Heritage/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.