David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

A “Sheer Misery” Market Defined


I was recently named Chief Investment Officer at Sowell Management Services, a registered investment advisor that is responsible for about $500 million of client assets. Part of the gig is to communicate all things market related to the portfolio managers, the sales team, and the independent advisors who represent the firm.

During a staff meeting on Monday, the National Sales Manager wanted my take on the current environment for “tactical” investment strategies. He noted that most tactical managers had a rough go last year and wondered if the environment had changed with the calendar. My response was brief and to the point, “It’s been ‘sheer misery’ in the tactical space since the beginning of 2014… and no, nothing has changed.”

Not surprisingly, I was asked to put “some color” behind my view and to extrapolate on why the environment has been tough on folks trying to employ a tactical approach to investing (which according to Investopedia is defined as: “An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.”)

I tried to respond as succinctly as possible and when I was done, I realized that others might find my explanation of the current environment worthwhile.

So, here was my response and some thoughts on what investors/advisors should be doing now…

Since the beginning of 2014, stocks have working higher in a very choppy, sometimes violent fashion. Intraday volatility has increased dramatically as high-speed trend-following has become increasingly prevalent. For example, the S&P regularly moves plus or minus 0.5% within a matter of minutes these days – and without any news.

The next point is that each new high in the indices (and there have been more than a few over the last 15 months) has been met with selling. This price action has been affectionately referred to as the dreaded “breakout fakeout.” The problem is that “breakouts” tend to be considered a good thing by most trend or momentum-based market indicators. So, in short, this means that the indicators most tactical managers employ have been consistently “fooled” each time a “fakeout” occurs.

Given that this trend has quickly became quite obvious to most traders, a great many of these “breakout fakeouts” quickly evolved into pullbacks as the “fast money” types sold short with glee each time a breakout failed.

However, after pulling back a handful of percentage points, each and every one of these declines (which are traditionally a friend to tactical managers) was quickly reversed as the next round of QE/monetary stimulus/friendly Fedspeak arrived from the likes of Mr. Bullard (see the October decline bottom), the ECB, China, Japan, etc.

In addition, the market has been a bit of a bucking bronco of late as we’ve seen no fewer than 10 changes in direction since December alone – and 7 already this year!

Perhaps the best statistic I’ve seen that describes the environment is this… From 1955 through 2012 the S&P experienced a “V-Bottom” every 1.6 years on average. However, since the beginning of 2013, the market has experienced a “V-Bottom” every 1.5 months on average.

Then there is the “fund flow” issue, that is likely responsible for the V-Bottoms. By now, most folks know about the money that has been flowing steadily into the U.S. market. But let’s spend a moment to review the cause and effect here.

With the U.S. Fed and the Bank of Japan printing trillions in fresh cash via their QE programs last year, the bottom line is that money had to go somewhere. And what we saw is that an awful lot of it wound up in the U.S. stock and bond markets (remember, money goes where it is treated best).

And while the U.S. has stopped its QE program, the ECB has now stepped in to pick up the slack to the tune of €60 billion a month for a total of 19 months. As such, there is underlying support for the stock market whenever a “dip” takes place.

So, with the “fast money” selling all new highs and the fresh new QE money buying the declines, you wind up with a choppy, mean-reverting environment that has eventually managed to move steadily higher.

In sum, the fast-paced changes in direction have been tough as tactical managers have had a very difficult time dealing with this up-one-minute and then down-the-next market.

So, what is working, you ask? In essence, this continues to be a time to be more “strategic” in your approach to the markets. Or another way to put it is that your risk management techniques have needed to be longer-term in nature in order to succeed.

But perhaps the best answer is that investors, advisors, and clients alike have to learn to diversify their portfolios properly. And no, I’m not talking about that ancient MPT stuff.

What I’m talking about is diversifying your portfolio by strategy, by manager, and by methodology. In other words, don’t put all of your eggs in one basket. The bottom line is that ALL (yes, ALL!) investment managers/strategies experience periods of under performance from time to time. So, don’t freak out when it happens to you or a money manager near you employ.

In 2013 it was asset allocation that was made to look silly as the term “diworsification” made a comeback. But since then, allocating across asset classes has worked just fine. Then since the beginning of 2014, tactical strategies have clearly been picked on by Ms. Market.

So, is it time to give up on all those folks trying to manage risk or stay on the right side of the market? In a word, no.

While no one knows how long the current environment – the same environment that is causing tactical managers to struggle – will last, there is one thing we do know for certain about the stock market. And that is right about the time you’ve got the answer, the game changes.

So, instead of dumping those underperforming tactical managers, a true contrarian might be licking their chops at what will likely amount to an opportunity when the environment changes. And it will change, you can count on it.

Turning to This Morning…

At long last, there is some data for traders to chew on this morning. Overnight in China, the news was disappointing as the HSBC Flash Manufacturing PMI fell back into the contraction zone. Across the pond, the news was surprisingly good since both the Manufacturing and Services PMI’s were above expectations for the Eurozone and Germany. And with Greece scrambling to try and deliver reforms in order to receive the cash it desperately needs, European bourses are a bit higher this morning. Here in the U.S., the CPI sported a gain for the first time in four months and stock futures are pointing to a modestly higher open on Wall Street.

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