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Putting Fear Back in the Market Mix
Posted by: Dave and Donald Moenning (IP Logged)
Date: September 25, 2013 04:56PM

There are times when the market's moves do not appear to have a clear-cut driving force behind them.

Monday's decline of about one-half percent was a decent example of this. Stocks fell for a third consecutive session and although the damage wasn't terribly significant, the fact of the matter is that there is some fear returning to the mix.

Those Who Don't Know History...

Believe it or not, this is a good thing. Remember, trees don't grow to the sky [size=10pt; line-height: 115%; font-family: Calibri, sans-serif; background-position: initial initial; background-repeat: initial initial]— [/size]even in the most bullish environments. And history shows that when the game becomes too lopsided, when one team is totally dominant for an extended period of time, it usually ends badly (think 1999). Therefore, the pattern witnessed this year where the market takes three steps forward and then pulls back for a bit is really quite healthy.

Card-carrying members of the glass-is-at-least-half-empty club contend that when stocks fall without any real reason, the indices are actually cracking under their own weight. The thinking is that if stocks decline just for the heck of it, it means that the buyers have been exhausted, momentum has waned, and the joyride to the upside is over. As such, investors are warned to look out below.

If a Bear Is Chasing You, Climb a Tree

It is right about this time that the long-frustrated bears, the folks that have missed out on the 19 percent gain in the S&P 500 so far this year, take to their soap boxes. From bully pulpits, the Debbie downers tell us that the gains seen in the market will be fleeting, that things will turn ugly when the Fed pulls the punch bowl, that the economy has yet to reach escape velocity and that we'd all best be prepared for the day of reckoning. In short, our furry friends opine that the sky will indeed fall this time, just you wait.

To be sure, this uber-negative position has not been a good stance to take for the past two years. But instead of poking fun at the bear camp, we should probably be thanking them for their service. For without the occasional bout of fear, the runs in the market would always be one-way affairs.

Playing the Game, Washington-Style

We should thank all the traders that are concerned about headline risk relating to the goings-on in Washington these days. Honestly, does anyone really believe that the boys and girls playing politics in our nation's capital will cause the government to default on its debts? Haven't we seen this movie before? Doesn't everybody know that the two sides will play the blame game and then fight, scratch and claw until the very last second before caving and extending the debt ceiling?

And yet, the fact that there have been government shut-downs before keeps the fear of what might happen alive. This causes some traders to take profits after a strong year of gains. This fear causes the dip-buyers to take a knee on the sidelines for a while. And it emboldens the perma-bears to put on some short positions as they dream of 2008 revisited.

In short, this is what makes a market. This is what keeps things from getting completely out of hand, and this is what ultimately sets up the next rally.

Frankly, the odds don't seem to be with the bears at this time. Even if one embraces the idea that the politicians could have a brain cramp and screw things up, history suggests that a deal will get done at the eleventh, twelfth, or even thirteenth hour (remember the "sequester" deadlines that weren't really deadlines?) Then when the fear of the big, bad events passes, buyers return, shorts cover, and the algorithms have a field day.

But the bottom line is that the worry about the debt debate, and what the Fed may or may not do, and who will be the next Fed Chairman, and what the earnings will look like next quarter, etc., all are adding some fear to the mix right now. And the key point here is that adding a little fear once and awhile is a good thing.

Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Strategist at Heritage Capital Management. He focuses on stock market risk management, stock analysis, stock trading, market news and research. Click here to claim a free copy of Dave's Special Report on changes in the current market.

Stocks Discussed: SPY,
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