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State of the Markets for Friday February 22, 2013

Good Morning. To be honest, making sense of the stock market action (which is the primary objective of my oftentimes meandering morning market missive) can be challenging at times. For example, one minute the focus is on the economy and the next it's on the Fed. On the subject of Bernanke's Bunch, one day the worry is that the Fed is going to pull the punch bowl from the QE party and the next, well, the data indicates that QEinfinity is still the name of the game. Oh, and just in case that isn't confusing enough, we're told that all of the above is bad. Ughh.

In case you are not aware, my son Don, who has a degree in economics and is definitely much smarter than I am, has been working with me for more than five years now. On Wednesday afternoon, he pinged me with a somewhat sarcastic comment on the state of the market action. “Let me get this straight,” he said. “Stocks are going down on fears that the Fed might be able to start removing their stimulus from the economy. But if the economy is improving – so much so that the Fed needs to take action – doesn't that mean that profits would likely improve as well? And correct me if I'm wrong, but isn't that a good thing?”

Although he knows full well that markets “trend” on the fundamentals of the market but “trade” on prevailing sentiment, my son still has trouble at times separating his economics background from what I loosely term “stock market logic.” I explained that a certain segment of the “fast money” crowd believes that the only reason that stocks have been rising is due to the liquidity being continuously pumped into the economy by the Bernanke cavalry. Thus, if the Fed even hints at turning off the spigot, this group of market masters will fall all over themselves to avoid “fighting the Fed.”

While he definitely wasn't buying the validity of the explanation, he did understand that sometimes it is “the trade” of the day that matters most. So, if traders were selling on fears that interest rates were going to rise, then that was the reality of the day.

Dave Moenning

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.