You've got to love the stock market game. Just about the time you think you've got it figured out, boom - it changes. Or maybe it doesn't, who knows. Frankly, there are times when it is very hard to tell why Ms. Market is doing what she is doing. But since that's the stated objective or our time together each day, let's give it a shot, shall we?

The S&P 500 is now off 5.76 percent from its recent high water mark. Believe it or not, that's the good news. The Dow is down 7.26 percent. The S&P midcaps are off  6.9 percent and the Russell 2000 smallcaps have now fallen 7.3 percent from their recent highs. Looking across the pond, the EAFE index has dropped 7.3 percent and the much maligned emerging markets now sport a decline in the double digits at 11.21 percent this year alone.

Given the numbers on the pullback, it will suffice to say that we've got a correction on our hands. As such, there are really only two questions that matter. First and foremost there is, why are stocks going down? And then there is the ever popular question of, how low can they go?

Since any honest player in this game must plead ignorance on the latter issue (or merely admit to guessing early and often), it is probably a good idea to focus on the first question here today - you can probably find the opinions and the guessing lots of other places.

It's The Economy, Stupid

For the past week or so, the idea has been that stocks have been falling on fears of what another emerging markets crisis would mean to both the major economies and equity markets of the world. Thus, we've spent an inordinate amount of time doing inter-market analysis to try and determine whether or not there was actually a crisis at hand.

The thinking has been that if there isn't really a crisis, then the current pullback will likely wind up in the "garden variety" category and investors could buy the darn dip with confidence. However, if there were signs that the "crisis trade" was heating up, it would probably pay to move to the sidelines for a while as things tend to get nasty whenever traders and their computers latch onto a crisis theme.

However, Monday's 326 point dance to the downside didn't appear to be driven by worries about the emerging markets. No, the theme to yesterday's shellacking was as old as the hills: slowing growth.

Blame It On the Weather?

While a great many analysts prefer to chalk up the recent spate of weaker-than expected data to the nasty winter weather, if one looks objectively at the string of reports, a pattern emerges.

First there was the December jobs report, which missed badly. Speaking of December, it is now widely accepted that the holiday shopping season was a bit of a dud. Then there has been the data out of China, which seems to get weaker each month. Next up, there was yesterday's ISM Manufacturing report which missed badly and as the WSJ opined "fell out of bed" by dropping to an eight-month low. Oh, and the sales numbers from the nation's auto manufacturers weren't exactly inspiring.

So let's see here. China is slowing. The U.S. consumer is muddling through. The rest of the economic data has been on the punk side. In addition, the Federal Reserve has decided that it's time to start removing the punch bowl from the party. And to some analysts, this represents a dangerous combination.

And Now A Word From the Bear Camp

So, what do traders do with this string of inputs? Sell, that's what. Now toss in a breach of important support on the charts, the mother of all short squeezes in the bond market, a soaring Yen, and a spike in the VIX, and you've got the makings for a bad day at the office for those in the business of trying to manage the stock market (unless, of course, you had already taken defensive measures, which means that the latest declines haven't hurt so bad).

Soc Gen's Kit Juckes summed it up nicely in a note. Mr. Juckes wrote, "The combination of weakening Chinese data, and the gradual turn in Fed policy, will continue to fuel negative sentiment. Flows of money into EM since 2010 have been huge. The path back towards any kind of neutral fed policy stretches ahead of us and the Chinese economic slowdown is no flash in the pan. So the drivers of the current turmoil aren’t going to go anywhere and any respite is likely to be temporary.”

The Bears Are Back

So there you have it; according to their spokesman, the bears have all the bases covered at the present time. Those seeing the glass as half empty win if the outflows in the emerging markets continue and also if the economic data continues to underwhelm. Super.

Given that our furry friends had a very rough go of it last year and haven't had much of anything really to cheer about since the U.S. debt downgrade in late-2011, it isn't surprising to see traders of all shapes and sizes jumping on the bandwagon at this time.

It would appear then that is once again time to buckle up because the ride is getting very bumpy again. The real question now is if investors will need to don the helmet and/or crawl under their desks any time soon. Time will tell. But to be sure, THIS type of market is why we believe in a disciplined approach to managing risk in the stock market. Such an approach isn't for everyone and it doesn't always go smoothly, but it does help us sleep at night when things get nasty.

Looking for Guidance in the Markets? We can help...

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Looking For Money Management Help?

If you are looking for help with money management, check out Heritage Capital Management's Active Risk Manager Service - or call Heritage for more information at (630) 250-4700.

ALL NEW: The next generation of the Daily Decision system is now available to clients of Heritage Capital. The new and improved approach (which is not available in subscription form due to the complex nature of trading the program) utilizes swing trading during neutral market environments, multiple indices for long positions, incremental moves in and out of the market, multiple managers and multiple strategies - with the overall goal being reduced volatility and a smoother ride. Contact Heritage for details at (630) 250-4700.

Turning To This Morning... After the worst start to the month of February for the S&P since 1933, stocks are looking to rebound a bit today. However, overnight markets aren't much help. China's markets are closed for the lunar holiday, Japan was shellacked for a loss of -4.18 percent, and European bourses continue to sport losses at this stage. With concerns about economic growth now center stage, traders will be listening to the Fedspeak made available today as Lacker and Evans will provide commentary. Currently, the U.S. futures are pointing to a slight advance at the open.

Pre-Game Indicators

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

Major Foreign Markets: 
- Japan:      -4.18%  
- Hong Kong:  closed 
- Shanghai:   closed 
- London:     -0.49%
- Germany:    -1.11%
- France:     +0.19%
- Italy:      -0.31%
- Spain:      -0.19%

Crude Oil Futures: +$0.14 to $97.57

Gold: -$5.60 at $1254.30

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

10-Year Bond Yield: Currently trading at 2.607%  

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.26
- Dow Jones Industrial Average: +16
- NASDAQ Composite: +5.40

Thought For The Day...

Be not afraid of going slowly, be afraid only of standing still. -Chinese Proverb

Are you getting all the market research you need?

Remember, you can receive email alerts  for more than 20 free research report alerts from StateoftheMarkets.com including:  

• State's Chart of the Day - Eeach day we highlight a top rated stock with a positive technical setup
  
• The Risk Manager Report - Stay in tune with the market's risk/reward environment
  
• The “10.0” Report - These are the REAL best-of-breed companies
  
• The Insiders Report - See what the people who know their company's best are buying
  
•  ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.
  
•  The SOTM 100 Portfolio - The top rated stocks in each market sector
  
•  State's Market Models - Each week we quantify the "state of the market" with a series of models
  
•  The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Our Mission Statement:

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Follow on  Twitter: @StateDave

---

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 and on our website is for informational purposes only. No part of the material presented in this report or on our websites 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 editors of StateoftheMarkets.com 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.