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An Awful Lot To Consider image

Anyone expecting a quiet Columbus Day Holiday in the markets (where stock markets are open but banks and bond markets are closed) will likely to be disappointed as the news flow over the weekend and the early action in the futures market suggests that last week's volatility could continue.

In the wee hours, U.S. stock futures were down 15 points and suggested that it might be a scary open on Wall Street. Traders were apparently concerned about all the Fed-speak coming out of an IMF/World Bank conference. Vice Chair Stanley Fischer said that rate hikes in the U.S. could be delayed by a global slowdown and Daniel Tarullo stated that he was worried about the state of global growth.

In case it isn't obvious, the key driver to the markets right now is global growth, or, perhaps more appropriately, a lack thereof. The bottom line is that there is once again talk of recession in places like Japan, Germany and the Eurozone as well as a serious growth slowdown in China.

On the latter subject, there were reports out of China that the government is targeting an annual growth rate of 7% in 2015. Recall that the economic growth for the world's second biggest economy has been downgraded almost constantly in 2014 and the current estimate for 2014 is in the 7.3% zone.

Speaking of the slowdown in China, semiconductor maker Microchip (NASDAQ: MCHP) missed earnings badly and blamed conditions in China for the shortfall. As expected, the company's stock got slammed for a loss of -12.3%. However, the concerns about China's impact on earnings quickly spread to the rest of the semiconductor sector as the SOX index (NASDAQ: SOXX) fell -6.9%.

Shifting the focus across the Atlantic, let's not forget that the banking crisis that threatened the unity of the Eurozone from mid-2009 through much of 2012 was never really fixed. And in case you missed it, Finland's debt rating was downgraded on Friday. And then later in the afternoon (recall that S&P just love to make announcements on sovereign debt ratings on Friday afternoon's) Standard & Poor's downgraded their outlook on France from neutral to negative. In short, this means that France's debt rating will see a downgrade in the coming months. If your first reaction to all of this is, "here we go again," join the club.

While growth is the subject du jour, remember that the Fed is also still part of the game. For example, Goldman Sachs was out with a report over the weekend suggesting that the end to QE could produce a shock in the markets that will expose liquidity risk.

However, the good news is that things have improved rather dramatically in the last couple of hours. The improved mood appears to be tied to the announcement that Russian President Putin announced orders to pull back 17,600 troops from the Ukrainian border. As a result, European bourses now sport a decent shade of green and U.S. futures now point to a flat open on Wall Street.

Current Market Environment

The key question of the day is how low can the market go during this corrective phase? For the last 3+ years, all declines were contained within the -3% to -6% range. So, with the S&P 500 now down -5.23% from its September high, the bulls argue that the difficult days ought to be ending any day now. However, we remain concerned that (a) the reasons for the current decline are fundamental, (b) the divergences seen in the market are typically present during major tops, and (c) this time we are starting to see some important indicators issue sell signals. So, while our market environment models remain neutral on balance at the present time, we continue to view risk levels as elevated.

Looking At The Charts

Last week's reversal of the prior reversals created a large degree of technical damage on the charts. First, the near-term support was broken. Next, the 150-day moving average, which had been support, snapped and now represents overhead resistance. And finally, the S&P put in a "lower low" on a closing basis. Granted, you have to squint to see it, but Friday's close was below the August low. The good news is that the S&P 500 remains above its upwardly sloping 200-day moving average and stocks are now oversold on both a short- and intermediate-term basis. Therefore, a countertrend, reflex bounce is likely in the near-term. But the key line in the sand remains the 200-dma, which currently resides at 19005. Should this level be violated, we can probably expect a strong "whoosh" lower thereafter.

S&P 500 - Daily

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Pre-Game Indicators

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

Major Foreign Markets:
    Japan: closed
    Hong Kong: +0.24%
    Shanghai: -0.36%
    London: +0.19%
    Germany: +0.45%
    France: +0.28%
    Italy: +0.60%
    Spain: +0.70%

Crude Oil Futures: -$1.21 to $84.61

Gold: $6.20 at $1228.00

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

10-Year Bond Yield: Currently trading at 2.38%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +2.40
    Dow Jones Industrial Average: +17
    NASDAQ Composite: -2.15

Thought For The Day:

If you'll not settle for anything less than your best, you will be amazed at what you can accomplish in your lives. - Vince Lombardi

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 Outlook for Global Growth
      2. The Price Action in the Major Stock Market Indices
      3. The State of Fed/ECB Policy
      4. The Outlook for U.S. Economy
      5. The Outlook for U.S. Earnings

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

Intermediate-Term Trend: Moderately Negative
(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: 1906
  • Key Near-Term Resistance Zone(s): 1930

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): Neutral
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Negative
  • Bull/Bear Volume Relationship: Negative
  • Technical Health of 100 Industry Groups: Low Neutral

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: Oversold
          - Intermediate-Term: Oversold
  • Market Sentiment: Our primary sentiment model is Positive .

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 - A CONCERT Advisor
Be Sure To Check Out the NEW Website!


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., an SEC 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.