Paul Schatz of Heritage Capital, LLC is filling in for Dave M. this morning. We are pleased to be able to offer Paul's thoughts on the state of the market and hope that you enjoy his views.
After a clear loss to the bears last week, the bulls finished well off the worst levels last week and closer to the highs. Typically, this type of price action tends leads to some follow-through buying in the ensuing sessions. However, in looking at the five major stock market indices, they look very different, which is not normal.
The Dow and the Russell 2000 oddly look the most similar with the S&P 500 and S&P 400 together. The NASDAQ 100 has the most bullish configuration, which makes sense as the likes of Amazon, Facebook, Netflix and Google have been leading that charge.
In order for the bulls to stay in the game in the near-term, stocks need to bounce right here and now. But, based on the action it is highly unlikely that the bulls have enough energy to go very far. While I do not believe the ultimate bull market peak has been seen, I also don’t think that stocks have hit their intermediate-term low either.
Sector leadership is fragile and junk bonds continue to really struggle. Both concern me, but the junk situation even more so. These bonds are acutely sensitive to ripples in the liquidity stream and very good leading indicators for the economy. We will continue to watch them closely.
Paul Schatz is President and Chief Investment Officer of Heritage Capital, LLC, in Woodbridge, CT. and a Managing Partner at Numetrix Capital, an investment research firm focused on multi-manager, multi-strategy portfolio solutions.
Turning to This Morning
Despite the PBoC's insistance that Monday's devaluation was a one-off event and would not continue, China's yuan continued to fall overnight. Adding to the negative sentiment this morning is the fact that there are now issues with Portugal's banks. The two worries are serving as a one-two punch to markets with European bourses down hard and U.S. futures pointing to continued selling at the open on Wall Street.
This Morning's Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -2.38%
Crude Oil Futures: +$0.36 to $43.44
Gold: +$10.80 at $1118.50
Dollar: higher against the yen, lower vs. euro and pound
10-Year Bond Yield: Currently trading at 2.098%
Stock Indices in U.S. (relative to fair value):
S&P 500: -14.10
Dow Jones Industrial Average: -112
NASDAQ Composite: -30.60
Thought For The Day:
There are no traffic jams along the extra mile. – Roger Staubach
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 State of Global Economic Growth
2. The State of European Banking System
3. The State of Fed/ECB/PBoC Policy
4. The State of the U.S. Economy
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: Moderately Negative
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Moderately 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: 2065
- Key Near-Term Resistance Zone(s): 2100-2135
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): Negative
- Price Thrust Indicator: Negative
- Volume Thrust Indicator: Negative
- Breadth Thrust Indicator: Negative
- Intermediate-Term Bull/Bear Volume Relationship: Negative
- Technical Health of 100+ Industry Groups: Moderately Positive
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: Neutral
- Intermediate-Term: Moderately Oversold
- Market Sentiment: Our primary sentiment model is Neutral .
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: Low Neutral
The opinions and forecasts expressed herein are those of Mr. Paul Schatz and may not actually come to pass. Mr. Schatz'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.
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