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Buyers Decide to Stand Aside Until... image

The word of the day appears to be weakness. Asian stock markets are down across the board this morning in response to weaker-than expected FDI (foreign direct investment) data in China, which showed inflows hitting the lowest level in at least two and one-half years. In addition, the ZEW Investor Confidence data in both the Eurozone and Germany continued to be surprisingly weak (Germany's ZEW index came in at the lowest level since December 2012). As a result, European bourses are also a sea of red this morning. Finally, geopolitics are back in the news today as the U.S. initiated its first official airstrikes against ISIS in Iraq and the fragile ceasefire in Ukraine is being tested by some military activity. Here at home, traders continue to fret about the Fed and futures point to a slightly lower open on Wall Street.

Current Market Outlook

While there does not appear to be any panic in the market at the present time, the action this month has been sloppy, to say the least. This is likely due - at least in part - to the uncertainty relating to the Fed's monetary policy. Everybody knows that QE is ending and that the Fed will begin to raise rates at some point next year. The questions at this stage are when and by how much? This uncertainty is likely causing buyers to either do less or stand aside completely at this time. Now toss in another round of selling in some of the high-flying "mo-mo" names such as Tesla and the social media darlings and you're left with a market that appears to be weakening. As such, the traders who have been looking/waiting for a meaningful correction are once again on high alert. Finally, our market models have slipped to neutral. And while this is not a death knell for the market, it does indicate that some degree of caution may be warranted until the bulls can regain their mojo.

Looking At The Charts

It is said that technical analysis of chart patterns is more art than science and the current situation would appear to confirm this view. For example, the bears are arguing that the near-term support levels on the major indices have been violated and that the direction of the trend is down. On the opposite sideline, our heroes in horns suggest that support in the market is not a specific point or level, but rather a zone. Therefore, as long as stocks don't make a meaningful break below 1980, the bulls say everything is fine. From an objective point of view however, one has to admit that the line in the sand is getting a little thin. We continue to contend that 1980 holds the key to the next move. Yet at the same time, the Fed is on tap tomorrow - so the action before Janet Yellen's press conference may take on less importance. In short, the outlook is more than a little cloudy right now.

S&P 500 - Daily

Pre-Game Indicators

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

Major Foreign Markets:
    - Japan: -0.23%
    - Hong Kong: -0.91%
    - Shanghai: -1.80%
    - London: -0.43%
    - Germany: -0.36%
    - France: -0.47%
    - Italy: -0.55%
    - Spain: -0.45%

Crude Oil Futures: -$0.39 to $91.53

Gold: +$2.40 at $1237.50

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

10-Year Bond Yield: Currently trading at 2.560%

Stock Indices in U.S. (relative to fair value):
- S&P 500: -2.97
- Dow Jones Industrial Average: -27
- NASDAQ Composite: -6.44

Thought For The Day:

If you are determined enough and willing to pay the price, you can get it done. -Mike Ditka

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 Fed/ECB Policy
      2. The State of the Geopolitical 'Issues'
      3. The Outlook for U.S. Economic Growth
      4. The Level of Interest Rates

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: Moderately Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

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: 1980-85(ish)
  • Key Near-Term Resistance Zone(s): 2000-11

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
Signal 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: Positive
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: Neutral
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: Neutral
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: Moderately Positive
Indicator 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: Neutral
Model 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.

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: Neutral
  • Market Sentiment: Our primary sentiment model is Negative.

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 State of the Market Model Reading: Neutral
Model 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.

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
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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.

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