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Can You Say, Dovish? image

Obviously, the key to yesterday's joyride to the upside, which saw the S&P 500 surge nearly 46 points (or 2.22%) in about an hour and both the smallcap and midcap indices vault to new all-time highs, was the Fed statement. Obviously, traders liked what first the FOMC and then Ms. Yellen had to say about the state of the economy and the outlook for monetary policy. And obviously, the Fed remains the driver to this market.

However, at this stage of the game, with the stock market overvalued by most measures and concerns mounting about the state of corporate earnings, it is important to understand why exactly the market blasted higher yesterday.

Within seconds - no, make that, milliseconds - of the release of the FOMC statement, everybody on the planet knew that the Fed had dropped the word "patient" from their forward guidance language relating to monetary policy. To be sure, this was expected. The question of the day then was what tone the statement would take and if the FOMC would provide any hint as to when rates could be expected to be lifted.

We Expected Tough Talk...

To be honest, we expected the Fed to "talk tough" yesterday. We expected Ms. Yellen to ignore the recent punk data and effectively put the markets on notice once and for all that the FOMC would raise rates whenever it was appropriate. Looking at the situation logically, this would help the Fed gain credibility and allow Ms. Yellen's merry band of central bankers some flexibility going forward.

We also expected Ms. Yellen to avoid providing any details in her prepared remarks during the ensuing press conference and then to keep her cards very close to her vest when the Q&A session began. And as a result of this, we felt that there was a decent chance that stocks could sell off on the idea that the Fed really meant what it said this time.

But Instead...

But instead of talking tough, the bottom line is that both the FOMC statement and Ms. Yellen's remarks came in MUCH more dovish than had been anticipated and stocks quickly (very quickly) went on a tear to the upside in response.

S&P 500 - 1 Minute

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There were really three key takeaways from yesterday's FOMC meeting and Ms. Yellen's presser.

First, the FOMC made it very clear that they were now data dependent and that the committee could begin raising interest rates at ANY time going forward. Normally, this would have likely spooked the market a bit.

However, after that, the Fed then went on to basically downgrade their view of the economy. You probably don't care about the exact verbiage used, but it will suffice to say that the FOMC did in fact acknowledge the recent string of punk data.

Ms. Yellen even went so far as to say that in its estimation, the FOMC believes that the economy has not yet met the objectives set to trigger the first rate hike.

The third key came seconds into the Chairwoman's prepared remarks during the press conference. With what appeared to be a wry smile and a twinkle in her eye, Ms. Yellen stated that removing the word patient from the FOMC statement does not mean that the Fed will be "impatient" moving forward. Can you say, "dovish?"

And then with Ms. Yellen failing to stumble or be tripped up by the questions asked in the press conference, traders came to the conclusion that the Fed is NOT going to raise rates in April and in all likelihood, the Fed is NOT going to begin the long-awaited rate hike campaign in June either.

And based on the fact that Ms. Yellen suggested that the jobs market isn't good enough yet, analysts were forced to consider the possibility that there may not be any rate hikes in 2015 at all - unless, of course, the jobs market continues to improve, or if inflation and/or the economy perks up a bit.

Party On Wayne

So, with the ECB having launched its new QE program, in which it will spend €60 billion a month for 19 months, China talking stimulus, and now the Fed looking like it will remain friendly for some time yet, it appears that the "liquidity trade" remains firmly in play. Party on, Wayne!

Does this mean that stocks will simply continue to skyrocket going forward? Well, not exactly. You see, stocks remain overvalued and there is a fair amount of concern about the dollar's impact on earnings. Oh, and the sellers did indeed come in hard when the NASDAQ once again briefly breached the 5,000 mark yesterday afternoon. So, it looks like the game to sell into all new highs is still in play.

No, in my humble opinion, what yesterday's Fed adventure means is this... Given that the globe's central bankers remain friendly stocks are unlikely to come unglued in the near future. Sure, the market could experience any number of 3% to 5% corrections and maybe even something a bit more meaningful if earnings start to stink up the joint. However, a severe decline appears to be unlikely while the Fed is friendly, the economy is improving, and the rest of the world is printing money.

Turning to This Morning...

The big story overnight remains the Fed's surprisingly dovish stance at yesterday's FOMC meeting. The key appears to be that a June rate hike, while possible, is not probable at this stage. A Reuters poll showed that 12 of 16 primary dealers surveyed now expect the rate liftoff to begin in September or later. Just four are now looking for an initial tightening in June, which is down from nine earlier this month after the second consecutive upside surprise in nonfarm payrolls occurred. In other news, Greece is back in the headlines ahead of yet another EU summit. Finally traders will continue to watch the data in the U.S. as well as the action in the dollar and oil pits. Currently stock futures are pointing to a pullback at the open on Wall Street.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.35%
    Hong Kong: +1.45%
    Shanghai: +0.13%
    London: +0.10%
    Germany: -0.35%
    France: +0.07%
    Italy: +1.15%
    Spain: +0.47%

Crude Oil Futures: -$1.78 to $42.88

Gold: +$9.70 at $1160.90

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

10-Year Bond Yield: Currently trading at 1.944%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -3.70
    Dow Jones Industrial Average: -42
    NASDAQ Composite: +2.70

Thought For The Day:

Never put the key to your happiness in someone else's pocket.

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 U.S. Economy
      3. The State of the U.S. Dollar

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 Positive
(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 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: 2080
  • Key Near-Term Resistance Zone(s): 2100-20

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): Positive
  • Price Thrust Indicator: Positive
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Positive
  • 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: 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 Market Environment Model Reading: Moderately Positive

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research


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., a 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.