Posted |
Don't Be Fooled, All Is Not Right With This Market image

With a Holiday season upon us, it is a good bet that most folks have their attention focused on more important things than the stocks market right now. As such, I'll cut to the chase this morning. The big thing I'd like to get across in today's missive is that this is no time to be complacent as all is not in the world of my major market indicators.

To be sure, Ms. Market has made a habit out of "fooling" all kinds of stock market indicators (especially those focused on the short-term) over the past 18 months. But let's be clear about one thing this morning, I'm not talking about the shorter-term stuff here. No, I'm talking about long-term indicators that have a history of getting the big picture right.

In light of the fact that I've already bored you with a review of the indicators lately, I won't rehash the readings/levels of a bunch of models. But the bottom line is the majority of my favorite, most trusted, long-term indicators are NOT in good shape right now.

And so that my meaning is not misunderstood, I'm not simply complaining about the "pin action" in the market or whining that the indicators not as robust as they should be during a bull market. No, the point I'd like to get across is that four of my top five long-term indicators/models are actually negative right now.

Are The Bears Ready to Attack?

Does this mean that a bear market is imminent and should we heed the warning and start buying those inverse ETFs with both hands? In a word, no. Does this mean that one should sell everything and head for the hills? Not exactly.

From my perch, what the current state of the indicators DOES mean is that current environment is not "healthy" at the present time. And perhaps the key takeaway is that the stock market has not produced strong returns when the indicators are in the present state.

And while all that fresh QE cash being printed by global central banks and all the corporate buybacks may be able to support the market for longer than anyone can possibly imagine, I do think that this is a time where investors need to be on high alert.

If one of these indicators were negative, I might talk about the issue. And yes, there might be some whining involved with such a report. But with four out of the five flashing red, it would irresponsible of me if I failed to suggest that some caution is warranted.

Bears Will Need a Catalyst

But let's remember that bear markets are usually accompanied by some sort of catalyst or trigger. And make no mistake about it; few, if any gurus see these triggers coming in advance. So, with my favorite "state of the market" indicators flashing warning signs, it is probably a good idea to be ready for anything - just in case.

For long-term investors, this means you will want to be ready to buy the next big dip. You want to have your shopping list ready and you want to have a plan for when you are going to put capital to work. For it is during times of market dislocation that the really big opportunities present themselves.

Sorry to be a Debbie Downer during the holiday season. But since market tops often take a very long time to play out, it is important to (a) be aware of the situation and (b) have a plan.

But In The Near-Term...

From a shorter-term perspective, it is would appear that stocks are in a downtrend as fears over oil, the global macro picture, and high yield have taken hold.

S&P 500 - Daily

View Larger Image

However, it is also worth noting that (a) the market is oversold in the near-term and (b) the S&P 500 has a propensity to finish most calendar years in the black. Remember, red numbers for the major indices are a relatively rare occurrence. So, stay tuned, the rest of this year is likely to be interesting.

Finally, I'd like to take this opportunity to wish everyone a joyous holiday season and a prosperous New Year!

Publishing Note: With the holidays upon us, I am going to take some time to focus on the important stuff in life and recharge the batteries a bit. Thus the goal is to try and stay away from the keyboard as much of possible between now and the New Years.

Today's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.37%
    Hong Kong: +0.17%
    Shanghai: +1.76%
    London: +0.87%
    Germany: +0.67%
    France: +0.38%
    Italy: +0.46%
    Spain: -2.53%

Crude Oil Futures: -$0.51 to $34.51

Gold: +$7.70 at $1072.70

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.202%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +11.40
    Dow Jones Industrial Average: +15
    NASDAQ Composite: +33.36

Thought For The Day:

"To err is human, to blame it on somebody else shows management potential" -- Unknown

Here's wishing you green screens and all the best for a great day,

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

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 Central Bank Policy
      2. The State of the Oil/Junk Bond Dive
      3. The State of Global Growth

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 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Neutral
(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: 2020
  • Key Near-Term Resistance Zone(s): 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(NASDAQ): Negative
  • Breadth Thrust Indicator (NASDAQ): Negative
  • Short-Term Volume Relationship: Negative
  • Technical Health of 100+ Industry Groups: Moderately Negative

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 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: Negative

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 is the owner of Heritage Capital Management (HCM) a registered investment adviser. Advisory services are offered through Heritage Capital Management, Inc. For a complete description of investment risks, fees and services review the HCM firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting HeritageHCM also serves as a sub-advisor to other investment advisory firms. Neither HCM or Heritage 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.