The focus of the market this morning is easy to identify as all eyes are on Mario Draghi and the ECB. After approximately two years of jaw-boning, "Super Mario" finally delivered on his promise to "do whatever it takes" to get inflation moving higher.
The ECB announced an expanded asset purchase program, commonly referred to as quantitative easing, where the ECB will buy €60 billion a month of public and private bonds. The program will continue until at least September 2016. And the new program, which compliments the existing programs, will include partial loss-sharing (20%) with the national central banks.
The key is the program did exceed the expectations for €50 billion a month. Thus, futures have rallied on the news.
However, many analysts contend that the ECB's move has already been priced into the market at this time and therefore, today's market reaction will be important.
On the oil front, prices are bouncing a bit in early trade. The initial strength seems to be tied to comments by OPEC's Secretary-General Abdalla El-Badri. El-Badril told Bloomberg in Davos that oil prices will rebound because the collapse over the past six months is not reflective of global supply and demand. He also said non-OPEC producers should be first to reduce their output as their production has expanded over the past decade while OPEC's remained stable.
However, it is worth noting that oil has been unable to rebound over the last six months. Therefore a rally that would take prices out of the current sideways pattern seen on the charts would likely ignite a strong short-covering move to the upside. But so far, the trend has been for prices to moves sideways and then begin a new leg down.
Here at home, while oil and the ECB continue to get the headlines, traders may soon turn their attention to earnings. The bottom line here is that the earnings season has been lackluster so far. According to FactSet, with just over 13% of S&P 500 companies having now reported, the growth for Q4 stands at just 0.02%. This is down from the 1.7% seen at the end of last quarter's reporting season. FactSet says that in aggregate, companies reporting earnings that are 0.4% below consensus. This compares to one- and five-year average positive surprise rates of 4.2% and 5.5%.
Looking ahead to today's session, U.S. stock futures are pointing to a stronger open on Wall Street.
Current Market Environment
Although there has been a fair amount of movement in the stock market indices over the last four months, the S&P 500 is only marginally higher than where it was on September 19, 2014. And over the past month and a half, investors have been treated to at least five direction changes. Thus, it is safe to say that, at a minimum, stocks are in the midst of a consolidation phase. As such, there is little wonder that our market models are currently stuck in neutral and suggesting that investors exhibit some caution at this stage.
Looking At The Charts
After yesterday's close, the media pointed out that the S&P had put in its first three-day winning streak of the year. While this is technically an accurate statement and the gains "feel" good, the bottom line is that stocks continue to waffle around within the wedge pattern that has been in place all year. Generally speaking, a wedge is considered a consolidation pattern. However, traders will be watching intently to see if the S&P can break out of the pattern today. The key levels are 2040 on the upside and 1990(ish) on the downside.
S&P 500 - Daily
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Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: +0.70%
Crude Oil Futures: +0.43 to $48.21
Gold: -$4.30 at $1289.40
Dollar: higher against the yen and euro, lower against the pound
10-Year Bond Yield: Currently trading at 1.918%
Stock Indices in U.S. (relative to fair value):
S&P 500: +14.48
Dow Jones Industrial Average: +130
NASDAQ Composite: +123.41
Thought For The Day:
Can you live in that moment... with clear eyes & love in your heart, with joy in your heart? If you can you're perfect. -Friday Night Lights
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 the Oil Crash
2. The State of Fed/ECB Policy
3. The State of the U.S. Economy
4. The State of the Global 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: Neutral
(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: 1991
- Key Near-Term Resistance Zone(s): 2040-60
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: Neutral
- Breadth Thrust Indicator: Neutral
- Bull/Bear Volume Relationship: Moderately Negative
- Technical Health of 100 Industry Groups: 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: 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: Moderately Positive
Wishing you green screens and all the best for a great day,
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.
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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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.
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