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Expectations for Stimulus May Aid Mood image

Good morning. After a disappointing end to an otherwise strong year for the stock market in 2014, the mood appears to be improved on this first trading day of 2015. There are several stories capturing traders' attention on the topics of QE in the Europe, Eurozone PMI, and China's PMI data. So, let's run them down.

In Europe, the December manufacturing PMI came in at 50.6, which was an increase from last month's reading of 50.1. However, taken as a whole, Markit said this was the worst growth seen since Q3 2013. By country, Germany's PMI was reported at two month highs (51.2) and Ireland hit a four month high at 56.9. However, Italy's PMI hit a 19-month low and France's PMI came in at a four month lows at 47.5. The general consensus seems to be that the weak data continues to be supportive of further stimulative action by the ECB in early 2015.

Speaking of the anticipated action in Europe, ECB President Draghi said that the risk to price stability is higher now than six months ago. Therefore, Draghi said that preparations were underway to adjust monetary policy in terms of size, speed and composition for early 2015 - if needed. However, the ECB President also noted that while government bond buying one of the tools, the bank must avoid state financing. Analysts suggested the interview was largely an attempt to win German backing for launching QE.

In China, the official manufacturing PMI came in at 50.1, which was in line with the consensus expectations, but down from last month's read of 50.3. The report also indicated that activity continued to slow at large factories. The report would appear to confirm the view that the economy continues to slow and that further policy easing in 2015 is expected.

Here at home, traders continue to watch the oil futures (which are continuing to sink to new lows) and will receive manufacturing data. U.S. futures are pointing to a higher open on Wall Street.

Current Market Environment

To be sure, the final day of 2014 was annoying. The decline had little in the way of catalysts and appeared to be mostly a case of sell algos overwhelming the market at several points during the day as the S&P 500 was hit for losses of 10 points or so on three separate occasions. The last session of the year was also indicative of the way the market has acted for much of calendar year 2014. In short, the trading machines seemed to have their way with the indices many times in 2014, as the millisecond trend-followers merely chased prices in one direction until it was time to go the other way. Therefore, trend-following indicators will likely take on more importance as we venture into 2015. On that score, our market environment model is teetering on the edge of positive and negative. This tells us to remain alert - yes, even on this pseudo holiday session - and to be ready to take defensive measures if necessary.

Looking At The Charts

The trend for the past 6-9 months has been for the market to first experience a modest pullback. Next, the selling stops abruptly and the indices put in a "V-Bottom." Stocks then advance sharply in a straight line. Next, the market usually proceeded to make a modest new high. From there, stocks tend to stall out before finally entering into the next pullback phase. As a result, all "breakouts" have been reversed in fairly short order. And since Wall Street's traders (and their computers) love to milk a trend for all it is worth, we shouldn't be too surprised if this cycle continues for a while - especially after the New Year's Eve line in the sand was violated on Wednesday. Finally, we should note that although it is the first trading day of the new year, most trading desks are likely to be thinly staffed again today.

S&P 500 - Daily

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Pre-Game Indicators

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

Major Foreign Markets:

Major Foreign Markets:
    Japan: Closed
    Hong Kong: +1.07%
    Shanghai: Closed
    London: -0.31%
    Germany: -0.62
    France: -0.35%
    Italy: +0.88
    Spain: +0.80%

Crude Oil Futures: -$0.86 to $52.41

Gold: -$7.40 at $1176.70

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

10-Year Bond Yield: Currently trading at 2.191%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +7.10
    Dow Jones Industrial Average: +65
    NASDAQ Composite: +17.47

Thought For The Day:

No one has ever made himself great by showing how small someone else is. - Irvin Himmel

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/BOJ Policy
      3. The State of Russia/Emerging Markets "Crisis"
      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: Neutral
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: 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: 2050
  • Key Near-Term Resistance Zone(s): 2080-90

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: Neutral
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Positive
  • Bull/Bear Volume Relationship: Positive
  • Technical Health of 100 Industry Groups: 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: Moderately Overbought
          - Intermediate-Term: Moderately Overbought
  • 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: Positive

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
Be Sure To Check Out the NEW Website!


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.