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If Prices Continue to Follow the Recent Trend... image

To say that the recent market action has been frustrating to traders would be an understatement. Since the beginning of December, the major indices have moved up and down within a clearly defined trading range and changed direction no fewer than eight times. The mood has flip-flopped back and forth in response to the various inputs including oil, Greece, and QE, and there has been no discernible trend. Well, up until the middle of last week, that is.

With the investing world seemingly focused on Greece and most analysts assuming that the script for the past dramas would play out once again (meaning that markets would remain volatile and move on every headline out of Greece and Eurozone leadership), one couldn't be blamed for expecting that the sideways range would be extended until a deal was completed. However, a funny thing happened on the way to the Forum as traders began to assume that a deal would eventually get done and prices on some of the major indices broke out to new highs.

For example, take a look at the daily charts of the S&P Midcap 400 and the NASDAQ Composite below.

S&P Midcap 400 - Daily

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In reviewing the chart of the Midcaps, it looks as if a clear breakout to the upside is underway. And the same thing can be said for the chart of the NASDAQ.

NASDAQ Comp - Daily

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But in looking at the chart of the S&P 500, the breakout is a lot less convincing. Sure, the venerable index did close Friday at the first new all-time high of 2015. However, as far as breakouts go, this one looks a little weak and only time will tell if Friday was the beginning of something good or another in a long series of "breakout fakeouts."

S&P 500 - Daily

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The Recent Trend Has Been...

Speaking of "fakeouts," it is important to recognize that this has certainly been the trend of late. In fact, since the middle of July, only one breakout led to a meaningful move higher. The rest of the time, new highs were met, almost immediately, with selling. In other words, most new highs seen over the past seven months have been quickly followed by declines.

The chart below illustrates this trend.

S&P 500 - Daily

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The question, of course is if this time will be different. One could argue that the current worries in the market are close to being resolved as most expect a deal between Greece and the Eurozone by the end of the week, and oil seems to be putting in a bottom. Therefore, the bulls argue that traders will soon look to brighter days ahead.

Our heroes in horns also contend that the recent trading range represents a consolidation phase. If this is the case, then the technical analysis textbooks tell us that a meaningful move to the upside is to be expected as markets tend to exit this type of pattern heading in the same direction they were going when the consolidation began.

What's more, chartists inform us that the size of the ensuing breakout after a period of consolidation tends be a multiple of the range itself. If this is to be the case, then investors can look forward to a move of at least a couple hundred points to the upside on the S&P 500.

However, keep in mind that technical analysis tends to be more art than science at times and that stocks will undoubtedly suffer if (a) a deal doesn't get done in Greece or (b) oil resumes its decline.

Thus, the takeaway here would seem to be that the odds tend to favor the bulls here, but that nothing can be taken for granted in this market.

Turning to This Morning...

The headlines over the long holiday weekend were all about the "acrimonious" end to the talks between Greece and the Eurogroup's finance ministers. It turns out that the two sides couldn't even agree on enough to put out a statement. At issue is the fact that on Sunday it appeared that the two sides had agreed on a deal but that the actual verbiage of the agreement came back much harsher than expected. Thus, in typical fashion, the Greek fin min stormed out of the meeting calling the meetings a joke and saying that there is no way a deal could be agreed to. However, behind the scenes, reports seem to indicate that the current drama is tied to political posturing on both sides and that a deal appears likely by the end of the week. And this is the reason that we did not wake to big red numbers in Europe and double-digit declines in U.S. stock futures.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.10%
    Hong Kong: +0.24%
    Shanghai: +0.76%
    London: +0.38%
    Germany: -0.35%
    France: +0.04%
    Italy: +0.48%
    Spain: +0.13%

Crude Oil Futures: +$0.04 to $52.82

Gold: -$4.00 at $1223.10

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.029%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -4.50
    Dow Jones Industrial Average: -24
    NASDAQ Composite: +1.75

Thought For The Day:

Once the game is over, the king and the pawn go back in the same box. -Italian Proverb

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 Latest Greek Drama
      2. The State of the Oil Crash
      3. The State of the U.S. Economy
      4. The State of Fed/ECB Policy

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: Positive
(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: 1975
  • Key Near-Term Resistance Zone(s): 2090-95

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: Neutral
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Neutral
  • 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: Overbought
          - Intermediate-Term: Neutral
  • 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: Positive

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

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