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If You Are Scratching Your Head... image

After the usual post-Fed announcement hysterics, stocks stepped lively Wednesday afternoon and finished at the high of the day. For those of you keeping score at home, the S&P 500 is now more than 11% higher than where it closed on September 28. And lest we forget, that was the day the naysayers were particularly boisterous in their claim that the next Armageddon was about to hit the corner of Broad and Wall.

Given the depth of the belief in the bear camp at the time, there are probably more than a few folks scratching their heads right about now, wondering how the market finds itself just a smidge less 2% away from another all-time high.

Some tell us that the Fed's non-decision on Wednesday was the catalyst for the latest 1% joyride to the upside. However, that doesn't really jive with the nasty spill the market took after the FOMC released their statement saying that rates could go up in December.

And given the fact that the Fed statement was considered to be more hawkish than expected, one has to wonder why the DJIA would first drop 150 points and then rally 220 points.

In short, the FOMC gave what would be considered a clear sign (well, clear in Fedspeak, that is) that Janet Yellen and her merry band of central bankers are ready to begin raising interest rates. The language in the statement really says it all.

For example, on the subject of when to start moving rates back toward a more normal level, the FOMC statement changed from, "determining how long to maintain this target range" to "determining whether it will be appropriate to raise the target rate at its next meeting..."

What Me Worry?

The FOMC also backpedaled away from its concern about global issues as the following verbiage was dropped from this month's statement: "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."

If Ben Bernanke were still running the show, this type of verbiage would have signaled that the FOMC was planning to hike rates in the next meeting or two. As such, investors should probably expect that the Fed will raise rates either in December or January.

One could argue that the Fed may want to move sooner rather than later to protect its credibility as an inflation fighter. In short, the FOMC is saying that while the economy isn't exactly humming along, it is now strong enough to handle rates moving up a quarter point.

So, given that a major concern during the August swoon and the ensuing retest of the correction lows was global growth, Janet Yellen saying that her gang isn't too worried about either the U.S. or the global economy is a good thing.

Looking Across the Pond...

But that's not all. You see, prior to the FOMC announcement and the ensuing upside surprise in the stock market, the ECB team also gave traders a little something to cheer about.

First came word that Super Mario had made a deal with the governing ECB members to pave the way for a rate cut in December. Then the ECB's Visco said that the bank will use "all available tools to boost inflation." And finally, ECB governor Constancia said that they will expand the bank balance sheet (which is a Fedspeak for "print money") until there is a "sustained adjustment" in the path of inflation. Can you say, more QE?

Oh, And Did You See The Move in Oil?

Then there was the move in oil. One day after it looked like oil had broken down and was ready to make new lows, the USO (the U.S. Oil ETF) popped up +6.3% yesterday. The good news here is that the price of oil is tied to the view on global growth. So, with oil back in the trading range that is now a little over two months old, this is one less thing for traders to worry about.

Next Stop Is...

With the S&P 500 just 1.9% away from the Promised Land of new highs, the logical question becomes, what's next?

The bulls will argue that since the bulls are on a roll right now, we should expect to see another set of new highs going into the end of the year.

S&P 500 - Daily

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However, from a technical perspective, it is important to keep in mind that stocks are indeed overbought here. As such, it would not at all be surprising to see the market indices pull back a bit to allow the bulls to "catch their breath." But then again, we've been saying that for a while now.

Instead of trying to predict what will happen next, it is probably a better idea to watch the action closely from here. If the bulls can maintain possession of the ball and continue to show some "oomph" in the coming weeks, then we could very well see more gains through January. But if the rally starts to weaken, it would not be unusual to see the bears make an attempt to get back in the game. So, stay tuned folks, this is probably going to get interesting.

The Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +0.17%
    Hong Kong: -0.59%
    Shanghai: +0.35%
    London: -1.10%
    Germany: -0.36%
    France: -0.83%
    Italy: -1.02%
    Spain: -0.74%

Crude Oil Futures: -$0.51 to $45.43

Gold: -$17.80 at $1158.30

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

10-Year Bond Yield: Currently trading at 2.104%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -9.25
    Dow Jones Industrial Average: -76
    NASDAQ Composite: -23.50

Thought For The Day:

"It's what you learn after you know it all that counts." Earl Weaver

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 China/Global Growth
      3. 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 6 months, and long-term as 6 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: Moderately Positive
(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): Positive
  • Price Thrust Indicator: Positive
  • Volume Thrust Indicator(NASDAQ): Neutral
  • Breadth Thrust Indicator (NASDAQ): Positive
  • Short-Term 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: Overbought
          - Intermediate-Term: Neutral
  • Market Sentiment: Our primary sentiment model is Moderately 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 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.