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Is 'Grexit' Back On The Table? image

One of the most interesting and/or maddening things about the stock market is that the focus can turn on a dime. One day traders are focused on the Fed, the economy, and/or earnings, and the next, well, it can be just about anything.

Such is the certainly case at the present time. Up until Friday, the stock market had been driven by the price of oil on a daily basis. Wall Street's computers had created correlation trades that tied buy and sell programs in the stock market to the movement in oil futures.

The thinking was fairly straightforward as nobody could be completely sure about the extent of the fallout from what can only be described as a crash in crude prices. On a micro basis, there was concern about the number of marginal companies that would be forced to fold should oil keep falling, the defaults in junk bonds, and the ensuing impact on the banks. And from a macro point of view, the worry was that the nation's job growth would suffer and the "escape velocity" that the Fed has spent five years and trillions of dollars establishing, could falter.

While this may not make a lot of sense to individual investors, the idea is that if crude were to continue to dive, the economic fallout would likely worsen. And then conversely, if the crash in crude prices subsides, much of the worry as to what might happen next could be removed. Enter the correlation trade, where stocks and oil are joined at the hip.

The key here is that Wall Street does not like surprises. History proves that the market can "deal" with just about anything given enough time and information. It is the surprise factor that oftentimes causes traders to sell first and ask question later.

So, with the oil crash now more than seven months old and the stock market indices only a couple percent off their all-time highs, one could argue that the worry about oil might be waning. As long as oil didn't resume the waterfall decline, the thinking is that traders might be able to move on - meaning that the oil/stock correlation trade could be removed.

The End of the Correlation Trade?

This appeared to have been the case on Friday. In short, oil and stocks wound up going in opposite directions. While oil prices actually rose a couple percent, stocks experienced yet another bout of intraday volatility, giving up early gains and finishing in the red.

In the early going on Friday, things were looking up. Oil was up and the Nonfarm Payrolls report showed that job growth (along with a bunch of other statistics) looked pretty good. As such, stocks were movin' on up after the opening bell and it looked like the recent trading range might finally be resolved to the upside.

However, just about the time you thought it was okay to take your eye off of the intraday madness in the market for a while, the headlines out of Greece started to hit the tape.

The New Focus Is...

There was word that Greece's debt rating had been cut by Standard & Poors, which to most thinking investors wouldn't seem to be much of a shock. But to headline-reading algos, this was just another opportunity to hit the panic button.

Next, Eurogroup Chairman Dijsselbloem made the pronouncement that Greece would need to get moving in order to apply for an extension to their bailout funding, which, by the way, has some sort of deadline of February 16 tied to it.

Finally, there was word that Greece's new Prime Minister, Alexis Tsipras would provide a detailed account of his plans to solve the debt situation on Sunday.

And just like that, the focus changed. Gone was the worry about oil. No, traders and their computers were back to worrying about Greece, a "Grexit," and what could happen to the Eurozone. Joy.

The Game Begins - Again

In his speech to Parliament on Sunday, Tsipras said that his country would not seek an extension to the current bailout. Instead, the Greek PM said his government would negotiate new deals with its partners.

While that may not sound too bad, the translation is that despite the stern warnings from the Eurozone and Germany, Tsipras says that he plans to renegotiate the terms of Greece's debt and bailout deal. In essence, this means is that he wants bond holders to write-off more of the debt.

The problem is that Eurozone leadership has already made it clear that there is no way this is going to happen. So, we're back to worrying about Greece defaulting on their debts and leaving the Eurozone, which, of course, paves the way for the rest of the PIIGS to follow suit.

Thumbing His Nose at the EU

Tsipras went on to say Sunday that he will be reversing many of the structural reforms that were part of the bailout deal. Tsipras said he would cancel the property tax that was put in place, raise the personal tax threshold, and restore minimum wage to pre-crisis levels.

Also on Sunday, Greek Finance Minister Varoufakis said that if Greece is forced out of the Eurozone other countries will inevitably follow suit and that the currency bloc would collapse. Varoufakis said that Greece's debt problems must be solved as part of a rejection of austerity policies for the Eurozone as a whole.

And in a sound bite that would make Hollywood agents proud, Varoufakis said his government would propose a new deal for Europe like the one enacted in the US in the 1930, which would involve the European Investment Bank investing ten times as much as it has so far. Good one.

Oh, and on another humorous note, the Greek government said over the weekend that it has no short-term cash problems. (Never mind that Greece's Economy Minister had warned last week that the country is on course to run out of money in just weeks if it doesn't gain access to additional funds.)

So there you have it. It would appear that oil is out and Greece is back in as a focal point. Or rather, oil is not a concern as long as it isn't crashing. But the bottom line is that traders we are back to watching the headlines out of Europe - yes, again.

Turning to This Morning...

Greece continues to be the word in the early going. Alexis Tsipras' anti-austerity government stirred the pot over the weekend, basically saying it is going to ignore the warnings from the Eurozone and renegotiate its deal. This has put the potential for a "Grexit" to occur and brought new fears of what could happen next. Not surprisingly, European bourses are down hard across the board. In what may today be viewed as yesterday's news, oil is on the rise again today after an OPEC report. And here at home, U.S. futures are

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +0.36%
    Hong Kong: -0.64%
    Shanghai: +0.62%
    London: -0.78%
    Germany: -1.80%
    France: -1.23%
    Italy: -2.20%
    Spain: -2.37%

Crude Oil Futures: +$1.19 to $52.88

Gold: +$6.30 at $1240.90

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.910%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -8.31
    Dow Jones Industrial Average: -81
    NASDAQ Composite: -17.34

Thought For The Day:

If your ship doesn't come in, swim out to it. - Jonathan Winters

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 Greece Situation
      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: Moderately 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: 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): 2060-90

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): Positive
  • Price Thrust Indicator: Neutral
  • 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: Moderately 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 - 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.