Posted |
It's Fed Day, Here's What We're Watching... image

Although the surprise move by the People's Bank of China to pump 500 billion yuan (approximately $80 billion) into the country's top five banks (a move that was the equivalent of a 0.50% cut in the country's reserve requirement rate) got all the attention yesterday, today is all about Janet Yellen and her merry band of central bankers here in the United States. In short, it's "Fed Day" again here in the U.S. and traders are likely ready to go.

Speaking of "Fed Days," Bespoke Investment Group reports that the S&P 500 has averaged a gain of 0.47% on days when the Fed made announcements since ZIRP began in December 2008, which is well ahead of the average gain of 0.35% seen on all Fed days since 1995 (when central bank began publicizing policy changes on meeting days). However, since the Fed began to taper its latest QE program last December, the S&P has averaged a gain of 0.19% and finished higher on four of the last six "Fed Days."

As a reminder, the FOMC announcement is scheduled for 2:00 pm eastern with Janet Yellen's Press Conference scheduled to follow at 2:30 pm. When the FOMC statement is released, analysts will be quickly scanning the text for the words "considerable time." Recall that these two little words have been used by the Fed to describe how long the Fed Funds rate is expected to stay at the current 0% - to 0.25% target. Removal of the phrase would seem to suggest that the Fed is leaning toward raising rates sooner rather than later. The current consensus expectation is for the Fed to begin a long, gradual rate-hike campaign in June 2005.

Analysts will also be paying close attention to the "dot plot" contained in the FOMC statement. This graph shows the projection of where rates will be from each Fed Governor. The expectation is that there will be more "dots" projecting higher rates, sooner than there were at the last FOMC meeting.

Overnight, markets rallied in China on the back of the monetary stimulus efforts of the PBOC. In Europe, the sentiment is upbeat as well. And U.S. futures are sporting a slightly green hue in the early going.

Current Market Outlook

Don't look now, but the much ballyhooed weakness in the stock market as well as the expectations for a meaningful decline appear to have been, once again, put on the back burner. Yesterday's triple-digit pop higher took the DJIA to new all-time highs on an intraday basis, a move that was sponsored in large part by the PBOC. The thinking is that China's stimulus moves will produce economic spillover in the global economy. The bulls were also supported Tuesday by Jon Hilsenrath, the WSJ's Fed-watcher, as well as PIMCO's Bill Gross. "Hilsy" opined that the "considerable time language in the Fed statement is likely to stay. And Mr. Gross, aka the bond king, suggested that Yellen will remain cautious in terms of monetary policy because the risk of the "lost decades" seen in Japan is higher than the difficulty some inflation might cause in the near-term. The bottom line is that the "liquidity trade" continues to be the focal point in this market.

Looking At The Charts

The title of Stealers Wheel's big hit "Stuck in the middle with you" seems to be a fitting description of the current technical picture as yesterday's move pushed the Dow and S&P 500 back into the trading range that has been in place since late August. However, this remains a tale of two tapes as the charts of the NASDAQ, Smallcaps, and Midcaps continue to sport downtrends. But for now at least, the threat of an imminent correction in the blue chips would appear to have been lessened.

S&P 500 - Daily

Midcap 400 - Daily

Pre-Game Indicators

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

Major Foreign Markets:
    - Japan: -0.14%
    - Hong Kong: +0.99%
    - Shanghai: +0.50%
    - London: +0.04%
    - Germany: +0.37%
    - France: +0.68%
    - Italy: +0.99%
    - Spain: +0.95%

Crude Oil Futures: -$0.42 to $94.46

Gold: +$0.60 at $1237.30

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

10-Year Bond Yield: Currently trading at 2.582%

Stock Indices in U.S. (relative to fair value):
- S&P 500: +1.42
- Dow Jones Industrial Average: +14
- NASDAQ Composite: -2.87

Thought For The Day:

I am an optimist. It does not seem too much use being anything else. -Winston Churchill

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 Fed/ECB Policy
      2. The State of the Geopolitical 'Issues'
      3. The Outlook for U.S. Economic Growth
      4. The Level of Interest Rates

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 12 months)

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: 1980-85(ish)
  • Key Near-Term Resistance Zone(s): 2000-11

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
Signal 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: Neutral
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: Neutral
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: Negative
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: Moderately Positive
Indicator 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: Neutral
Model 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.

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: Neutral
  • 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 State of the Market Model Reading: Neutral
Model 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.

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!


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., an SEC 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.