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Poised To Break Up, Or... image

The "discussion" in the market continues to revolve around four key areas: (1) When the Fed is going to raise rates, (2) The impact of the dollar's rally on earnings, (3) The state of the U.S. economy, and (4) The ongoing mess in Greece. To be sure, the primary focus on an intermediate-term basis would appear to be the question of what the Fed is going to do - and when. The party line out of the Fed appears to be taking shape as there has been a flurry of Fedspeak lately. Just yesterday we heard from Fed Governors Rosengren, Mester, and Lockhart,and then some guy named Bernanke.

Thursday, Boston Fed's Rosengren said that the Fed's criteria for raising rates has not been met. Rosengren, who is a non- voting member of the FOMC, said in a speech on monetary policy at the Chatham House in London repeated that "the incoming data would need to improve to fully satisfy the Committee's two conditions for starting to raise rates."

Next up, Cleveland Fed's Mester reiterated the data dependent theme as it relates to the Fed's decision on raising rates. In a speech to the Forecasters Club of New York, Mester, who is also a non-voting member, said she is fine with "relatively soon" being the descriptive term used with regard to the question of when the Committee will raise interest rates. Ms. Mester added that the data must show growth has regained momentum following the latest round of weak Q1 economic statistics.

In addition, Atlanta Fed's Dennis Lockhart, who is a voting member this year, chimed in saying that there is no preconceived plan for raising interest rates. Lockhart, who was speaking at the Palm Beach County Business Leaders Luncheon, also hit on the theme of the Fed's data dependence. Lockhart stated, "The FOMC has also emphasized that the decision will be data-dependent. I consider this an essential discipline around our decision making on this matter. To me, data dependency means there is no preconceived plan. Data dependency means the decision will be based on the best evidence we have of the reality and trajectory of the economy."

Heck, even Ben Bernanke, who has announced that he join the "dark side" and go to work for Citadel, was out with comments about what the Fed could to with regard to influence interest rates.

The key takeaway is that despite all the talk out of the Fed, the stock market has barely budged recently. As such, analysts can assume that the key themes the Fed governors have been stressing would appear to be baked into stock prices at this point in time. As such, it is a safe bet that the market will soon find some other shiny object to attract its attention in the near-term.

Technical Take

With the S&P 500 sitting at the top end of the trading range that has been intact for some time now (which, of course, followed another range which dominated the face of trading for months), the question of the day is if the market is poised to break up and out of the top end of the range - an event that would, on the surface, appear to favor the bulls - or break down and begin another trip through the range. For much of the last six months, the game plan has been for traders to sell into each and every new high. And based on the early action this morning, it appears that the fast-money has decided to implement this game plan once again.

S&P 500 Index - Daily

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Turning to This Morning...

Once again, an "excuse" has emerged for the hot-money on Wall Street to hit the sell button early and often. According to the news wires, U.S. stock futures took a sudden, sharp dive early Friday morning after a change in the short-selling rules for Chinese index futures. It appears that Chinese regulators will now allow fund managers to lend stocks for short selling, media reports said Friday - and the futures sold off hard on the news. And just to keep traders on their toes, the situation in Greece is escalating again as concerns about a default grow. As a result, European bourses are down hard across the board this morning. And here at home, U.S. stock futures are currently pointing to a weak open on Wall Street.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -1.17%
    Hong Kong: -0.31%
    Shanghai: +2.20%
    London: -0.83%
    Germany: -1.74%
    France: -1.23%
    Italy: -1.93%
    Spain: -1.76%

Crude Oil Futures: -$0.57 to $56.14

Gold: +$6.70 at $1204.70

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

10-Year Bond Yield: Currently trading at 1.853%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -11.34
    Dow Jones Industrial Average: -112
    NASDAQ Composite: -33.60

Thought For The Day:

"A clever person solves a problem. A wise person avoids it." - Albert Einstein

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 Earnings Season
      3. The State of the U.S. Economy
      4. The State of the U.S. Dollar

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: 2040
  • Key Near-Term Resistance Zone(s): 2120

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: Positive
  • Bull/Bear Volume Relationship: Neutral
  • 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: 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


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.