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Pricing Equilibrium (For Now) image

The Fed remains the focus at the present time, although with the earnings parade now officially underway, this could easily change in the near-term. But during Wednesday's session, the Fed was still the name of the game.

First, we had some additional "fedspeak" from Fed governors Dudley and Powell, both of whom mentioned that a June "liftoff" in rates might still be on the table. Never mind the fact that both men also stuck with the party line saying that the FOMC remains "data dependent." No, it was the mere mention of June in their respective commentary that got the algo traders riled up again intraday on Wednesday.

Then there was the release of the minutes from last month's FOMC meeting - and the obligatory hysterical trading that quickly ensued (what's 9 S&P points down and then 13 quick points up among friends, right?).

At first blush, the Fed minutes didn't appear to contain any major surprises. The meeting minutes showed that Fed officials were still split on the timing of the so-called liftoff in rates (which, by the way, was NOT news). According to the minutes, "some members" favored raising rates in June while "others" wanted the initial rate hike to come later in the year, and then two called for a 2016 liftoff.

When all was said and done, the S&P closed about where it stood before the Fed minutes were released. As such, it appears that cooler heads prevailed once the algos had played their games with prices for half an hour or so. The key takeaway would seem to be that while the Fed is clearly split on when rates should begin to move up, that was BEFORE March's dismal Nonfarm Payrolls report was released.

The bottom line here seems to be that we will have to wait and see what the data looks like in the coming months. If the economic soft patch is quickly reversed then the weather can be blamed and a June rate hike might still be a possibility. And if it takes a while for the data to thaw out, then the Fed will likely be looking at September. And so it goes.

The next point I'd like to make on this fine Thursday morning is that the S&P 500 appears to be positioned in the absolute center of the current trading range. Therefore, one could argue that stocks are sitting at an equilibrium point, waiting for the next input to tip the scales.

And based on the fact that we will get the earnings from some big name starting next week, it is a decent bet that the reports from the banks and some of the big tech names might provide the catalyst necessary to break the current logjam. So stick around, this probably going to get very interesting, very soon.

Technical Take

One of the best ways to identify the bounds of a trading range is the use of a technical indicator called a Donchian Channel. The indicator was developed by Richard Donchian and is a simple trend-following breakout system. In short, the indicator plots the highest high and the lowest low over a set number of time intervals. In a sideways or range-bound environment, the indicator effectively creates the upper and lower "breakout/down" levels. And right now we would appear to have a textbook case for the use of a Donchian Channel as a break above 2115-20 would be a clear breakout to the upside while a break below 2040ish, would be an obvious break of support. And for now anyway, everything in between could be considered just "noisy" price action.

S&P 500 Index - Daily

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Turning to This Morning...

The primary stories in the market this morning include word that Greece is actually planning on making the scheduled payment to the IMF today, the ongoing joyride to the upside in Hong Kong (the Hang Seng is up +6.6% in the last 2 days alone), and the unofficial start of the earnings parade. While none of these are big market movers, we will note that Alcoa's earnings may be representative of the trend expected from the Q1 reporting season. As the majority of companies seem to be able to do, AA beat managed to exceed EPS estimates but was light on the revenue side. And while the earnings season doesn't really start heating up until next week, investors will want to pay particular attention to revenues and company guidance as it relates to the impact of the stronger dollar. U.S. stock futures are currently pointing to a modest gain at the 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: +0.75%
    Hong Kong: +2.70%
    Shanghai: -0.92%
    London: +0.82%
    Germany: +0.53%
    France: +1.03%
    Italy: +0.80%
    Spain: +0.66%

Crude Oil Futures: +$1.05 to $51.47

Gold: -$4.10 at $1199.00

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.887%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +2.05
    Dow Jones Industrial Average: +34
    NASDAQ Composite: +9.39

Thought For The Day:

Every time you smile at someone, it is an action of love, a gift to that person, a beautiful thing. -Mother Teresa

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 U.S. Economy
      3. The State of the Earnings Season
      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: 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 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"...

 

  • Price Thrust Indicator: Positive
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Neutral
  • 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: Neutral
            - 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: 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, 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.