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Quick Take: Watch the 'Momentum Meltdown' Names image

Today's market action is likely to focus on the upcoming earnings season as Alcoa kicks off the parade of numbers after the close. However, keep in mind that the real flow of company reports doesn't start until next week. In overnight news, there continues to be rumblings regarding Russia/Ukraine and Iraq. Although neither situation seems to be capturing traders' attention at this time. The early action continues to look sloppy as both macroeconomic and earnings data disappointed across the pond and foreign markets followed Wall Street's lead. U.S. futures point to modest losses at the open on Wall Street.

In economic news, it will be another fairly quiet day. We will get the JOLTS report at 10:00 am eastern and we got the the NFIB Small Business Optimism Index for June. After three straight monthly increases, the NFIB index pulled back in June and came in below expectations.

Current Market Outlook

The fact that stocks pulled back on Monday should not have been surprising. The major indices had enjoyed a nice run, the Dow had broken through another big, round number, stocks had become overbought, and, in short, the advance had become extended. However, we should take note that once again, it was the former high flying momentum names that led the charge to the downside. While the internet, biotech, and social media names have enjoyed a nice run higher off the May bottom (the First Trust Internet ETF (FDN) had gained 15% since 5/8, the Global X Social Media ETF (SOCL), was up 21.7% from 5/7, and the iShares Biotech ETF (IBB) had soared 23.5% since mid-April), they reversed hard on Monday. And while one day does not a trend make, this remains an area to watch as "mo-mo meltdowns" have been known to drag the market down with them over time. But for now our models remain positive and tell us to continue to side with the bulls.

Looking at the charts...

Yesterday's action in the S&P 500 is easy to dismiss as the current rally has paused on several occasions since it began in mid-April. And the fact that the Dow pulled back to the 17,000 level after last week's blast to new highs was to be expected. However, the action on the charts gets progressively worse as one peruses the NASDAQ, midcaps, and smallcaps. For example, yesterday's drop on the NASDAQ erased the last two days of gains, the S&P midcap index finished where it had ended four sessions ago, and the Russell 2000 smallcap index dove an eye-popping -1.8%. As such, it would appear that the tale of two tapes has returned and remains something to keep an eye on.

Pre-Game Indicators

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

Major Foreign Markets:
- Japan: -0.43%
- Hong Kong: -0.00%
- Shanghai: +0.30%
- London: -0.55%
- Germany: -0.49%
- France: -0.47%
- Italy: -1.18%
- Spain: -0.75%

Crude Oil Futures: -$0.10 to $103.43

Gold: +$7.00 at $1324.00

Dollar: higher against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.600%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -2.95
- Dow Jones Industrial Average: -22
- NASDAQ Composite: -3.16

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 Outlook for U.S. Economic Growth
      2. The State of Global Growth
      3. The State of Fed Policy
      4. The State of the Geopolitical 'Issues' in Ukraine and Iraq

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: Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: 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: 1985(ish)
  • Key Near-Term Resistance Zone(s): 1965

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: Positive
    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: Neutral
    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: Moderately Positive
    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 Condition:
        - Short-Term:
    Moderately Overbought
        - Intermediate-Term:
    Overbought
  • 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 because 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.

Weekly State of the Market Model Reading: Positive

Thought For The Day...

Good, better, best. Never let it rest. Until your good is better and your better is best. -Tim Duncan

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer Heritage Capital Management

Positions in stocks mentioned: None


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.

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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.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

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