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Rebound in Oil Patch Saves The Day - But Can It Last? image

Ho hum. The S&P 500 finished Wednesday's session with a gain of 1.98 points or 0.10% and the illustrious DJIA closed down 0.33 points, which, of course, amounts to 0.00% on the day. It must be late summer, right?

Well, as the Hertz commercials used to say, "Not exactly." Sure, if you had an early tee time Wednesday morning and didn't check your phone, your iPad, your new Apple watch, or the TV in the clubhouse at the turn, you would likely have looked at the close and assumed that it had indeed been a dull summer Wednesday in the markets.

But of course, this wasn't the case. In the span of the time it took you to play the first half of the front nine, the U.S. stock market went into full-on freak-out mode - with the Dow diving nearly 300 points within the first hour!

At issue was the fact that while Chinese officials had pledged that Tuesday's record devaluation in the yuan was a one-off event and there were no plans to continue pushing the currency lower, the yuan dove hard again overnight. In response, analysts everywhere started flapping their gums about the state of the Chinese economy and the expectations for China to drag down the rest of the world with it.

But Wait, There's More

And while China got most of the headlines, there was another story that prompted the trading computers to hit the sell button repeatedly when the opening bell rang in New York. Reports indicated that one of the big bank holding companies in Portugal was suddenly in trouble. So naturally, with the play book for the European debt crisis well-worn and kept close at hand, every trader worth their salt knew what to do - sell everything.

As trading began in the U.S. European markets were tanking as bourses in Germany, France, and Italy were all down more than 2%. Therefore it wasn't surprising to see the U.S. market take a hefty dive when the computers started whirring in Mahwah, NJ.

Sure enough, stocks sold off in the U.S. Moving averages were violated. Trend lines were broken. And support levels snapped like toothpicks. But then, just as things started to get ugly and the S&P 500 was approaching its recent closing lows around 2050, it happened. The short-covering blast, that is.

Wait, What?

Before those new to the currency devaluation game could confirm that renminbi was just another word used for yuan, stocks started to rebound. And as the rebound gathered steam, the uncomfortable dance to the downside, which at one point certainly felt a little like a flush lower, gave way to steady buying.

This wasn't the usual big, algo-induced spike that took the S&P up 15 points in 15 minutes. No, this was different. This appeared to be consistent buying over a period of hours. Frankly, it looked a little weird.

So what gives? Why would traders go from fear to jubilation in a matter of hours? Why would a market that was supposed to be succumbing to a "death cross" go from down 278 points to flat?

The appearance of a rebound in the oil patch, that's what.

It's the Oil Patch, Stupid!

There is an old saying in the market... "At what price value?" In short, this phrase refers to the fact that when something has been falling it eventually (key word) becomes a value play. At some point, the selling becomes stupid and values are ignored. Think March 2009.

With the stock in the "oil patch" having fallen more than 33% since last summer and nearly 20% since this spring, somebody must have thought that the stocks contained in the XLE (Energy Select Sector SPDR ETF) were worth a trade. Because, in short, while the market had been struggling over the last few days, the energy sector appeared to be reversing to the upside. And then by Wednesday afternoon, it looked like the oils might actually be starting to rally.

Energy Select Sector SPDR ETF (NYSE: XLE) - Daily

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So, suddenly every fast-money trader and every computer programmed to focus on momentum was busy buying energy names. True, such a move could certainly be attributed to short-covering as opposed to "real buying." But the bottom line is what looked like a rebound in the oil patch was likely responsible for what I have been classifying on Twitter as "idiotic behavior" in the major indices.

Can It Last?

So, will it last? Who knows? Frankly, the rally in the energy names would appear to be a classic example of a dead-cat bounce. Typically these types of moves tend to be short and sharp - then give way to a resumption of the big picture trend. And in all honesty, I'm not convinced value players are jumping into the oil patch with both feet here!

However, the key is to recognize that the market these days is all about the next hour, the next trade, and what where the algos decide to take the indices next. So yesterday, the focus on the oil patch managed to keep the bears at bay. But again, the question we have to ask ourselves is, can it last?

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +1.00%
    Hong Kong: +0.43%
    Shanghai: +1.77%
    London: +0.68%
    Germany: +1.78%
    France: +1.82%
    Italy: +2.15%
    Spain: +1.50%

Crude Oil Futures: -$0.24 to $43.06

Gold: -$6.20 at $1117.40

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

10-Year Bond Yield: Currently trading at 2.166%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +6.70
    Dow Jones Industrial Average: +45
    NASDAQ Composite: +2.66

Thought For The Day:

Never believe that a few caring people can't change the world. -Margaret Mead

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 China's Currency/Economy
      2. The State of Global Economic Growth
      3. The State of European Banking System
      4. The State of the U.S. Economy

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

Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Moderately 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: 2050
  • Key Near-Term Resistance Zone(s): 2100-2135

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): Negative
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Negative
  • Intermediate-Term Bull/Bear Volume Relationship: Negative
  • 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: Moderately Oversold
  • Market Sentiment: Our primary sentiment model is Positive .

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: Low Neutral

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.