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Recent Tape Action is Worrisome image

Are we having fun yet? If you are someone who attempts to manage risk and/or play the trends in the market the answer is likely a resounding, NO!

What's the problem, you ask? The short answer is the price action has been more than a little nutty lately as the market has been moving sideways (and violently so), changing directions as many times as the Patriots change out footballs.

Here's what I mean. In 2014, I count 14 changes (give or take a couple) in the direction of the trend for the year - with some waffling in between at times, of course. And it was this high number of direction changes that caused many active managers (including the vast majority of hedge funds) to struggle with performance last year.

However, with less than a month under our belts in 2015, active managers couldn't be blamed if they began pining for the good ol' days of 2014. The problem is that since the beginning of December, there have been 7 changes in direction - with no waffling whatsoever - as stocks have been moving either straight up or straight down for two straight months now.

S&P 500 - Daily

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Of course, it would be easy to blame the schizophrenic behavior on the fast-money types and their high-speed trading computers that seem to push the indices here and there, each and every day, at the drop of a hat. However, the key point to this morning's missive is that there just might be something else happening here. And if we are correct in our assessment, investors will want to be on their toes in the coming days/weeks.

"Bad Action"

Let's take a closer look at some of the "market action" seen recently. On December 16, it looked like the market was ready to break down in a meaningful way. Oil was crashing in spectacular fashion and analysts were busy telling us why this was a bad thing for the banks, emerging markets, jobs, and global growth.

But as had been the case for quite some time now, the talk about Super Mario doing a QE deal caused traders to put aside their fears and instead bask in the glow of what would soon be another trillion dollars looking for a home.

The problem is that while the rally (labeled #2 on the chart) did manage to make a new high, the fun and games didn't last long. Then on December 30th, things started to go the other way. And before you could put away your New Year's Eve garb, trend change #3 was at hand.

During trend changes #4 and #5, oil was once again the focal point. Well, in between worries about Russia, Greece, and the U.S. economic data that is.

But on January 16, word leaked out that the ECB wasn't going to disappoint and that Super Mario would actually fire the much ballyhooed bazooka that he'd been going on about for the better part of a couple years. Sure enough, the news of the next great money-printing experiment caused traders to celebrate (i.e. trend change #6) once again. The problem was that the QE celebration lasted for a grand total of 4 days.

This time there was no new all-time high. This time investors didn't fall all over themselves to get on board the bull train. Nope, this time, the trend changed (#7, of course) on a dime as new concerns surfaced regarding the state of the U.S. economy, the impact of crude's rude move on blue chip earnings, and Greece... Yes, Greece... Again.

And We're Back...

Should we REALLY be worried about Greece, their banks, and what it might do to the European Union again? Haven't we been through this before? Wasn't the European debt mess declared solved in 2012?

Apparently not. You see, even the Federal Reserve has now added the potential for "international developments" to their list of things to keep an eye on. And since Janet Yellen and her merry band of central bankers are pretty darn picky about the choice of words they use in their FOMC statements, the thinking is that there just might be something bad happening in the banking system across the pond.

And then, just when you thought oil was stabilizing, WTI futures broke to a fresh new low yesterday. According to official reports, there appears to be a whole lot more oil floating around these days than had been previously though. And increased stockpiles of Texas Tea is not what the oil bulls wanted/needed to see on Wednesday.

So, with the Fed worrying about Europe, the new Greek government talking trash to Germany, and oil continuing to crater, not even a blow-out quarter from Apple could keep prices from falling apart yesterday afternoon.

Sure, things could easily turn around, maybe even today. And the bulls tell us that the 150-day moving, which currently sits at 1996 and has held like a champ over the past month and a half, is likely to be the bottom again. So, maybe trend change #8 will begin right here, right now and the day will once again be saved.

However, the bottom line is the tape action has been anything but strong lately. In fact, it's been pretty rotten. And because of this, some caution might be warranted in the coming days. Yes, you are correct... Managing risk has been a waste of time and money over the past couple years. And yesterday did feel a little overdone. But if the tape action doesn't improve in a meaningful way, investors may soon need to start looking over their shoulders to see if something furry is lumbering their way.

Turning to This Morning...

Although none of the issues plaguing the market at the present time have been resolved, things appear to be stabilizing this morning. Much of the focus remains on yesterday's FOMC statement which was viewed by some as being dovish while others believed the Fed is being stubborn by not raising the possibility of postponing the liftoff in rates. On the subject of Greece, contagion issue seems to have calmed a bit and the country's stock market has caught a bounce - but the benchmark index is still down more than 13% on the week. Oil remains a focal point as well with WTI futures falling to fresh 6-year lows yesterday. Finally, earnings will continue to get a lot of attention today with more big names due to report. U.S. stock futures currently point to a mixed 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: -1.07%
    Hong Kong: -1.07%
    Shanghai: -1.32%
    London: -0.32%
    Germany: +0.16%
    France: +0.26%
    Italy: +0.61%
    Spain: +0.11%

Crude Oil Futures: +$0.11 to $44.56

Gold: -$15.70 at $1270.20

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

10-Year Bond Yield: Currently trading at 1.741%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -1.01
    Dow Jones Industrial Average: +26
    NASDAQ Composite: -6.18

Thought For The Day:

There is no pillow so soft as a clear conscience. -French proverb

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 the U.S. Economy
      2. The State of the Earnings Season
      3. The State of Fed/ECB Policy
      4. The State of the Oil Crash
      5. The State of the Greece Banking System

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: 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: 1995-75
  • Key Near-Term Resistance Zone(s): 2060

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: Neutral
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Neutral
  • Technical Health of 100 Industry Groups: Neutral

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 Oversold
          - Intermediate-Term: Moderately Oversold
  • 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 - A CONCERT Advisor
Be Sure To Check Out the NEW Website!


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.