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Recovery, What Recovery? image

After being down five of the last six sessions and ten of the last fourteen, stocks blasted higher on Monday. The popular media attributed the unexpected joyride to the upside, which turned out to be the Dow and S&P's best days in more than three months, to the "recovery in oil" and Warren Buffett deciding to make another big acquisition.

To be sure, when the Oracle of Omaha makes a move, people sit up and take notice. And the fact that Buffett's Berkshire Hathaway (NYSE: BRK.A) decided to pony up $37.2 billion for Precision Castparts (NYSE: PCP) on Monday would seem to run counter to the bear camp's contention that the stock market is wildly overvalued and ready to take a big dive.

Yes, I can see how Buffett's move would embolden the bulls a bit. Heck, if this market is good enough for Warren Buffett to make a splash in, maybe the water is just fine for the rest of us, right?

And given that the market had become oversold and sentiment was definitely on the glum side, it makes sense that stocks might be able to bounce up a bit on the Buffett news.

S&P 500 Index - Daily

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But Wait A Minute...

But then there's the other part of the reasoning posited by the media for Monday's big bounce: "The recovery in oil." Uh, what?

At first, I thought I had heard it wrong. My screens showed that oil was up, but not dramatically so and certainly not enough to justify a 200 point move on the DJIA. Then, later in the morning, I thought the trader being interviewed was being sarcastic. But no, everybody was serious - the move in stocks was about oil (and/or expectations for global growth).

To make the point of how ridiculous this situation is, let's play a little game. Let's take a look at a few charts and see if you can spot the "recoveries" and/or the "rebounds" in things like oil, copper, and the commodity index.

First up is the US Oil Fund ETF, which is a pretty decent proxy for the price of oil.

US Oil Fund ETF (NYSE: USO) - Weekly

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On Monday, there was a lot made of the fact that oil had first dipped to a fresh new 6-year low and then reversed to finish higher. However, in looking at the chart of the USO, the big "rebound" is pretty tough to spot.

Next up, let's take a peek at the commodity index to see if perhaps there was a big recovery in other areas.

PowerShares Commodity Index ETF (NYSE: DBC) - Weekly

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When I glanced at the chart of the DBC, the words that leapt to mind were, "not so much."

And finally, since traders had spent much of the past few weeks fretting about the state of global growth, I figured we should take a look at "Dr. Copper" - you know, the commodity with a PhD in economics.

Ipath Bloomberg Copper Subindex ETF (NYSE: JJC) - Weekly

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While the bounce in the JJC is at least visible on this chart, the bottom line is the patient still looks pretty sick to me and calling Monday's move anything more than an uptick seems like a stretch.

So, while stocks tend to move hard in both directions these days for all kinds of reasons (or in many cases, no reason at all), I'm having a VERY hard time swallowing the idea that the "recovery in oil" had anything fundamental to do with the Dow's blast of 242 points on Monday.

Even if we switched our view from weekly to daily, the song remains the same - the bounce is barely visible.

Personally, I'm going to chalk up the move to a bounce in oil triggering ignition algos, which in turn caused the millisecond trend-following algos to start chasing their tails. And with most humans away at the beach with the kids, the game appears to have, once again, gotten a bit out of hand.

The problem - well for me, anyway - is this is the way the game is being played these days. While the market lacks volatility from a big-picture standpoint, it is oftentimes stupidly volatile on an intraday basis.

In any event, I believe it is important to recognize that this remains a very strange market. And as we've been saying for some time now, we are of the mind that risk levels continue to be elevated at this time.

Turning to This Morning

The PBoC shocked markets overnight by devaluaing the yuan by 1.86% - the largest devaluation on record. The move caused the biggest one-day decline in the yuan in nearly 20 years and has sent ripples through the financial markets as concerns about growth in the world's second biggest economy continue to mount. European stock markets and U.S. futures are declining on the news and yesterday's celebratory rebounds here at home looks like it could be reversed in short order.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.42%
    Hong Kong: -0.09%
    Shanghai: -0.01%
    London: -0.70%
    Germany: -1.70%
    France: -1.11%
    Italy: -0.26%
    Spain: -0.72%

Crude Oil Futures: -$1.15 to $43.81

Gold: +$5.00 at $1109.10

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

10-Year Bond Yield: Currently trading at 2.167%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -13.95
    Dow Jones Industrial Average: -140
    NASDAQ Composite: -21.90

Thought For The Day:

Between saying and doing many a pair of shoes is worn out. -- Italian 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 Global Economic Growth
      2. The State of Fed/ECB/PBoC Policy
      3. 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: Neutral
(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: 2065
  • 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): Neutral
  • 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 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: 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.