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Sifting Through The Tea Leaves image

As I have likely mentioned a time or twenty, the purpose of my oftentimes meandering morning market missive is to (a) identify the primary drivers of the market action, (b) ponder the important questions/issues facing the market, and (c) to try and stay in tune with what is ACTUALLY happening to stocks.

And so that we're clear, I do not believe in, nor will I ever attempt to provide a prediction as to what the market will do next. If we're being honest with ourselves, the best we analysts can do is attempt to understand what is happening and why. And one thing I've learned since I began taking responsibility for other people's money in 1987 is that NO ONE has been able to "call" what will happen next in Ms. Market's game with any semblance of consistency -- and in my opinion, to try and do so is sheer folly.

So, now that we've laid out the proper expectations, let's proceed to exploring the current drivers and what the important questions are at this point in time.

From a shorter-term perspective, the factors that appear to be causing prices to move in one direction or the other right now include oil (and the extrapolations on global growth that the pricing of crude may imply), the state of the earning season, and of course, what central bankers are planning to next (and when).

On the earnings issue, we are still waiting on the majority of the big names to report. However, Wal-Mart got an awful lot of attention yesterday. WMT came under significant pressure following their update on company expectations at its analyst day. The stock plunged -10.04% on Wednesday, adding to the long list of concerns about the state of the consumer.

Wal-Mart Stores - Daily

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However, in looking at a longer-term chart of the ginormous retailer, it becomes clear that concerns about the state of Wal-Mart's business isn't exactly new. And for those of you keeping score at home, WMT is down -30.1% so far in 2015.

Wal-Mart Stores - Weekly

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Adding insult to injury here was the report on Retail Sales, which disappointed in September. Sure, we can blame it on oil as gasoline sales created a monster drag on the number. But the bottom line is that analysts are looking for good news right now, not more data confirming that growth may be slowing in more places than China.

On the subject of disconcerting news, the WSJ reported that the number of empty cargo containers being shipped out of the U.S. surged in September. According to the report, the Port of Long Beach, CA handled a total of 197,076 empty outbound shipping containers in September, which represented nearly one-third of all containers moved last month. In addition, September marked the eighth straight month in which empty containers outnumber those loaded with goods being exported. And in case connecting the global macro dots is not your cup of tea, this implies weakening global demand - especially from China.

The Important Question

With the S&P 500 having first stalled and then turned lower over the last week, our furry friends in the bear camp suggest that all is not well under the hood of the stock market.

As such, the question of the day here is if the correction that began in mid-August has done enough to (a) discount the punk data and the slowdown in earnings and (b) rejuvenate the bulls in preparation for a year-end rally.

Of course, we won't know the answers to these questions without a healthy dose of hindsight. However, the price action in the stock market may provide some clues as to what traders may be thinking/feeling these days.

S&P 500 - Daily

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In looking at the recent price action of the S&P 500, one couldn't be blamed for feeling a little bummed right about now as there are lots of reasons to be "concerned" here. And then there is the fact that Ms. Market has spent the vast majority of 2015 in a bipolar state. Therefore, we shouldn't be surprised if stocks decide to take another trip through the trading range in the near-term.

But before you run out and load up on those leveraged inverse ETFs, we should recognize that, so far at least, the dip we've seen over the last couple of days hasn't been extreme. In other words, there isn't any panic in the air at the moment. As such, our heroes in horns tell us that this very well could be a brief "pause that refreshes."

If you find yourself confused by all of this, you are not alone. So, at times like this it is best to open up your mind and let price be your guide until things become a bit clearer.

Turning To This Morning

When central bankers talk, traders and their computers listen. Screens are green around the globe this morning on increased expectations for "policy support." China is seen doing more to support their economy before year end, the ECB's Nowotny provided uber-dovish comments regarding the bank "clearly missing its inflation target," and Mr. Hilsenrath opined in the WSJ this morning that the Fed won't be able to raise rates in 2015. In response, Asian, European, and US futures markets are all up nicely and bond prices in the U.S. are lower (the yield on the U.S. 10-year is currently trading under 2%). As such, stocks are expected to open higher in when the opening bell rings on Wall Street.

The Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +1.15%
    Hong Kong: +2.00%
    Shanghai: +2.32%
    London: +1.07%
    Germany: +1.61%
    France: +1.24%
    Italy: +1.57%
    Spain: +0.57%

Crude Oil Futures: +$0.04 to $46.70

Gold: +$0.70 at $1166.10

Dollar: higher against the yen, euro, and pound

10-Year Bond Yield: Currently trading at 1.997%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +12.50
    Dow Jones Industrial Average: +89
    NASDAQ Composite: +26.80

Thought For The Day:

"There is thy gold, worse poison to men's souls" -Shakespeare

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/Global Growth
      2. The State of the Earnings Season
      3. The State of Fed Policy
      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 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Positive
(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: Neutral
(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: 1980
  • Key Near-Term Resistance Zone(s): 2020

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: Positive
  • Volume Thrust Indicator(NASDAQ): Positive
  • Breadth Thrust Indicator (NASDAQ): Positive
  • 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: Overbought
          - 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: 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 is the owner of Heritage Capital Management (HCM) a registered investment adviser. Advisory services are offered through Heritage Capital Management, Inc. For a complete description of investment risks, fees and services review the HCM firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting HeritageHCM also serves as a sub-advisor to other investment advisory firms. Neither HCM or Heritage 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.