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For those that weren't around in the early 80's, it is important to recognize that parsing the Fed's verbiage is MUCH easier today than it was during the early days of Paul Volcker's rein. Although Alan Greenspan did make the game a little easier than his predecessor, recall that the thickness of the Fed Chairman's briefing pouch was itself used by analysts as an indicator of what the FOMC might do next.

Due primarily to the credit crisis and the Fed becoming the white knight that saved both the U.S. economy and the global banking system from falling into ruin in early 2009, today's Fed is pretty darn transparent about what they intend to do with monetary policy. For example, by now everyone on the planet knows that Janet Yellen's bunch will indeed move rates higher at some point in the not too distant future. The only question is when.

Enter the current game of words used by the FOMC and traders' interpretation of those words. At the conclusion of yesterday's FOMC meeting the committee issued a statement that was largely in line with prior releases. However, there were a couple of changes that seem to be attracting a lot of attention.

The "S" Words

New to this month's FOMC statement were two words beginning with the letter "s". The first "s-word" came in the Fed's description of the labor market. So, let's compare this month's review to last month's and see if we can determine what all the fuss is about.

From the June 17 FOMC Statement:

The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat.

As you can see, there were a couple of "s-words" used here: "steady" and "somewhat." However, take a look at the verbiage on the jobs market that was released yesterday:

"The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year."

I've bolded the key words in order to make the game easier/shorter. The key is the change in the Fed's view of job growth from "picked up" to "solid." And then on the subject of the unemployment rate, the Fed went from "remained steady" to "declining unemployment."

Honestly folks, this is all you need to know. The Fed has told us for what seems like eons that they want to get rates off of zero. And based on this statement, the word "solid" appears to be potentially laying groundwork for an initial increase in September.

The Second "S" Word

But before you jump to conclusions and assume that Ms. Yellen will raise rates for the first time in nearly a decade in September, there is the second "s-word" to consider.

In terms of what the Fed is looking for in order to justify beginning the "liftoff" in rates, another "s-word" was employed. In this case, the statement said that the Fed is looking for "some further improvement in the labor market." This replaced last meeting's "further improvement."

While the change in verbiage may appear to be subtle, to Fed-watchers, the message is clear: While the data may not be there just yet, a September rate hike is still on the table.

However, the statement also seems to suggest that the FOMC would prefer to see some additional data before making the first, largely symbolic move.

In terms of market reaction, the algos produced the usual idiotic reaction within the first five minutes of the FOMC statement's release... First the S&P 500 spiked 6 points in 2 minutes and then dove 8 over the next 3. But from there, things calmed down a bit as traders recognized that Janet Yellen is still Janet Yellen and she continues to suggest that the Fed isn't likely to do anything surprising or rash.

However, if one steps back from the blinking screens and looks at the chart of the S&P, it becomes very clear that nothing has really changed. In fact another "s-word" would seem to be appropriate as the market appears to be stuck, dead-center in the middle of the current trading range. A range that is quickly approaching the 6-month mark.

S&P 500 Index - Daily

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So, will the new "s-words" continue to be meaningful to this A.D.D.-inflicted market? Only time will tell, of course. But the emergence of the new verbiage might be enough to warrant traders to check in from the beach a time or two each day during the summer vacation season.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +1.08%
    Hong Kong: -0.49%
    Shanghai: -2.19%
    London: +0.77%
    Germany: +0.47%
    France: +0.69%
    Italy: +0.49%
    Spain: -0.70%

Crude Oil Futures: +$0.20 to $48.99

Gold: -$8.30 at $1084.30

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

10-Year Bond Yield: Currently trading at 2.303%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -6.68
    Dow Jones Industrial Average: -36
    NASDAQ Composite: -15.12

Thought For The Day:

You can't base your life on other people's expectations. -Stevie Wonder

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
      4. The State of the Earnings Season

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: 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): 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): Positive
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Negative
  • Intermediate-Term Bull/Bear Volume Relationship: Moderately 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 Moderately 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: 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.