With the negative news, or perhaps what was perceived as negative earnings news out of the likes of IBM, Apple and some other tech heavyweights, arriving right on cue, the S&P 500 appears to have bonked at the top of the trading range again. For those keeping score at home, the reversal from the 2130 level would mark at least the fourteenth directional change - this year.
Sure, we could argue over what counts as a direction change and this number could easily be much higher as a result. However, the key is to recognize that trends lasting more than a handful of days have been few and far between in this market.
See for yourself. On the chart below, there is really just one trend, which began at the end of January and lasted until traders decided it was time to go the other way again at the beginning of March.
S&P 500 Index - Daily
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To be sure, Ms. Market has made a mockery of anyone attempting to manage the risk or the trends of this market for some time now. The question, of course, is why the market is behaving in such a fashion and how long the current choppy, trendless market will last.
One argument for the sideways action is the market is in a consolidation mode. With neither team being able to gain control of the ball for more than a few days at a time, the argument can be made that stocks are digesting the recent gains of the past few years. The bulls contend that such action provides the market a way pause and let earnings and/or the economy to "catch up" with prices without valuations becoming extreme.
S&P 500 Index - Weekly
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Speaking of valuations, another way to look at this range-bound market is to argue that there are simply too many crosscurrents in play at this time for the bulls to get any real traction. As we've discussed, valuations are rich by any traditional absolute measure. Then there is the fact that earnings growth is slowing, the economy's trajectory is once again a question mark, the Fed is getting ready to raise rates, the internals of the market have weakened noticeably, and there seems to be a new crisis cropping up every time you turn around.
As such, it isn't exactly surprising to see the bulls remain bottled up. But on the flip side, it is also important to note that the bears have also been frustrated this year. With everything that has been thrown at this market, it is a wonder that stocks have not entered into anything even remotely worthy of the term "correction." Remember, this is now the 2nd or 3rd longest stretch in history without a 10% correction.
Some will contend that this is due to the general idea that there just aren't any alternatives to stocks. Or more specifically, many believe that the U.S. stock market remains the best place play around the globe.
I have also contended that the central bankers of the world are to blame for the market's current malaise. With fresh cash being printed each month by both the Bank of Japan and the ECB, there is simply too much money looking for a home these days. Therefore, each and every time stocks go on sale for even the briefest period, this money gets put to work.
Then there is the fast-money masters of the universe and their computers, following trends in the market on a millisecond basis. I've opined many times that the preponderance of players in this game creates outsized moves on an intraday basis and a market that appears to have little memory from one day to the next.
In essence then, we've got a stalemate on our hands. There are simply too many worries currently to allow the bulls a chance to embark on a new leg higher and too much cash laying around for the bears to have a real shot at the downside. And so it goes.
My best guess is that this type of environment can last until either (a) something meaningful comes along that gives the bears the edge or (b) the world's central bankers pull the punch bowl from the party. But until then, we can probably expect this schizophrenic, back and forth market to continue. Are we having fun yet?
I have an early meeting tomorrow and will not publish a report. Have a great weekend!
This Morning's Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: +0.46%
Crude Oil Futures: -$0.02 to $49.17
Gold: +$8.60 at $1100.10
Dollar: higher against the yen and pound, lower vs. euro
10-Year Bond Yield: Currently trading at 2.315%
Stock Indices in U.S. (relative to fair value):
S&P 500: +1.30
Dow Jones Industrial Average: +3
NASDAQ Composite: +9.00
Thought For The Day:
Logic will get you from A to B. Imagination will take you everywhere. - Albert Einstein
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 Earnings Season
2. The State of the Greek Crisis
3. The State of Fed/ECB/PBoC 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 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Positive
(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: 2100
- 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): Negative
- Price Thrust Indicator: Negative
- Volume Thrust Indicator: Neutral
- Breadth Thrust Indicator: Neutral
- Intermediate-Term Bull/Bear Volume Relationship: Moderately Positive
- 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: Moderately 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
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.
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.