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The Important Message From Earnings Season image

Oil didn't go down. Bank stocks in Greece didn't crash. The dollar didn't make a new high. And rates didn't put in a new low. As a result, traders and their computers in the U.S. had the green light to hit the buy button for much of the day on Thursday.

Yep, that's what this choppy, back-and-forth market has come to. If the key drivers are up, stocks move up. And if not, well, the algos chase their tails to the downside until the closing bell rings.

If you are able to trade the stock market on a millisecond basis, as the big banks such as Goldman, Morgan Stanley, JPMorgan, etc. and hedge funds such as Citadel do, then this is what the stock market game is all about. However, if your time frame extends beyond lunch, the game is a bit more complicated at the present time.

For investors - you know, the folks that own positions for periods measured in weeks, months, or years instead of milliseconds - their view on the stock market's fundamentals tends to play an important role in their decision making. As such, the outlook for the economy, earnings, inflation, and interest rates tends to be the primary focus of this crowd.

Up until December, the outlook for most of the market fundamentals was pretty rosy. The economy was kicking into high gear, earnings were at record highs, inflation was nowhere to be found (which for the majority of my 35 year career has been a good thing), and rates were likely to stay low from an historical perspective. Therefore, the rebound from the September/October pullback pushed the S&P 500 to new all-time highs. And frankly, this made sense.

Muddy Waters

However, since the beginning of December the market's waters have been muddied as the economic data has come in on the punk side more often than not, the oil crash looks like it may be starting to have an impact, and folks in high places are becoming very worried about inflation - err, the lack thereof.

The question at this time is if any of the worries are real. And one of the best ways to confirm or deny such concerns is to listen to the message from companies when they issue their earnings reports. And the bottom line is that based on the most recent reports, some pretty big names are starting to fret about the impact from crude's rude move, the dollar's strength, and a slowdown in global growth.

What Companies Are Saying Now

Let's go to the video tape and see what some of the big industrial names are saying about the issues of oil, the dollar, and global growth...

Caterpillar (NYSE: CAT) kicked things off by saying in no uncertain terms that there are headwinds from oil, currency exchange, and global growth. Here are some of the comments from management from January 27:

"Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we're expecting lower sales in 2015...With oil this low, we expect substantial reductions in producers' capex and that it will be negative for our sales."

"Year-over-year, we expect a stronger dollar to be a sales headwind, commodity prices in mining have also taken another leg down over the past few months."

"US [sales] still positive, but probably not quite as positive as we thought before. Almost every place else in the world, to some degree, negative."

General Electric (NYSE: GE) said the following on January 23:

"In December, we also outlined our expectations for Oil & Gas with a backdrop of oil at $60 to $65 a barrel. Since then, prices have fallen further. When we planned the year, we relied on multiple scenarios including a further fall in oil prices... The [Oil & Gas business] team is reducing employment, executing restructuring and simplification projects to materially reduce their cost structure, all predicated on a tougher scenario."

3M (NYSE: MMM) also sounded the alarm about the rising dollar in it's January 27 report:

"We now estimate FX to reduce sales by 4% to 5% versus previous guidance of minus 2% to minus 3%."

Crane (NYSE: CR) voiced concerns on January 27 about the global macro outlook by saying:

"While the long-term outlook remains attractive, we believe that current macro uncertainty from the decline in oil prices, weakness in Europe, currency volatility and geopolitical risks have delayed business investments across our process valve verticals."

Illinois Tool Works (NYSE: ITW) talked about the dollar's impact of earnings on January 27:

"We gave everybody a rough rule of thumb that said a $0.01 change in the euro versus dollar rate equates to $0.01 of EPS on an annualized basis. And obviously, since then, the euro has weakened versus the dollar to the tune of about $0.10 and so that's the $0.25 of headwind that we talked about now versus the $0.15 in December. And obviously, all currencies are moving."

Rockwell Automation (ROK) referenced headwinds from oil in its report from January 28...

"We're reducing full year sales guidance, primarily to reflect a much more significant headwind from currency...We're dropping the high end of the sales range primarily due to the very significant decline in oil prices, but also because we are continuing to see forecasts for IP and GDP be revised downward in most regions..."

Parker Hannifin (NYSE: PH) mentioned issues with currency conversion and China on January 27:

"[Reduction in International guidance] is almost – almost all of it is currency. We are seeing some organic weakness in China in the construction business going forward, and that's impacting the numbers a little bit, and also internationally in Oil & Gas."

Dover (NYSE: DOV) was all about oil in its comments from January 27:

"...the big change to our forecast is in Energy, where the rapid decline in oil prices is significantly impacting energy CapEx spending and U.S. rig counts."

The Takeaway

So, there you have it. Some of the biggest industrial names are saying that the rise in the dollar, the crash in oil, and the economic slowdown in places like China and Europe are starting to impact their bottom lines - and will likely continue to do so.

From a big picture point of view, the key takeaway is that a trend is starting to develop. But, since things don't matter on Wall Street until they do (and then they matter a lot), the question of the day is if this trend will become a focal point and cause traders to enter a "price discovery" (trader-speak for heavy selling) phase in the overall market.

Recall that fundamental problems in the market oftentimes take a very long time before they impact prices. However, if one is paying attention to what is happening out there, it is quite possible to get ahead of the A.D.D. children and their fancy computer toys that control Wall Street on a daily basis. So, right now, the message from the big names is that the crash in oil, the rise in the dollar, and the slowdown in global growth is a big-picture concern.

Turning to This Morning...

Despite an improvement in Greece's stock market and pretty good earnings from Amazon.com, Visa, and Google, the mood in the markets on this fine Friday morning has flip-flopped once again. With traders keying on the movement in oil, the dollar and rates, it isn't surprising to see more red than green on the screens in the early going. In addition, the first look at U.S. GDP for the fourth quarter came in below expectations. So, with Europe a bit lower and rates diving, stock futures are pointing to a weak 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: +0.38%
    Hong Kong: -0.36%
    Shanghai: -1.60%
    London: -0.41%
    Germany: -0.51%
    France: -0.55%
    Italy: -0.38%
    Spain: -0.26%

Crude Oil Futures: +$0.28 to $44.83

Gold: +$9.40 at $1264.00

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

10-Year Bond Yield: Currently trading at 1.681%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -14.00
    Dow Jones Industrial Average: -72
    NASDAQ Composite: -7.35

Thought For The Day:

"The way I see it, if you want the rainbow, you gotta put up with the rain!" -Dolly Parton

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 the Oil Crash
      4. The State of Fed/ECB Policy
      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.