The key to yesterday's move to fresh all-time highs was easy to identify as Janet Yellen did herself proud in front of the Senate Banking Committee. So before we move on to other inputs or the drivers behind today's early action, let's spend a moment or two to understand what the nation's central banking head had to say.
As expected, Ms. Yellen stuck to the recent FOMC script regarding the state of the U.S. economy and the improvements seen in the jobs market. In what was described as less dovish than normal testimony, Yellen downplayed the recent decline in inflation and highlighted what she called the transitory impact of lower energy prices. And while on the subject of oil, she also talked up the concept of crude's crash being a broader tailwind for the economy.
On the subject of interest rates, the Fed Chairwoman stressed that the FOMC can be patient in considering when to begin to normalize monetary policy. She added that economic conditions are unlikely to warrant a tightening for at least the next couple of meetings. In the spirit of transparency, Yellen told the Senate Banking Committee that the Fed will change its forward guidance language before it begins raising rates. However, she also said that any modification to the Fed's language does not necessarily mean that rates would rise within the next two meetings. Instead, Yellen stated that a change in verbiage would indicate that a move could be warranted at any meeting.
In other words, Ms. Yellen told the committee that the FOMC would give the market's plenty of time before raising rates but that there is no set time table as to when "rate normalization" would begin at this time.
While the initial view of the testimony was that Yellen sounded a little more hawkish than expected, all the talk of flexibility seemed to wind up being a tailwind for bonds and stocks. And by the time the humans got done digesting what the Fed Chairwoman had actually said, stocks began a steady march higher into the afternoon.
So, the key takeaway is that the Fed is on the case and remains cautious. They are watching the data from both here and abroad carefully. And while the FOMC is now anxious to begin moving the Fed Funds rate back above the zero-line, Yellen made it clear that the timing of the "liftoff" has not yet been determined. Thus, although a rate hike at the June FOMC meeting technically remains on the table, the fear of a misstep by the Fed can be put aside for now.
Looking At The Charts...
To be sure, this game is SOOO much easier when a healthy dose of hindsight is applied. For example, while things were tense there for a while on the chart of the S&P 500 (the key question was if the breakout would hold or be just another fakeout) the "wedge" consolidation pattern that unfolded over a period of about two months is now obvious. And as the technical analysis textbooks explain, the market generally exits a consolidation pattern heading in the same direction it was going when the pattern began. As such, the current leg higher appears to be perfect example of stocks digesting gains before heading higher and it is clear that the market is now in an uptrend again.
S&P 500 - Daily
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Turning to This Morning...
Janet Yellen's testimony is being spun by both sides this morning. In short, with rates moving down after Ms. Yellen's performance the bond market's view was that the testimony was dovish (note that the yield on the U.S. 10-year is back below 2% this morning). However, all the talk about the improvement in the jobs market caused some to say that Yellen was more hawkish than expected. As a result, there were no major moves in the foreign markets in reaction. In China, the HSBC/Markit Flash PMI rose to 50.1 in February, which was the highest level in 4 months and above the January's reading of 49.7. The New Orders component also rose to 50.4 from 50.1 last month but the Employment component slipped to 49.3 from 49.5. In Europe, the Eurogroup's approval of the four-month extension to Greece's bailout program has diffused this situation to a large degree. And on the oil front, Saudi oil minister Naimi said demand for oil is actually picking up at this time. Finally, as has been the trend of late, U.S. stock futures are pointing to a flat-to slightly lower open in the early going.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -0.10%
Crude Oil Futures: +$0.09 to $49.37
Gold: +$11.90 at $1209.20
Dollar: higher against the yen, lower vs. euro and pound
10-Year Bond Yield: Currently trading at 1.975%
Stock Indices in U.S. (relative to fair value):
S&P 500: -1.03
Dow Jones Industrial Average: +2
NASDAQ Composite: +4.53
Thought For The Day:
To get the full value of joy, you must have someone to divide it with. - Mark Twain
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 Fed/ECB Policy
2. The State of the U.S. Economy
3. The State of the Oil Crash
4. The State of the Latest Greek Drama
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: 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: 2085
- Key Near-Term Resistance Zone(s): NA
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: Positive
- Volume Thrust Indicator: Positive
- Breadth Thrust Indicator: Positive
- Bull/Bear Volume Relationship: 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: Overbought
- Intermediate-Term: Neutral
- Market Sentiment: Our primary sentiment model is Negative .
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,
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.
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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.
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