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Trouble Brewing Beneath The Surface image

Paul Schatz of Heritage Capital, LLC is filling in for Dave M. this morning. We are pleased to be able to offer Paul's thoughts on the state of the market and hope that you enjoy his views.


The more I analyze, the more I don’t like.

The number of stocks participating in this rally has not been encouraging, but Friday’s action along with Monday's action is eerily similar to that of 1999. Notice I said 1999 and not 2000. Valuations are nowhere near as egregious as they were then nor is sentiment showing much greed, not to mention froth. And monetary conditions are certainly not restrictive.

On Friday, on the New York Stock Exchange, there were almost 1000 more stocks declining than advancing with the major indices roughly flat. On Monday, we saw nearly a carbon copy.

On the NASDAQ, it was equally as troubling or maybe even more so because that index saw all time highs. Three days in row saw essentially new highs with more stocks going down each day than rallying. However, keep in mind that the NASDAQ typically has a negative skew on a daily basis.

Sector leadership has been fine, but the majority of sectors are no longer bullish. In fact, the semiconductors closed down slightly on Friday while the Nasdaq 100 index saw fresh 2015 highs, up 1.5% on the day. The same thing happened again on Monday. New high for the NASDAQ and yet, the semis finished in the red - to the tune of -0.7%.

Smart money traders went from being net buyers a few weeks ago to net sellers last week. Historically, they take months and quarters to go from one end to the other. This is schizophrenic behavior to say the least!

Given the aforementioned concerns, I still do not believe the bull market is over nor do I think stocks are headed for a double digit correction. I do, however, continue to believe that the upside is capped by 500 Dow points while the downside is 1300 points. Not exactly the greatest risk/reward ratio.

Paul Schatz

Paul Schatz is President and Chief Investment Officer of Heritage Capital, LLC, in Woodbridge, CT. and a Managing Partner at Numetrix Capital, an investment research firm focused on multi-manager, multi-strategy portfolio solutions.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +0.93%
    Hong Kong: +0.52%
    Shanghai: +0.65%
    London: -0.04%
    Germany: -0.09%
    France: +0.04%
    Italy: -0.23%
    Spain: -0.03%

Crude Oil Futures: -$0.05 to $50.10

Gold: -$0.40 at $1106.40

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

10-Year Bond Yield: Currently trading at 2.389%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +0.52
    Dow Jones Industrial Average: -43
    NASDAQ Composite: +6.40

Thought For The Day:

I don't know anything about music. In my line you don't have to. - Elvis Presley

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: 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

The opinions and forecasts expressed herein are those of Mr. Paul Schatz and may not actually come to pass. Mr. Schatz'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.

Paul Schatz, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital LLC, a legal business entity(Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC 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.

Heritage Capital a state-registered investment adviser. Heritage also serves as a sub-advisor to other investment advisory firms. Neither Heritage or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage 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 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.