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What's the Takeaway? image

With the end of the month approach and the stock market acting a little strange lately, I thought it might be a good time to step back from the blinking screens and do an overview of the market using different lenses. What follows is my attempt at a succinct summary of each of the primary time-frames traders and investors traditionally view the market. So without further ado...

SHORT-TERM (0-30 days)

The volatile, up and down, back and forth market that was prevalent in March has been replaced by a more civilized uptrend during the month of April. Granted, there have been a couple scary down days along the way as uncertainty over the state of the economy, the earnings season, Europe/Greece, and what the Fed is planning to do next (and when) has kept traders on edge. For the most part however, the high degree of uncertainty that kept the market moving in both directions last month has subsided. Traders now know that the economy's soft patch is likely to be short-lived, that the earnings season was not as bad as had been feared, that the ongoing drama in Greece is not going to cause the global banking system to collapse, and that Janet Yellen's Fed is unlikely to do suddenly change its stripes. So, while the S&P 500 remains trapped near the top end of a sideways range, the improved mood has allowed the NASDAQ to finally recover the entirety of the tech-bubble bear market and move to new all-time highs. The question of the day is if the blue chips will follow suit in the near-term.

S&P 500 Index - Daily

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INTERMEDIATE-TERM (1-6 months)

As we mentioned last time, one of the best ways to determine the state of the intermediate-term trend in the stock market is to look at the 10-week moving average of the S&P 500. So, with the index currently above the moving average and near all-time highs, and the moving average itself still moving higher (albeit only modestly so), the intermediate-term trend can be rated as no worse than moderately positive. The reason for the qualifier is the fact that the action remains choppy and the internal momentum of the uptrend has clearly slowed. In addition, our primary market model, which is designed to indicate whether risk factors are high, low, or uncertain, tells us that the overall environment remains moderately positive. And in sum, history tells us that this type of model reading favors the bulls and that the dips should be bought.

S&P 500 Index - Weekly

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LONG-TERM (>6 months)

From a long-term perspective, the stock market has traditionally been seen as a discounting mechanism for the future outlook for the economy, interest rates, corporate earnings, and inflation. So, let's review where we stand on these issues. While the economy has clearly hit another soft patch, the labor market remains strong and our economic models indicate that there is a zero percent chance of a recession at this time. This favors the bulls. On the monetary front, although the Fed will soon begin to normalize policy, interest rates remain near generational lows and are unlikely to spike higher any time soon. This can also be put in the bullish column. Next is the topic of corporate earnings. While it may be surprising to learn, a slowdown in earnings growth has NOT been a death knell for the stock market historically (quite the opposite, actually). Then there is the topic of inflation. With most of the world's central bankers fretting about not enough inflation in the system, this is most definitely not a source of concern for the stock market at this time. And finally, if I was stranded on a desert island with just one stock market indicator, it would be a model that measures the longer-term technical health of the more than 100 subindustry groups that make up the S&P 500 (there are 10 sectors, 20 industry, and 104 subindustry groups). This long-term indicator has "called" every bear market in the last 35 years and the buy/sell signals would have been correct 88% of the time. The good news is that this model remains positive. The only bad news to report is that (a) traditional valuations measures are stretched at this time and (b) the current bull run is one of the oldest ever. To sum up, the long-term outlook for the U.S. stock market remains positive. However, investors must recognize that risk factors are elevated at this time.

Turning To This Morning...

It's Fed day once again and as such the action prior to the release of the FOMC's statement will likely have little bearing on the day. While no one expects the Fed to announce any changes to the current language in the statement, analysts will be listening intently for any attempts to "nudge" the markets in any direction. For example, a Reuters article today suggests that the FOMC may attempt to take a more hawkish tone on the subject of inflation in order to back up their "data dependent" stance. In other news, the chief economist at the People's Bank of China denied recent speculation in the press that the bank is considering a QE-style stimulus program. Here at home, it is worth noting that yields on the 10-year are moving back above 2% at the moment and futures are pointing to a slightly lower open at this time.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: closed
    Hong Kong: -0.15%
    Shanghai: +0.02%
    London: -0.26%
    Germany: -0.45%
    France: -0.55%
    Italy: -0.50%
    Spain: -0.45%

Crude Oil Futures: -$0.30 to $56.76

Gold: -$6.50 at $1207.40

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.033%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -0.31
    Dow Jones Industrial Average: -10
    NASDAQ Composite: -3.22

Thought For The Day:

Quality means doing it right when no one is looking. - Henry Ford

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 Earnings Season
      3. The State of the U.S. Economy
      4. The State of the U.S. Dollar

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 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: 2080
  • Key Near-Term Resistance Zone(s): 2120

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: Neutral
  • Breadth Thrust Indicator: Neutral
  • 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: Moderately Overbought
          - Intermediate-Term: Neutral
  • 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


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.