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Apparently investors can now add the state of U.S. growth to their list of worries. Whether or not the worry is warranted will likely continue to be debated for some time. For example, economists tell us there is nothing to fear but fear itself at the present time due to the fact that the trend of the U.S. economic data remains positive. However, even the most ardent bulls will have to admit that the majority of the data seen over the past month has come in on the punk side.

Yet, the professional economists I know and trust insist that while we may indeed have seen a "turn" in the recent data, there is no "trend" to the downside.

The thing to keep in mind is that the stock market is a discounting mechanism for future expectations. As such, stocks don't wait for revisions to data that was released months ago or for a definable trend to develop. No, if traders start to sniff out a problem, they tend to sell first and ask questions later - especially in this day and age of millisecond data review and algo initiation.

The most recent problems have come from the Retail Sales report and yesterday's Philly Fed data. Unfortunately, Retail Sales continue to surprise to the downside and the Philly Fed index declined for a second consecutive month.

The bulls tell us not to worry about the December Retail Sales data. It was gasoline and a preponderance of gift card giving that kept the data down we're told. Thus, we should expect January's data to surprise to the upside as the public cashes in those gift cards.

Add It To the List?

So, should investors now add the state of the U.S. economy to their list of worries? This would mean that in addition to the crash in oil and commodities, the surge in interest rates, the debacle in Russia, new worries about Greece, China's growth rate, and the recent fallout from the latest move by the Swiss National Bank, investors will now need to watch the U.S. economic data very closely.

The bears argue that the answer to this question is a resounding, Yes! Just look at the recent action in the stock market, we're told. Why else would the stock market be on the verge of breaking down here?

S&P 500 - Daily

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Still All About Oil

While the argument from our furry friends would certainly seem to make sense and investors should probably pay particularly close attention to the economic data in the coming days/weeks, the real story in the market remains the crash in oil prices.

Point number one is that stock prices continue to be tied to oil on an intraday basis. If you aren't convinced here, simply pull up a one-minute chart of the USO and the SPY. Then start watching the intraday action. The point that these two are currently joined at the hip should become obvious in fairly short order.

Point number two is tying prices to oil keeps things simple at this stage of the game. The big concern with the dive in oil isn't necessarily the price of the commodity itself but rather the ripple effect that could occur in response. Junk bonds. Emerging markets. Banks. Jobs in the U.S. Etc. The bottom line is all of the above could be negatively affected by the crude's rude move.

So, how do investors possibly keep track of all the potential consequences from the crash in oil? Well, the current thinking is, why not just follow the price of oil itself?

Think about it. If oil continues to fall from here, the potential for all of the above problems (and more) increase. And if oil rallies, the potential consequences would seem to diminish.

Remember, at some point, oil will rally - and rally hard - as market crashes tend to follow a similar script. First there is the massive decline. Then there is a snapback, which tends to be fast and furious. This is followed by a retest of the lows. And then finally, there is the long period of consolidation.

Due to the fact that (a) most traders know the crash play book inside and out, and (b) crude is quickly approaching the generally accepted price target of $40, investors should probably expect that "fast and furious" rebound in crude at some point soon. And the good news is that if stocks continue to follow the price of oil around like a little puppy dog, then the big bounce in oil could be mirrored in the stock market.

The bottom line is that while the U.S. economic data is a nice distraction, this stock market remains all about oil.

Turning To This Morning

Just about the time you decide to ignore everything except the price of oil, our friends in Greece come back into the mix. In addition to the political uncertainty/instability being caused by the upcoming election, this morning there are new problems in the banking sector. Word is that two Greek banks have requested emergency assistance, which, of course leads to the question of how many more will come forward? This has caused the focus to shift back to Europe. So, despite oil rallying a bit in the early going, futures point to a lower 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: -1.43%
    Hong Kong: -1.01%
    Shanghai: +1.19%
    London: -0.10%
    Germany: -0.27%
    France: -0.10%
    Italy: +0.64%
    Spain: -0.45%

Crude Oil Futures: +0.81 to $47.06

Gold: +$4.30 at $1269.30

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

10-Year Bond Yield: Currently trading at 1.715%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -9
    Dow Jones Industrial Average: -81
    NASDAQ Composite: -27

Thought For The Day:

Success is not permanent & failure is not fatal. -Mike Ditka

Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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