Are You Looking At the Right Picture?
Is there really anything more fun than watching the financial networks fawn all over a major index moving above a big, round number? Thinking back, I guess it truly was a big deal the first time the Dow Jones Industrial Average moved above the 10,000 level. (Admit it; you've still got the hat, don't you?) But as time marches on, the importance of such events would seem to diminish substantially.
And yet, here we go again. The current hullabaloo is all about the NASDAQ moving back above the 5,000 level for the first time in 15 years. Based on the nostalgic segments on CNBC that aired all morning, one might have thought that the "NAZ" had finally completely recovered from the devastation created by the technology bubble bursting in early-2000.
But what was largely left out of the coverage was the very simple fact that the NASDAQ Composite did NOT finish at a new all-time high on Monday. No, it wasn't even close. In fact, the NASDAQ is still a full 40 points (40.52 to be exact) away from the previous all-time high set on March 10, 2000. Now I ask you, wouldn't that be the reason to celebrate instead of everybody running around saying, "Hey look, the NASDAQ is over 5,000 again!"
On this topic, another one of my pet peeves about looking back at historical events is the use of traditional charts. For example, the chart below shows that the NASDAQ has been on one whale of a ride since the early 1980's.
NASDAQ Composite - Monthly
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Admittedly, the meteoric rise during the 1990's and terrifying crash of 2000-02 were both something to behold. And then the run from the 2009 low has been nothing short of breathtaking on this chart.
And perhaps because of this, there are more than a few analysts suggesting that the NASDAQ has entered into another bubble. And we're told that as sure as day follows night, history is going to repeat itself very soon.
In all honesty, the monthly chart of the NASDAQ Composite shown above is likely to give anyone suffering from acrophobia a few chills.
But let me ask you something. On the chart above, see if you can find the "Crash of 1987." And feel free to click on the View Larger Image Link so that you can get a better look at things.
It's tough to locate, right? The key here is that when looking at a traditional chart, October 19, 1987's "Black Monday" event barely shows up! Oh and that little bear market in 1990 as well as the emerging markets crisis of 1998 are hardly visible.
The point is that if you want to view the market from the proper perspective, you have to, well, change your perspective.
Take a gander at the chart shown below. Believe it or not, this too is a monthly chart of the NASDAQ Composite going back to 1982. Same index. Same time frame. But a very different picture, right?
NASDAQ Composite - Monthly (Log Scale)
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Suddenly the misery of 1984, 1987, and 1990/91 are easy to see. Suddenly the long-term perspective of the tech bubble bursting looks a great deal different. And finally, the rebound from the 2009 low is not quite so dizzying. Oh and what's this - an uptrend in the NASDAQ stock market going back to 1982?
In case it isn't obvious, the use of a logarithmic scale changes the picture rather dramatically!
What's the Point?
The point to this morning's somewhat meandering market missive is that if one views the action of the NASDAQ over a long-term perspective using a traditional chart, they couldn't be blamed for feeling like the index has run too far, too fast and that very bad things are about to happen again.
However, when looking at the NASDAQ on a log scale basis, the long-term trend does not appear to be in any sort of danger zone at all.
And then when one looks at the same monthly log chart of the S&P 500, they can even argue that the current leg of what is obviously a new bull market, might be just getting started. Yikes, I think I might sound downright bullish here.
S&P 500 - Monthly (Log Scale)
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There is little doubt that this rudimentary chart analysis will likely bring a fair amount of hooting and hollering from those in the bear camp, who contend that valuations are once again at extreme levels. There is talk of Shiller's CAPE along with various other valuation metrics that would seem to argue that the next big, bad, bear is lurking right around the corner.
So, in fairness to our friends in fur, next time we will explore some important valuation measures.
Turning to This Morning...
Perhaps the most surprising thing about this morning's action is the lack of follow-through after yesterday's round of new highs on Wall Street. And while there does not appear to be any major difficulties, it interesting to note that all of the major global indices we follow are red this morning, albeit only slightly so. The exception is China, where a slide of more than 2% is being attributed to approvals for a slew of new IPO's. There may have also been some disappointment over the fact that the RBA failed to cut rates. Recall that after the surprise rate cut in February, analysts had expected the bank to continue to lower rates. However, the statement provided did suggest that further policy action would be forthcoming. Across the pond, European markets continue to fret about near-term funding issues in Greece. However, traders did get another batch of stronger-than expected data in Germany as retail sales were reported with the biggest gains in 4 years. Here at home, there is no economic data scheduled for release but traders will be watching the February auto sales numbers which will be released throughout the day. U.S. stock futures are currently pointing to a pullback at the open on Wall Street.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -0.74%
Crude Oil Futures: +$0.74 to $50.33
Gold: +$1.80 at $121.00
Dollar: higher against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 2.105%
Stock Indices in U.S. (relative to fair value):
S&P 500: -5.49
Dow Jones Industrial Average: -53
NASDAQ Composite: -11.50
Thought For The Day:
You can do anything if you have enthusiasm. Enthusiasm is the yeast that makes your hopes rise to the stars. -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 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): 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: 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,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research
Be Sure To Check Out the NEW Website!
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.
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.