Posted |

If investors have learned anything since the current bull market began on March 9, 2009, it is to "buy the dips." The bottom line is that any and all problems, fears, and/or crises (both real and imagined) over the last 6 years have been met with, almost without exception, a spirited reversal. Dubbed "V-Bottoms," these instantaneous changes in market mood have tended to quickly reverse most, if not all, of the declines seen in the stock market in a matter of days/weeks, as investors scramble to buy whenever prices decline.

We have argued that global QE is likely the reason for the market's propensity to put in V-Bottoms. In what is really a close relative to the "Bernanke Put," investors know that the ECB and the BOJ continue to print a big pile of new money every month. And since that fresh cash usually goes where it is treated best, it seems that a fair amount continues to find its way into U.S. stocks - especially when there is a dip in prices to be bought.

But with Greece's travails dominating the headlines, China diving 30% in 3 weeks, commodities breaking down, Puerto Rico talking default, the Fed preparing for liftoff, and any number of big-picture indicators suddenly looking sick, I've received a fair number of questions from financial advisors recently, wondering if this time is going to be different.

By now, everybody knows that the dips should be bought. But the question is if either a "Grexit" or the big dive in China will change the game. Will dip-buying become a thing of the past? Is the next big, bad bear market upon us? Or... Should investors stop overthinking things and just continue to put money to work into any and all declines, I've been asked.

Where's the Dip?

Before I get into a discussion of the issues at hand on these calls - you know, whether Greece matters, if China will become a global contagion, or if the Fed has reason to wait until 2016 (they don't, by the way), etc. - I tend to make one very important point on these calls. As gently as I can, I ask the following question: "Exactly what dip are you referring to here?"

Take a look at the chart below and you should see my point pretty quickly. While everyone has been fretting mightily about the status of the "aGreekment" or if Germany will just say "Nein!" to any and all new proposals, as well as whether or not the swoon in Chinese stocks will lead to global economic difficulties, the stock market hasn't really noticed.

S&P 500 Index - Weekly

View Larger Image

If you will recall, the first Greek crisis (circa 2010) produced a decline of about -16% on the S&P 500. The second go round with Greece, which was combined with the children in Washington managing to get the country's debt rating downgraded, resulted in a decline of -19%. Then in 2012 - the last time Greece was a real story - the S&P surrendered somewhere in the vicinity of -12%.

Therefore, it is safe to say that Greece has managed to roil the markets at times and as a catalyst for dips in the stock market, should probably be respected.

However, this time around, the question is really, "Dip? What dip?" From the all-time high set on May 21, 2015 (which was tested as recently as June 23rd), the S&P 500 has pulled back just -3.95% during the so-called crises in Greece and China.

So despite the surprise "Greferendum" (which was political grandstanding at its finest), the last second "aGreekment," and the potential for a Germany-imposed 5-year time-out from the Eurozone, the stock market hasn't even fallen 5% from its high. And I'm sorry, but a pullback of -3.95% doesn't really qualify as a "dip" worth buying. Well, not in my book, anyway.

The Real Question Is...

From a shorter-term perspective, all the hysterics seen on a daily basis haven't actually done much to change the charts. Sure, there has been a lot of excitement and some big swings intraday. But the S&P 500 is still stuck in a trading range and shows no signs of embarking on a trend any time soon. As such, the real question is when will this volatile up-and-down, back-and-forth environment end?

S&P 500 Index - Daily

View Larger Image

Or is this just the way the game is going to be played from now on? Should investors simply ignore the short-term machinations created by the computer-driven algos that make decisions at the speed of light and focus on the longer-term trends instead? And with everyone in the game now using fancy technical indicators, is trend-following a thing of the past?

These are the questions that have been rattling around in my brain of late. These are the questions that investors will need to answer in order to play the game effectively in the coming years.

And getting back to the theme of this morning's missive, yes, by all means, feel free to continue to buy the dips as long as the central bankers of the world keep printing yen, euros, or whatever at a healthy clip. Because, the bottom line is it is a bull market until proven otherwise. And when the bulls are running, buying the dips - assuming there actually is a dip to buy, that is - continues to be a pretty good way to play.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +1.47%
    Hong Kong: -0.41%
    Shanghai: -1.17%
    London: -0.16%
    Germany: -0.44%
    France: -0.12%
    Italy: -0.94%
    Spain: -0.23%

Crude Oil Futures: +$0.01 to $52.21

Gold: -$0.20 at $1155.60

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

10-Year Bond Yield: Currently trading at 2.396%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -0.15
    Dow Jones Industrial Average: +10
    NASDAQ Composite: +7.00

Thought For The Day:

Great teachers have the power to change the world. - Bill Gates

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 Greek Crisis
      2. The State of China's Stock Market
      3. The State of Fed/ECB/PBoC Policy
      4. The State of the Earnings Season

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: Neutral
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Moderately 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): 2100, 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: Negative
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Negative
  • Intermediate-Term Bull/Bear Volume Relationship: ModeratelyPositive
  • 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: Neutral
          - Intermediate-Term: Very 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

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.


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.