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Welcome to the consolidation phase - are we having fun yet?

From a longer-term perspective, all we hear from the market analysts these days is that the volatility of the market has dried up this year. There have been no corrections, we're told. The trading range environment is both extremely tight and very rare, they say. And if one looks at a closing chart of the S&P 500 on a weekly basis over the past couple of years, it is hard to argue with these assessments.

Yet from a shorter-term perspective, I will posit that just the opposite is occurring. The action seen since the middle of June is a perfect example of my point as stocks have moved wildly in one direction and then the other. Back and forth. Up and down. With each trend (and I use that term loosely!) lasting a handful of days before the powers that be decide to simply go the other way - with reckless abandon.

Hence my handful of recent tweets terming the current action "idiotic." In fact, I'm still shaking my head over Wednesday's insanity. But the reality is, in this business, you've got to play the hand you've been dealt and not the one you'd like, right?

So, putting all emotions aside and looking objectively at both the charts and our host of market models, the word that best describes the current stock market is, neutral.

The daily chart of the S&P 500 makes this pretty clear. Take a peek at the graph below and see for yourself...

S&P 500 - Daily

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First, note the top and bottom of the trading range that is nearly six months old. Next, note the line drawn through the middle of the range. Then, take notice of the red lines, which represent both short-term up- and down-trend lines (the technical analysis textbooks would call this some sort of a wedge formation). And finally, check out where the S&P closed yesterday... Yep, that's right - smack dab in the middle of everything. Can you say, neutral?

The song remains the same when you look at the market from a longer-term perspective. Below is a weekly chart of the S&P. Note that the uptrend that was in place since the middle of 2012 has now given way to a pattern that fits quite nicely into the red rectangle drawn on the chart.

S&P 500 - Weekly

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While it may be hard to see, it is also worth noting that the blue and orange lines (the 10- and 30-week weighted moving averages) are now moving sideways and that price is currently resting right in the middle of the range and almost on top of the moving averages. Neutral indeed.

Do The Indicators Provide a Clue?

Then there are the indicators. While there are a growing number of our indicators that are beginning to flash warning signs, the weight of the evidence of the group suggests that things are, that's right... neutral. This is highlighted by our Market Environment Models (there are short-, intermediate-, and long-term models), which, in keeping with the theme of this morning's meandering market missive, are all yellow at the present time.

The questions of the day then are (a) where do we go from here? And (b) when does this maddening, neutral environment end?

As for the latter query, there is obviously no way of knowing. And since the "breakout fakeout" has become quite prevalent lately, we would suggest investors wait for some confirmation if/when one of our teams appears to gain control of the ball again. This can take the form of a percentage break above/below the range (if memory services, Martin Pring preaches a 3% confirmation when stocks break a meaningful trading range) or an indicator confirmation. In other words, we would want to see our models - especially those in the momentum category - turn a bright shade of green before jumping onboard the breakout train.

As for the first question, it is probably best to give the bulls the benefit of the doubt here. Remember, as I've mentioned a time or twenty, stocks tend to exit a consolidation phase heading in the same direction they were when the consolidation began. And in this case, this would suggest the current malaise is likely to be resolved to the upside. However, this does not mean that the bears won't scare the bajeebers out of everyone a couple times first!

So, on this fine Friday morning, the word of the day is neutral. And for now, it is probably best to play the game accordingly.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.37%
    Hong Kong: -0.12%
    Shanghai: +0.26%
    London: -0.13%
    Germany: -0.43%
    France: -0.58%
    Italy: -0.41%
    Spain: -0.34%

Crude Oil Futures: +$0.08 to $42.31

Gold: +$2.50 at $1118.10

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

10-Year Bond Yield: Currently trading at 2.180%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -4.00
    Dow Jones Industrial Average: -30
    NASDAQ Composite: -12.40

Thought For The Day:

"To have striven, to have made the effort, to have been true to certain ideals - this alone is worth the struggle" -- William Penn

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 China's Currency/Economy
      2. The State of Global Economic Growth
      3. The State of European Banking System
      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: Moderately Negative
(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: 2050
  • Key Near-Term Resistance Zone(s): 2100-2135

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: Negative
  • Breadth Thrust Indicator: Negative
  • Intermediate-Term Bull/Bear Volume Relationship: Negative
  • 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: Moderately Oversold
  • Market Sentiment: Our primary sentiment model is Positive .

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: Low 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.