While the spotlight has been on Janet Yellen this week, this morning traders are turning their attention to China. In Shanghai, stocks rocketed higher with the composite index gaining 2.14% overnight. Calls for additional monetary stimulus/easing were cited as the primary driver behind the move.
The party got started on the back of a report in the China Securities Journal, which said China is now facing liquidity pressures. The article said that at least two more RRR (required reserve ratio) cuts are required this year in order to keep the monetary base on target. In addition, there were policy tools unveiled to help small business and combat the downturn in economy growth. Finally, there was talk in the Chinese financial press about deflationary concerns, which also supports the idea of more policy stimulus/easing.
Across the pond, the Eurozone's Economic Sentiment Indicator actually came in above expectations. The reading was 102.1, which was better than the consensus of 101.9 and last month's 101.4. The good news helps temper the view that the European economies are on the brink of recession. It is also worth noting that the ECB's sovereign QE program is about to begin, which is the go-to excuse as to why bond yields in the Eurozone are hitting RECORD LOWS at the present time. Note that Portugal's 10-year yield is now below 2%, Ireland's is below 1%, yields on seven-year paper in Germany fell into negative territory for first time yesterday, and Denmark, Finland, Netherlands and Austria all have 5-year yields trading with negative yields.
If the idea of negative yields in Europe makes you scratch your head, the key is to understand that European banks take no balance sheet risk when buying sovereign bonds. In other words, banks can buy bonds issued by any country and carry them on their books at par. This makes the purchase of sovereign debt effectively risk-free for the banks and helps them shore up their balance sheets. And when coupled with the ECB's plan to buy €60 billion a month, it is easy to understand why investors are flocking to the European bond market.
Here at home, St. Louis Fed President James Bullard told CNBC this morning that, in his opinion, the FOMC should remove the 'patient' language from their March statement. Bullard also mentioned that he believes the Fed should be willing to change to a single mandate of price stability (i.e. focus only on inflation). Currently the Fed has a dual mandate of price stability and full employment.
The morning news flow has traders in an optimistic mood for a change before the open as futures currently point to a modest move up when the bell rings at the corner of Broad and Wall.
Current Market Environment
For the impatient types out there, this has to be a frustrating market. Yes, stocks have been moving up. However, the advance has a begrudging feel to it as it has been difficult for the bulls to put together a string of strong days lately. Yet at the same time, it is important to realize that the slow grind higher has produced a pretty strong month. Don't look now fans, but the Dow and S&P 500 are both up about 6% so far in February and the NASDAQ is up 7.2% this month. As such, it is hard to argue that the trend isn't positive. And our market models agree. Thus, the bottom line is that anyone believing in the old saw, "The trend is your friend" should continue to give the bulls the benefit of the doubt here.
There isn't much new to report this morning. Stocks remain in an uptrend. The major indices are overbought from a short-term perspective. And our sentiment indicators are starting to move into the warning zone. So, while the market has indeed been grinding higher and the trend has definitely been an equity investor's friend this month, no one would be surprised to see stocks pull back a bit in the near term. And if the bears should find a 'reason to be' in the next few days, we will want to watch the 2085 area as the key line in the sand for both teams.
S&P 500 - Daily
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Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: +0.50%
Crude Oil Futures: -$0.67 to $50.32
Gold: +$16.00 at $1217.70
Dollar: higher against the yen and pound, lower vs. euro
10-Year Bond Yield: Currently trading at 1.961%
Stock Indices in U.S. (relative to fair value):
S&P 500: +1.79
Dow Jones Industrial Average: +14
NASDAQ Composite: +4.76
Thought For The Day:
"To understand one thing well is better than understanding many things by halves." — Johann Wolfgang Von Goethe
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: Positive
- Breadth Thrust Indicator: Positive
- 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,
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.
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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.
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