After the relatively wild action seen late last week, the question of the day is if the swings we saw on Thursday and Friday are meaningful - or - simply the work of the trend-following bots doing their thing.

Recall that on Thursday, the S&P 500 fell 23.45 points or -1.2 percent on a plethora of headache-inducing headlines. First it was new sanctions on Russia for the handling of the situation in Ukraine. Next, it was flight MH17 being shot down over Ukraine. Then the Fed's James Bullard chimed in about the Fed needing to raise rates sooner than expected. After that, we heard that Israel had initiated a ground offensive in Gaza and that the White House was on lockdown. And finally, there was the report that the largest insider trading probe in history had begun, and involved no fewer than 44 hedge funds.

Through most of the day on Thursday, it is important to note that the market held up pretty darned well. The thinking seemed to be that the downing of another Malaysian airliner was likely not an act of war and that the various skirmishes in Gaza rarely affect the markets. However in the last hour, traders and their computers took the market back to the lows of the day, snapping a bunch of technical levels in the process.

Then on Friday it became clear that although MH17 was indeed shot down by a sophisticated Russian-built BUK surface-to-air missile, it was not the work of either the Russian or Ukranian governments. So, given that WWIII was not on the line, the dip buyers returned. As the momentum began to build to the upside, the trend-following bots jumped on board in earnest at three different points during the day. And before you knew it, the S&P had regained 20 of the 23 points lost on Thursday and the word in the press was that traders were "relieved."

However, as was mentioned in Friday's missive, this appears to be more a case of trend-following bots doing their thing than investors making adjustments to their portfolios based on fundamentals.

But Do The Levels Matter?

There is an old saying on Wall Street that may be appropriate here. "It's not a breakout if you are the one breaking it out."

In other words, a trader shouldn't base their view of the market action on something that they themselves were responsible for. And in short, this seems to be exactly what is happening in today's market and a great way to sum up the dilemma facing traders this week.

Today, the question is this: Given that the trend-following bots continue to move prices intraday in one direction until they don't, do the key price levels really matter?

Bulls Point to the Charts

S&P 500 Daily

One of the bullish arguments at the present time is that through all of the bad news and geopolitical tensions, the S&P has held above important near-term support and that the uptrend line that has been intact now since mid-April, has not been violated.

Most technicians would likely agree that the chart of the S&P 500 remains in pretty good shape. As such, one could argue that the bulls should be given the benefit of any doubt. But...

iShares Russell 2000 Smallcap ETF (IWM) Daily

The chart of the Russell 2000 ETF tells a completely different story. In short, the chart of the IWM is not a pretty picture. From a short-term perspective, a downtrend is evident. And from a long-term perspective, one can argue that a double-top is in place.

The bottom line is that (1) the charts of the S&P and Russell 2000 represents a clear case of technical divergence and (2) it is unclear if the trend-following bots care about the important technical levels that traders tend to key on.

Therefore, it is probably a good idea to continue to watch the action closely.

Important Reminder: In order to keep pace with our growth, better serve our advisors and clients, and to provide scale for future growth, Heritage is teaming up with CONCERT Global - an SEC Registered Investment Advisor with more than $2 Billion in assets under management. CONCERT will provide more robust back-office, compliance, technology, and trading infrastructure. Client packets to make the transition will be arriving in the coming weeks.

Turning To This Morning...

The focus this morning continues to be on Russia. However, at this stage, the focus is on the fact that Russia appears to be blocking access to the MH17 crash site. Since outsiders are being blocked by soldiers with machine guns, it makes an independent investigation nearly impossible. Therefore, the West is threatening further sanctions starting as soon as tomorrow if the situation is not rectified. In response, Russian stocks continued to move lower, Europe's bourses sport moderate losses, and U.S. stock futures point to a lower open.

Pre-Game Indicators

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

Major Foreign Markets:
- Japan: closed
- Hong Kong: -0.29%
- Shanghai: +0.25%
- London: -0.37%
- Germany: -0.85%
- France: -0.42%
- Italy: -1.05%
- Spain: -0.40%

Crude Oil Futures: +$0.11 to $103.24

Gold: +$8.20 at $1317.60

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

10-Year Bond Yield: Currently trading at 2.490%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -4.97
- Dow Jones Industrial Average: -39
- NASDAQ Composite: -5.64

Thought For The Day...

Win or lose you will never regret working hard, making sacrifices, being disciplined or focusing too much. -John Smith

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

David D. Moenning
President, Chief Investment Officer Heritage Capital
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Positions in stocks mentioned: None

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