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I start my day each morning by reviewing about 40 different stock market indicators, models, and then a host of charts. To be honest, not much changes on a daily basis. However, it is important to remain diligent in this task as one never knows when something out of the blue will crop up and as a professional investor, the last thing you want is to be surprised by something in the markets.

This morning, I'd like to spend a few minutes reviewing what I perceive as a good news/bad news situation relating to the subject of volume on the U.S. stock market.

But first, let me state that I very well could be making a mountain out of a mole hill today. To be sure, volume statistics are impacted rather dramatically by today's high speed trading environment, where the vast majority of the trading is generated by computers. In addition, it is important to recognize that there are all kinds of games that are played by the big boys and their computer toys on a daily basis.

However, if one steps back a bit from the daily hysterics and looks at indicators from a longer-term basis, a message can often be gleaned. You see, volume tends to be the ultimate "show me the money" indicator.

Cutting to the chase, the bigger-picture message from some of my favorite volume-based indicators is that despite the spirited romp by the bulls seen in October and the fact that the S&P 500 looks like it once again is ready to flirt with all-time highs, the "oomph" one might expect to see from the volume indicators is M.I.A.

Show Me The Money!

For decades, one of the most basic methods used to analyze the health of the stock market has been to look at "up volume" (the volume associated with stocks that rise on the day) versus "down volume" (the volume associated with stocks falling on the day).

And while the advent of HFT, high speed trading, and sophisticated algorithms definitely impacts this data, looking at the basic concept of the volume associated with up and down moves on a longer-term basis still makes a lot of sense (well, to me, anyway).

The Good News...

So first, let's look at the good news. The chart below shows the 30 day average of up and down volume. The black line is the average up volume and while it might sound unintuitive, the green line on the chart is down volume.

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What we want to see here is the black line to be above the green line during market rallies. This tells us that there is some "oomph" behind the move to the upside. And in this category, the more the better.

Which brings up the first issue. I'm a bit concerned that while up volume is indeed ahead of down volume on a 30-day basis and stocks are rising, (1) the level of up volume isn't exactly robust and (2) the current level is below the prior high. As such, we need to be on the lookout for a reversal.

The Bad News Is...

Unfortunately there is also some bad news to report on the subject of stock market volume.

The chart below illustrates a similar concept, but on a much longer-term basis. In this instance the black line represents something called "volume of demand" and the red line is "volume supply."

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As in the case above, the key is whether or not the black line is above the red line when stock are advancing on an intermediate-term basis.

The bad news here is two-fold. First, although the two lines have begun converging, the "volume supply" line remains above the "volume demand" line. And second, the black demand line has been in a downtrend for some time now.

The bottom line here is simple. This indicator tells us that while the bulls have clearly enjoyed a joyride to the upside, the internal health of the market (at least as far as the volume is concerned) is not as strong as we'd like it to be given all the talk of the bulls breaking out to new highs.

The Tie-Breaker

So far, we have reviewed some good news and some bad news. As such, it would appear that we need to look further in order to determine which team has the edge at this time.

As you might suspect, yes, there's a model for that! The model shown on the chart below takes the demand and supply volume data and turns it into buy and sell signals.

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Unfortunately, this too is a good/bad news situation. The good news is that the model, after issuing a very timely sell signal on July 9th, is back on a buy signal (yay!). In addition, those investors long the stock market can take comfort in the knowledge that looking back hypothetically at history, 90% of the signals from this model would have been profitable since late 1981.

What's more, when the model has been on a buy signal, the S&P 500 has gained ground at an annualized rate of more than 16% per year. Conversely, when the model is negative, stocks have lost ground at a -5.4% annualized rate. And simply put, this is why I like to look at these indicators each and every day of the year.

The bad news here is that the overall reading of the model remains sub-par. Thus, one could argue that the current rally isn't as strong as the price surge might indicate.

The Takeaway

In summary, I think I can say that the overall message from the volume indicators is moderately positive, but that there are some issues to be aware of. The bulls have indeed taken charge from a near-term perspective but these indicators make it clear that our heroes in horns have some ground to make up before they can complete the recovery from the August swoon.

So, as long as indicators that have been "right" 90% of the time tell us the odds favor higher prices going forward, it would seem to make sense to (a) give the bulls the benefit of the doubt and (b) to continue to buy the dips.

Publishing Note: I am traveling much of this week with a couple very early meetings. Thus, reports will be published as time and energy levels permit.

Today's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -2.10%
    Hong Kong: -1.19%
    Shanghai: -1.70%
    London: -0.35%
    Germany: +0.90%
    France: +0.42%
    Italy: +0.47%
    Spain: +0.72%

Crude Oil Futures: -$0.66 to $45.93

Gold: -$4.10 at $1147.80

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

10-Year Bond Yield: Currently trading at 2.179%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +2.00
    Dow Jones Industrial Average: +27
    NASDAQ Composite: +10.70

Thought For The Day:

Opportunity is not a lengthy visotor. --Anonymous

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 Global Central Bank Policy
      2. The State of China/Global Growth
      3. 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 6 months, and long-term as 6 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: Moderately Positive
(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: 2020
  • Key Near-Term Resistance Zone(s): 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): Neutral
  • Price Thrust Indicator: Positive
  • Volume Thrust Indicator(NASDAQ): Neutral
  • Breadth Thrust Indicator (NASDAQ): Positive
  • Short-Term 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: Slightly Overbought
  • Market Sentiment: Our primary sentiment model is Moderately 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: Moderately Positive

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 is the owner of Heritage Capital Management (HCM) a registered investment adviser. Advisory services are offered through Heritage Capital Management, Inc. For a complete description of investment risks, fees and services review the HCM firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting HeritageHCM also serves as a sub-advisor to other investment advisory firms. Neither HCM or Heritage 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.