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Good morning. With the S&P 500 down 8.0% on the year, it is safe to say that 2016 isn't off to a great start so far (for those keeping score at home, this has been the worst start to a new calendar year on record) . With the S&P 500 down 10.9% from the most recent (11/3/15) high and the Russell 200 off 16.3%, it is also safe to say that the stock market is in a corrective mode. And with reports showing that the average stock in the S&P 500 is down more 20% from the highs, some are arguing that a bear market is upon us.

To be honest, I think this is a fair argument. Stock market valuations are still well into overvalued territory. Earnings have been falling for 3 straight quarters (and no, you can't blame it ALL on energy). Global growth is slowing. U.S. manufacturing data continues to weaken. The debacle in oil is deflationary and may carry second and third derivative "domino" issues. There may be a de facto currency war developing. Oh, and the Fed wants to keep raising interest rates.

But before you run out and start loading up on those leveraged inverse ETFs, let's keep in mind that (a) the QE cash is still being printed in Europe and Japan, (b) the current stock market difficulty is not specific to the U.S., and perhaps most importantly, (c) really big, really bad bear markets are really rare.

For example, I've been in the financial game since 1980 and have been managing other people's money for a living since 1987. When I look back at the big, bad bears that have occurred around or during my career, I see the mess in the mid-1970's, the tech bubble bear of 2000-02, and the credit crisis in 2007-09.

That's it. The rest of the declines in my career were all relatively short-lived and investors wound up recovering from the drops in relatively short order. As such, I call these "mini bears."

Yes, it was nice/helpful to dodge events like the Crash of 1987, the Gulf War in 1990, the recessionary flirtation in '94, the LTCM/emerging market mess in 1998, and the Greece/debt downgrade bear of 2011. But the point is that none of these "mini bears" were mission critical to long-term investing success. No, it was the bears in the mid-70's, 2000, and 2008 that could have seriously derailed investor's plans and needed to be managed effectively.

Thus, the question in my mind is if this decline will morph into something really big and really bad, or simply be another "mini bear" (if it even gets that far)?

On that note, here are a couple more points to noodle on this fine Tuesday morning. First, one can never tell when a meaningful decline will begin - or end! Next, it is tough to figure out when the character of a market actually changes for good. And finally, most pundits are really good at using 20/20 hindsight to tell you what you should have done.

So, here's my take on the situation. To be clear, I don't know when the decline will end. It could end today - after all, it is a Tuesday and "Turnaround Tuesdays" are a thing. But then again, the market could easily fall farther, which would be followed by a bottoming process that could take months.

Admittedly then, I don't know much about the future. But what I would be willing to bet on is that we aren't likely to see (a) "multiple expansion" in the near-term or (b) a repeat of 2000-02 or 2007-09.

Sure, there is a laundry list of negatives. And yes, the bears do seem to be in control right now. But unless there is something big - and I mean, really big - that the market is missing and would threaten the global banking system, then the current decline is likely to wind up in either the "correction" or "mini bear" category.

The good news is that neither is a serious threat to long-term investors the way that the technology bubble bursting in 2000 or the credit crisis of 2008 was. Remember, corrections happen in the stock market all the time. It's just that with the U.S., and Japan printing money like there was no tomorrow there for a while from 2011-2014, investors wound up forgetting the way that corrections work.

But now that the U.S. is trying to move monetary policy back to some semblance of "normal" and Super Mario is getting some pushback from his banking buddies in the ECB about "doing whatever it takes" on the QE front, we may not see an endless supply of new money looking for a home in the U.S. stock market. And as a result, corrections just might also become "normal" again.

Short-Term Outlook

Looking at the near-term situation, there are two key points. First, stocks are oversold and due for a bounce. Second, if the line in the sand is breached and doesn't wind up triggering a massive, algo-induced reversal, then additional "price discovery" to the downside is a safe bet.

S&P 500 - Daily

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While there is little question that stocks will rally at some point in the near-term, the real key will be how the rally unfolds. In short, we will be watching to see if traders embrace the move or use any improvement in prices to lighten up on positions. We will also be watching the indicators to see if there is any "oomph" behind the move. The bottom line on this topic is everyone in the game knows that a rally without any real momentum is likely to fail. So, be sure to stay tuned.

Turning to This Morning

It appears that "Turnaround Tuesday" has arrived as just about every issue that has been ailing this market is improving this morning. In China, the yuan was higher and stocks rallied on renewed stimulus hopes in response to GDP coming in at 6.8%. There is also talk of additional state-sponsored buying in the Chinese equity markets. Next up, crude is moving higher despite another report on inventories being higher than expected this year. Finally, there is a lot of talk about the current move being overdone and that this is not a redux of 2008. As a result European bourses and U.S. futures are up strongly in the early going.

Today's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +0.55
    Hong Kong: +2.07%
    Shanghai: +3.23%
    London: +2.01%
    Germany: +2.08%
    France: +2.42%
    Italy: +1.41%
    Spain: +1.94%

Crude Oil Futures: +$0.31 to $29.73

Gold: -$6.30 at $1084.40

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

10-Year Bond Yield: Currently trading at 2.080%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +31.07
    Dow Jones Industrial Average: +254
    NASDAQ Composite: +76.37

Thought For The Day:

Life is change. Growth is optional. Choose wisely. -Unknown

Here's wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research

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 Renminbi
      2. The State of Oil Prices
      2. The State of the Earnings Season
      3. The State of Global Central Bank Policy

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

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

Long-Term Trend: Neutral
(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: 1860
  • Key Near-Term Resistance Zone(s): 1980(ish)

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(NASDAQ): Negative
  • Breadth Thrust Indicator (NASDAQ): Negative
  • Short-Term Volume Relationship: Negative
  • Technical Health of 100+ Industry Groups: Negative

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: Oversold
          - Intermediate-Term: 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: Negative

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 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 an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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.

Advisory services are offered through Sowell Management Services.