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From my perch, the question of the day really isn't really about oil, where the low in oil is, or when oil will embark on a real bounce. While it is quite clear that the correlation trade between stocks and crude is locked in the "on" position at this point in time, the bigger concern - again from my point of view - is the recent action in the banks.

From a big-picture point of view, this issue goes to the question of whether we are seeing a garden variety corrective phase, which can be triggered by any 'ol thing at any time, or another really nasty encounter with the bears. You see, the devastation that occurred in the 2008 "Credit Crisis" really wasn't about mortgages or real estate. No, it was the state of the banking system that was the real problem.

I've been writing about this, speaking about this, and recording videos about this for some time now. One of the key points I've been making is that big, bad bear markets aren't likely to occur unless the banks are at risk. And while I am by no means an expert in the banking sector, I can spot a chart that is in trouble with the best of 'em.

So, instead of me rambling on this morning, I thought we would run through some charts - to see if we all come to the same conclusion at the end.

A Picture Is Worth 1,000 Words

If one looks at a daily chart of the BKX (the KBW Bank Index), it is clear that the banks have been having a rough go since the beginning of December.

KBW Bank Index - Daily

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And then if we compare the chart of the BKX to the S&P 500, I would say that while the banks (a) are definitely not in great shape, (b) have poor relative strength to the SPX, and (c) are in a downtrend, the comparison of the two charts doesn't get me overly worked up.

S&P 500 - Daily

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However, sometimes you need to step back from the day-to-day madness to get the bigger picture. And I must admit that with the market having become so "noisy" due to all the high speed shenanigans that occur on a daily basis, I find myself looking at weekly charts more and more.

So, next let's compare the S&P 500 to the banks on a weekly basis.

S&P 500 - Weekly

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To be sure, chart analysis is oftentimes more art than science. And I'm confident I'll have folks take exception with my view on the weekly chart of the S&P. But in my opinion, while the S&P is definitely in some sort of a downtrend on a weekly basis, the chart hasn't "broken down." (And yes, I will admit that the word "yet" could easily be inserted at the end of that last sentence.)

But now let's take a look at the BKX on a weekly basis and I think my point will become quite clear...

KBW Bank Index - Weekly

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The bottom line is the recent price action in the BKX represents a very clear and very important break of support - and also represents a gaping divergence from the overall market. And this, my dear readers, could be a problem.

As banking expert Dick Bove said yesterday, the current move could be an overreaction in the prices of U.S. banks. Mr. Bove talked about the cash on the balance sheets of the big banks not matching up to the pricing being currently applied to the sector.

But unless the situation on the chart reverses in short, order, for me, the big question becomes, what do the banks know that we don't? And like 2008, is there something lurking on the balance sheets of the banks that we aren't aware of?

Another question that pops into my mind is if this an example of the "derivative" aspect of oil's decline? After all, going from $100 to $30 is bound to create some spillover/contagion problems along the way.

For example, analysts contend that the U.S. banks are on sound footing at the present time. Everybody knows about the collective exposure to the oil patch, junk, etc. And nobody seems terribly concerned - well at least not until now.

But here's a thought... Could this be about the banks in Europe, which, from what I've read, have not healed to any great degree since the European crisis ended? Is there outsized exposure in the U.S. banks to problem areas across the pond?

Don't forget that Greece has been the gift that keeps on giving to the bears for years now and the balance sheets of many European banks are not in great shape (to put it kindly). For me anyway, this is something to noodle on.

And just to be clear, I don't have answers to these questions. However, the divergent action in the banks has definitely caught my eye. So while I don't want to be an alarmist and I am a card-carrying member of the glass-is-at-least-half-full club, I, for one, will be watching the action of the banks very closely in the coming days/weeks and suggest that everyone do the same.

As I've mentioned, the banks are always the key to a crisis. And here's hoping that this does not turn into one.

Turning to This Morning

After selling off more than 5% on each of the past two sessions, oil futures are moving higher this morning on word that Russia is willing to talk with OPEC. However, the supply data from API that was released after the close yesterday showed that inventories continued to rise, which, of course is bearish. So, investors can be forgiven if they view the early move in oil with a skeptical eye. In the overnight markets, Asia saw declines (despite talk of endless QE in Japan) while European bourses are in the red today. However, U.S. futures are apparently focued on oil and point to a modestly higher open on Wall Street.

Today's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -3.15%
    Hong Kong: -2.34%
    Shanghai: -0.38%
    London: -0.54%
    Germany: -0.95%
    France: -0.35%
    Italy: -1.51%
    Spain: -1.74%

Crude Oil Futures: +$0.42 to $30.30

Gold: +$3.20 at $1130.40

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

10-Year Bond Yield: Currently trading at 1.879%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +4.20
    Dow Jones Industrial Average: +35
    NASDAQ Composite: +7.20

Thought For The Day:

The world is but a canvas to the imagination. -Henry David Thoreau

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 the Oil Crisis
      2. The State of Global Central Bank Policy
      3. The State of China's Renminbi
      4. The State of the Stock Market Valuations

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: Moderately Positive
(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: 1905
  • Key Near-Term Resistance Zone(s): 1950-1980

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: Negative
  • Volume Thrust Indicator(NASDAQ): Negative
  • Breadth Thrust Indicator (NASDAQ): Neutral
  • Short-Term Volume Relationship: Neutral
  • 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: Moderately Overbought
          - Intermediate-Term: Oversold
  • Market Sentiment: Our primary sentiment model is Neutral

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.