I am short on time this morning, but with the market apparently back in "freakout" mode I thought it might be a good idea to quickly review some of the key takeaways from the current market action.
First, the excuse du jour for yesterday's dance to the downside remains the same - worries about global growth. Or in this case, the potential lack thereof.
The selling began yesterday after China's Industrial Profits data stunk up the joint, coming in well below expectations at -8.8% on a year-over-year basis versus the prior month's reading of -2.9%. As such, the fear is that China's slowdown may be accelerating. This is not my assessment mind you, but rather, what traders seem to be worried about.
The worries were exacerbated by the continued collapse in the commodities space with Glencore's troubles getting a lot of attention. Note that GLEN.LN stock has plunged over 40% in the past few weeks. Analysts suggest the selloff is being driven by concerns around the commodity trader's balance sheet and liquidity, reflected by both rising CDS and bond yields. However, this is not keeping macro players from focusing on the decline in commodities of all shapes and sizes, which, of course, causes concern about global growth (are you sensing a theme here?).
The Playbook Still In Play
The next big issue traders are wrestling with is the fact that what I call the "Crash Playbook" is still in play here. Recall that traders on Wall Street LOVE the pattern recognition game and so far at least, the current decline continues to mirror the 2011 mini bear market.
S&P 500 - Daily
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Recall that the "Crash Playbook" tells us to look for 5 phases during an emotional "waterfall" decline. Phase I is the big dive. Phase II is the "dead cat bounce." III is the "retest." IV is the "bottoming process." And then phase V is "the breakout" where happy days return.
Currently it appears that we are likely in either the "retest" or "bottoming process" phase. In either case, we should not be surprised to see a "lower low" at some point in the very near future.
However, it is critical to recognize that VERY favorable seasonality is just around the corner. And since everybody knows the best time to buy stocks is during the October/November lows, traders may become more upbeat sooner rather than later - sepecially if prices move lower in the near-term.
This morning we'll be watching the oversold bounce. This is natural after the algos appeared to "overdo" things to the downside yesterday. However, where prices go after the open is anybody's guess. The key here is that if the bulls can't get anything going to the upside today, they are at risk of being overrun by the bears in the short-run. And this could - key word - set up the low that those looking for a year-end rally are waiting for.
Stay tuned, this is definitely getting interesting!
Publishing Note: I am traveling again this week and will publish morning missives as time and energy levels permit.
The Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -2.97%
Crude Oil Futures: +$0.47 to $44.90
Gold: -$5.10 at $1126.60
Dollar: higher against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 2.113%
Stock Indices in U.S. (relative to fair value):
S&P 500: +6.48
Dow Jones Industrial Average: +49
NASDAQ Composite: +20.23
Thought For The Day:
No matter how slow you go, you are still lapping everybody still sitting on the couch. - Unknown
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/Global Economy
2. The State of Stock Market Correction
3. The State of Fed/Global Central Bank Policy
4. 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: 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: Low 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: 1867
- Key Near-Term Resistance Zone(s): 1950
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
- Intermediate-Term Bull/Bear Volume Relationship: Negative
- Technical Health of 100+ Industry Groups: Moderately 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
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research
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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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, 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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