"No Soup For You" (Yet)
While geopolitical issues remain (China closed 4 high profile McDonalds restaurants in retaliation for the West's economic sanctions and a rescue attempt of an American journalist in Iraq failed) traders appear to be focused on the flash PMI data out of China and Europe as well as the outlook for Fed policy this morning.
In China, the HSBC/Markit flash Manufacturing PMI pulled back to 50.3 in August, which was below expectations and July's reading of 51.7. However, the indicator remains in the expansion zone for a third consecutive month. The final reading will be released on 9/1.
In Europe, flash reports for both the manufacturing and services sectors came in mixed with Germany's numbers improving and Eurozone's pulling back from July levels. However, stock indices in Europe seem to be shrugging off the data.
Traders in the U.S. are still noodling on the minutes from the July FOMC meeting, which showed committee members willing to consider rate hike sooner than anticipated - IF the data warrants such a move. Futures are pointing to a stronger open on Wall Street.
Current Market Outlook
With traders putting geopolitical issues aside, the primary focus at this stage of the game is the potential for new all-time highs on the S&P 500. Sell programs in the final minutes of yesterday's trade created a "no soup for you" close as the venerable index finished just 1.47 points or 0.07% from the Promised Land. Assuming the index will close in new-high territory in the near-term, the key difference this time around is that our momentum indicators are in better shape than the "no mo" move that ended on 7/24. Currently our market models are positive on balance which suggests the bulls may not be done yet.
Looking At The Charts
Although the S&P 500 failed to close at a new high yesterday and the DJIA is lagging behind on the current move, it is important to recognize the NASDAQ and NASDAQ 100 indices have taken on a leadership role at this stage. However, with the market currently in an overbought state and an important line in the sand still in place, it would not be surprising to see the bears dig their heels in here and try to keep the Dow and S&P from moving to new highs. Therefore, the 7/24 high on the S&P remains the key technical spot on the charts. Finally, the word on the street is that a meaningful close above 1987.98 would likely bring a move to 2000 in short order.
S&P 500 - Daily
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +0.85%
- Hong Kong: -0.66%
- Shanghai: -0.46%
- London: +0.26%
- Germany: +0.60%
- France: +0.85%
- Italy: +1.67%
- Spain: +1.16%
Crude Oil Futures: -$0.52 to $92.93
Gold: -$18.80 at $1276.40
Dollar: lower against the yen and euro, higher vs. pound.
10-Year Bond Yield: Currently trading at 2.447%
Stock Indices in U.S. (relative to fair value):
- S&P 500: +3.94
- Dow Jones Industrial Average: 41
- NASDAQ Composite: +5.80
Thought For The Day:
Remember to think positive today :-)
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 Geopolitical 'Issues'
2. The State of Fed/ECB Policy
3. The Level of Interest Rates
4. The Outlook for U.S. Economic Growth
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 3 months, and long-term as 3 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: Positive
(Chart below is S&P 500 daily over past 12 months)
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: 1940(ish)
- Key Near-Term Resistance Zone(s): 1985
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): Positive
Signal 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: Moderately Positive
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: Positive
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: Positive
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: Moderately Positive
Indicator 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: Neutral
Model 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.
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: Moderately 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 State of the Market Model Reading: Positive
Model 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.
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research - A CONCERT Advisor
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