Posted |

After a pretty crummy week, stocks finally perked up on Friday. The reason for the rally was simple. First, crude oil enjoyed its best day in years with a gain of more than 11%. And then banks on both sides of the Atlantic bounced with the BKX gaining 5.2% and European banks rising about twice that. So not surprisingly, the major U.S. stock market indices followed suit as the DJIA popped 313 points and the S&P tacked on nearly 2%.

While Friday's action didn't really change much of anything from a big-picture standpoint, there are two items worthy of note here.

First, the good news. From a near-term technical perspective, chart watchers tell us that the combination of Thursday's dive and Friday's big bounce represents a successful "retest" of the August lows - as well as a potential double bottom formation. Therefore, as long as the bulls can find a way to the S&P above 1810, technicians will argue that there is a decent chance that the lows have been put in.

S&P 500 - Daily

View Larger Image

The bad news is that according to Ned Davis Research, a bear market is officially upon us. NDR defines a bear market on the Dow Jones Industrial Average in a couple different ways. However, the rule that applies here is that the DJIA has been down at least 13% after 145 calendar days. So, with the Dow down -14.5% at the low from its May 2015 high, the criteria has clearly been met.

What Should We Expect From This Bear?

Although bear markets are never any fun, history shows that some types of bears are worse than others. We've already discussed the fact that bear markets accompanied by a recession are usually more severe. However, it is also worth noting that bear markets occurring when the secular trend (i.e. the long-term, big-picture cycle) is positive are shallower than those occurring during a secular bear cycle.

So, if one assumes that a secular bull market began on March 9, 2009, there is reason to be hopeful that the current decline might be nearing an end.

NDR reports that since 1921, there have been 7 bear markets that have occurred during secular bull market cycles. During the 1921-1929 bull, the one bear market that occurred produced a decline of -18.6% on the DJIA. During the 1942-1966 bull, there were 2 bear markets where the Dow lost -23.2% and -16.3% respectively.

In more recent times, there were 3 bear markets during the super bull that romped from 1982 to 2000. In 1984, the Dow fell -15.6%. The crash of '87 saw a dive of -36.1%. And the first Gulf War created a bear loss of -21.2%.

During the current secular bull, the combination of the European bank crisis and the U.S. debt downgrade produced a decline of -16.8% on the DJIA in 2011. And thus far, the DJIA has dropped -14.5% in the current bear market.

In doing some math, we find that the median decline for bear markets that occur within a secular bull framework is around -19%. We should also note that these bears are significantly more shallow than the -31.1% average decline for all bear markets since 1900 and the -34% decline for the bears that occur during secular bear cycles.

Will This Time Be Different?

Armed with the historical data on bear markets that occur within a secular bull, one couldn't be blamed for feeling optimistic. After all, with the Dow's decline currently at -14.5% and the median decline around -19%, one could argue that we are in the latter stages of the move.

The worry, of course, is that this time will be different. Currently stocks are worried that the oil bust will spill over into areas folks haven't thought about yet. However, with many European banks already down more than 30% year-to-date in 2016, the fallout from the oil may be largely priced into the banking sector.

But then again, there are those who argue that stocks are now in a "price discovery" mode and that buyers aren't likely to emerge for more than a few days at a time until valuations in the stock market become more attractive.

So, is the bottom nigh? Time will tell of course. But before I rush off to the airport again, let me leave you with one other observation. In short, I am concerned that the VIX remains at relatively low levels as compared to other important lows in the stock market. In fact, the VIX is currently well below the level seen during last August's selloff and is nowhere near the levels seen at times like 2011, 2009, etc. Hmmm...

The Takeaway...

Let's sum up. First there is the bad news; it's a bear market. But the good news is that if history is any guide, this bear is likely to be placed in the "mini bear" category. However, based on the fact that stocks are still tied to oil and oil has yet to put in a real bottom, it may be premature to equate the recent double-bottom on the charts to the end of the bear. But then again, the longer the 1810 level on the S&P 500 holds, the stronger the bulls' argument becomes.

Publishing Note: I am traveling the vast majority of this week and morning reports will be published as time permits.

Turning to This Morning

US markets are closed today for President's day, but the rest of the world is up and running. Stocks are moving higher in Europe on word of coordinated efforts by the Bank of England and the ECB. In addition, Super Mario is saying he is "ready to act" this morning. So, it really doesn't matter what exactly they are working together on, the idea of global central bank intervention is enough to cause traders to move to the buy button in an oversold market. And on that note, Japan soared overnight on, yep, you guessed it; talk of additional stimulus. As such, it would appear that the next "dead cat bounce" is being set up for tomorrow morning.

Today's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +7.16%
    Hong Kong: +3.27%
    Shanghai: -0.63%
    London: +2.11%
    Germany: +2.92%
    France: +3.38%
    Italy: +3.27%
    Spain: +3.18%

Crude Oil Futures: +$0.35 to $29.79

Gold: -$36.40 at $1203.00

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

10-Year Bond Yield: Currently trading at 1.75%

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

Thought For The Day:

For a man to conquer himself is the first and noblest of all victories -Plato

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

Looking for a "Modern" approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?

Investment Pros: Looking to modernize your asset allocations, add risk management to client portfolios, or outsource portfolio design? Contact

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 the Stock Market Valuations
      4. The State of China's Renminbi

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 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: Moderately Negative
(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: 1810
  • Key Near-Term Resistance Zone(s): 1870

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: 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 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.