The Consolidation Continues, But We're Watching...
The President's new, more aggressive campaign against ISIS appears to be spooking investors in the early going today. Recall that it was less than two weeks ago when Obama said "we don't have a strategy yet." This appears to have changed as the President laid out an expanded campaign to “degrade and ultimately” destroy the Islamic State including targeted air strikes in Syria in last night's address. Traders are also watching the ongoing decline in oil prices (Crude futures currently trading down at $90.59) as well as softer inflation data out of China (China CPI growth moderated to 2.0% y/y in August from 2.3% in July, which was below the consensus for 2.2% rate of increase). Stock markets are down fractionally across the board in Europe and U.S. futures point to a weaker open on Wall Street.
Current Market Outlook
Although the major indices bounced on Wednesday, concern about the Fed changing course at this month's meeting as well as the weakening economic outlook in Europe appears to be keeping enthusiasm for buying stocks in check. The primary issue facing stocks at this time is the debate over when the Fed will alter their guidance on monetary policy. Several sources have reported this week that there is growing discomfort internally at the Fed over the "considerable time" verbiage relating to how long rates will remain at zero after QE ends. The crux of the issue seems to be that the recent run of stronger-than expected economic data has led Fed Chair Yellen and others in the FOMC to acknowledge the possibility they may need to raise rates sooner than they thought just a few months ago. In short, this focus appears to be driving the current consolidation phase. But for now, our market models remain moderately positive.
Looking At The Charts
When dealing with trading ranges in the markets, the tricky part is to determine when the range has been broken versus when the range has merely been expanded. Given the tightness of the current range on the S&P 500, one can argue that Tuesday's dance to the downside as well as yesterday's intraday move down did just that. Yesterday's early decline also tested the support zone in the 1980-85 range. As such, yesterday's lows represents important technical levels in the indices. Should those lows be broken to the downside, you can rest assured that further technical selling will come in. But for now, we can argue that this remains a range-bound consolidation phase.
S&P 500 - Daily
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +0.76%
- Hong Kong: -0.17%
- Shanghai: -0.27%
- London: -0.47%
- Germany: -0.05%
- France: -0.33%
- Italy: -0.26%
- Spain: -0.46%
Crude Oil Futures: -$1.08 to $90.59
Gold: -$1.40 at $1243.90
Dollar: lower against the yen, euro and pound.
10-Year Bond Yield: Currently trading at 2.518%
Stock Indices in U.S. (relative to fair value):
- S&P 500: -7.04
- Dow Jones Industrial Average: -43
- NASDAQ Composite: -14.02
Thought For The Day:
The oldest, shortest words - 'yes' and 'no' - are those which require the most thought. -- Pythagoras
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 Fed/ECB Policy
2. The State of the Geopolitical 'Issues'
3. The Outlook for U.S. Economic Growth
4. The Level of Interest Rates
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: Moderately Negative
(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: 1980-85(ish)
- Key Near-Term Resistance Zone(s): 2011
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
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: 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: Neutral
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: Neutral
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: Positive
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: Neutral
- Intermediate-Term: Neutral
- Market Sentiment: Our primary sentiment model is Negative.
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: Moderately 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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