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Identifying the drivers of stock market action can be helpful in determining when a move is overdone and due to reverse. For example, the various wannabe crises that have cropped up over the past two years have all fizzled out in short order as investors realized there was nothing major to worry about. As a result, the dips have been bought on a consistent basis.

What makes the current corrective phase interesting is there is no single catalyst or "crisis" that has led to the selling seen over the past 3+ weeks. And respected stock market analyst Lazlo Birinyi suggested on Tuesday that this situation, in and of itself is problematic.

While the market action on an intraday basis has been exceptionally volatile of late (the CBOE Volatility Index hit the highest level since late 2012 yesterday), the big moves up and down each day have generally not been consistently tied to any specific headline.

With the exception of the various announcements tied to the Ebola situation, the market has been largely moving of its own accord. Which brings us to this morning's key point. Traders are not necessarily concerned about one specific issue, but rather a host of concerns that can be titled, The 5 E's.

E is for Ebola

There has been one death and now two additional cases of Ebola reported in the United States so far. However, concerns about an uncontrollable outbreak have caused investors to fret about the economic impact of such an event and more specifically how the fear of Ebola could impact what is projected to be a strong holiday shopping season.

However, investors (especially long-term investors) should keep in mind that Ebola is NOT an airborne disease. In short, the only way to catch Ebola is via contact with bodily fluids. And while the virus can stay alive on surfaces for a period of time, the fact that this disease in not transmitted through the air means that a huge outbreak is unlikely.

Investors should recognize that market fears over health issues tend to flame out quickly. Past examples of this include SARS, swine flu, and bird flu.

The bottom line here is that investors believing that Ebola is a key market driver should most definitely buy the dip here.

E is Also for Europe

Unless you have blocked it from your mind, you may recall that the stock market remained fixated on the European debt crisis from the summer of 2009 through most of 2012. During this period, the stock market saw three major corrections that were tied to the crisis, with the 2011 event being classified by some as a brief or "mini" bear market.

S&P 500 - Weekly

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The key at this stage of the game is fear that the European debt crisis, which was never actually fixed, will return. Remember, Super Mario (ECB President Mario Draghi) has only talked about "the bazooka," he has never even loaded up the weapon at this point. As such, analysts fear that unless a QE program begins - and soon - traders could wind up once again watching every headline out of the Eurozone.

It is also important to note that this time around the fear of what might happen in Europe is tied to economic weakness. No, make that surprisingly weak economic data out of Germany, which is the EU's biggest and purportedly strongest economy.

The bulls contend that fears here are overblown. They argue that the recent weakness is tied to economic sanctions imposed on Russia as well as the seasonal shutdown of auto plants for retooling. As such, the data coming out of Europe and Germany will be heavily scrutinized moving forward.

E Also Stands For Energy

In case you haven't been watching closely, oil has been falling off a cliff lately. (See the chart below of the United States Oil Fund ETF - USO).

The bears contend that the big dive in oil, which has taken prices down near the lows seen in 2011 and 2012, is due to concerns about global economic weakness. This would seem to fit as the drop in oil coincides with the weak economic data out of Europe and China.

As you might suspect, stock market bulls see things a bit differently. The argument from the glass-is-half-full camp is that the swoon seen in energy is really tied to the sudden glut of oil supplies. In short, OPEC says oil under $80 is just fine with them. Why? Easy - analysts contend that supplies produced by the U.S. shale industry are too expensive at these levels. So, it appears that OPEC is simply opening up the spigot.

In reality, this is probably a 60/40 or a 70/30 situation with the larger percent of the decline in oil being tied to supplies and the smaller amount tied to concerns about global growth.

E is for Easing (And Economy)

Another "E" that is causing concern in the stock market is tied to the central bankers of the world and their monetary easing programs.

While the U.S. is winding down the Q"E" program this month and the Bank of England is talking about raising rates in the future, the rest of the world is still in an easing mode.

Why is this a worry, you ask? The minutes from the most recent FOMC meeting along with multiple speeches from U.S. Fed governors reveal that the Fed is worried about global growth. So much so that there was talk about another round of QE being a possibility here in the U.S. And while the stock market has been lovin' QE for several years now (all that money being printed has to go somewhere and it has been winding up in the U.S. stock and bond markets), the fact that the worries are now about the global economy, well, you get the idea.

And E is Also for Earnings

The fear here is that all of the concerns about the other "E's" will wind up hurting earnings - if they haven't already. Frankly, this one seems a bit far-fetched at this stage of the game. But while the bulls point out that S&P 500 earnings are at record levels, the key thing to keep in mind is this was also true in 2000 and 2008.

Summing Up

The current decline in the S&P 500 is obviously a correction. Of course, a correction of "what" must remain the eyes of the beholder. And at -6.79%, the current decline is hardly anything to get overly upset about. However, the fact that the damage in the smallcaps is significantly more severe coupled with the 5 "E's" the market is struggling with suggests that the long-awaited "meaningful correction" in the U.S. stock market may indeed be here.

Turning To This Morning

There are two primary issues being highlighted this morning. First is another confirmed case of Ebola in Texas. And second is the surprisingly weak economic data in the U.S. While reports of another Ebola case caused U.S. futures to hiccup, the reports on PPI, Retail Sales, and the Empire Manufacturing Index were nothing short of shocking and have caused a rather negative reaction. First, on the inflation front, PPI fell again and is now up just +1.6% on a year-over-year basis. The key here is the Fed is looking for 2.0%. Next, the Empire Manufacturing Index, which has surged last month, nosedived this month and was well below expectations. And finally, Retail Sales in the U.S. fell for the fifth time in the last six months. The bottom line here is simple, suddenly economic worries in the U.S. are back and U.S. stock futures are pointing to another decline at the open.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +0.92%
    Hong Kong: +0.40%
    Shanghai: +0.62%
    London: -1.57%
    Germany: -2.10%
    France: -2.28%
    Italy: -2.91%
    Spain: -2.03%

Crude Oil Futures: -$1.51 to $80.33

Gold: +$1.50 at $1235.80

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

10-Year Bond Yield: Currently trading at 2.055%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -20.35
    Dow Jones Industrial Average: -133
    NASDAQ Composite: -38.95

Thought For The Day:

It is the mark of an educated mind to be able to entertain a thought without accepting it. -Aristotle

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Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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