Good morning. It looks like it will be another very bumpy ride on Wall Street today as U.S. stock futures are down again in the early going. There are three issues in play this morning that warrant your attention: The Chinese yuan, a successful hydrogen bomb test in North Korea, and oil.
The big surprise overnight wasn't the report that there had been a large earthquake (5.1 on Richter scale) in North Korea, but rather a later headline that the quake appeared to be "man made."
North Korea's KCNA reported the country had successfully tested a hydrogen nuclear bomb. According to the state-run news agency, North Korea tested a miniaturized hydrogen nuclear bomb "in the most perfect manner," putting it in possession of hydrogen bomb capability, which it described as "the most powerful nuclear deterrent."
Apparently the country is referring to the bomb as "the H-bomb of justice" and sees the nuclear capability as "protection from the ever-growing nuclear threat and blackmail by the U.S.-led hostile forces." Ughh.
Next up is the issue of the Chinese yuan. According to reports, the PBoC fixed the Chinese currency at a fresh five-year low against the dollar at 6.5314, compared with 6.5169 on Tuesday. Reuters notes that the offshore yuan price slumped to 6.7250 in late trading, which was the lowest level in five years and represented a record spread to the onshore rate. The point here is the idea that the PBoC may be losing control of the yuan.
The Yuan weakness is also being cited as an ongoing major concern for global markets. At issue here is the fear that a protracted devaluation of the yuan could unleash another wave of deflationary pressures in the global economy. Super.
And finally there is oil - the bearish input that just won't seem to go away. This morning, crude is under heavy pressure again as supply concerns continue to weigh.
Digging into the issue, we find that although the API data overnight showed a 5.6 million barrel drawdown in inventories, Cushing stockpiles grew by another 1.4 million, which is a new record high inventory level.
And then while it may sound counterintuitive, the geopolitical tensions between Saudi Arabia and Iran actually continue to work against oil prices. The latest flare-up only seems to further reduce the already-low probability of OPEC intervention to reduce supply. And finally there is the fact that Iran hopes to put more oil on the market in the near future when economic sanctions are lifted.
Turning to the U.S. stock market, U.S. futures are pointing to a tough open here at home. The S&P futures are currently off more than 30 points (about 1.5%), which would push the venerable index below the near-term support and into never-land on a chart basis.
S&P 500 - Daily
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The bears contend that there is no real support on the charts until you reach the August/September lows. However, it is worth noting that there is still a gap on the S&P chart at 1951, which could attract the attention of traders if reached.
The bottom line appears to be that the bears have the ball to start the day. However, as the saying goes, "It's where we close that matters." So, stick around, this ought to be interesting.
Publishing Schedule For 2016: With my Chief Investment Officer gig at Sowell Management Services (a registered investment advisor responsible for north of $600 million in client assets) comes a myriad of tasks and responsibilities, as well as frequent writing assignments, speaking engagements, video recordings, advisor calls/meetings, and industry presentations. Because of this, the time available to pen a "daily" missive is becoming more elusive (and nearly impossible when I'm on the road). And since my primary duty is to keep our investing strategies up to snuff and on the right path (or "out of the ditch" as William Sowell likes to say), my plan for the upcoming year is to publish my oftentimes meandering morning market missive two to three times a week - or when market circumstances dictate. For most, this will likely be a more appropriate diet of "Daily State" reports! But since there are loyal readers that will check in to make sure everything is okay in my world if I miss a day, I thought it would be best to publish my intentions for the "State of the Market" reports in 2016. Finally, I'd like to say thank you to all those who make this report a part of their morning routine. It is my sincere hope that readers will continue to find these reports helpful in some small way.
Today's Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -0.98%
Crude Oil Futures: -$1.19 to $34.78
Gold: +$8.10 at $1086.50
Dollar: higher against the yen, euro and pound
10-Year Bond Yield: Currently trading at 2.195%
Stock Indices in U.S. (relative to fair value):
S&P 500: -32.91
Dow Jones Industrial Average: -272
NASDAQ Composite: -84.18
Thought For The Day:
We make a living by what we get, we make a life by what we give. - Winston Churchill
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
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 Global Growth
2. The State of China's currency
3. The State of Global Central Bank Policy
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: Neutral
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: 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: 1990, 1950
- Key Near-Term Resistance Zone(s): 2040-50
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): Neutral
- Short-Term Volume Relationship: Negative
- Technical Health of 100+ Industry Groups: Neutral
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: Oversold
- Market Sentiment: Our primary sentiment model is Neutral
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: Neutral
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.
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 nit 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. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.
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.