Posted |

On Friday, we noted that the S&P 500 had recently experienced two 5-day declines within ten days of the first one starting. Although the number of historical occurrences are few (the pattern had only been seen 4 other times in history) and the result would seem to be counterintuitive, we also noted that such price action has tended to be bullish for stocks over the ensuing weeks and months.

In fact, the S&P 500 was significantly higher in three of the four prior occurrences. However, the fourth prior case of double 5-day declines saw prices move lower - to the tune of about 5 percent - over the next three months. The key here was in this case, a third 5-day decline quickly ensued.

Therefore, one could argue that unless we see another 5-day decline or the S&P move below the January 15 low, stocks ought to move higher from here.

One could also argue that over the past two months, the market has been consolidating the big gains seen during the mid-October/November rally, which produced gains of more than 11%. And given that stocks tend to exit a sideways consolidation pattern heading in the same direction they were moving when the pattern began, the bulls tell us that new highs are likely.

One-Way Streets

It is also worth noting that the vast majority of the market's trends have been one-directional lately - meaning that prices have tended to move in a straight line before reversing and going the other way.

S&P 500 - Daily

View Larger Image

This has been especially true since the beginning of December. Since the modest new all-time high hit on 12/5, stocks effectively moved straight down for seven days, then straight up for the next eight days, and then the 5-day declines began. Then just last week, stocks rallied for four consecutive days.

The question, of course, is why has the action been so schizophrenic? Why have stocks moved straight up for a few days and then at the drop of a hat, proceeded to move straight down?

Part of the answer is likely the millisecond trend-following game played by the big boys and their fancy computer toys. However, another key is that there are an awful lot of moving parts in the market these days.

Lots of Moving Parts

The theory here is that traders tend to lock onto a particular theme and then ride it for a while. Well, until the next theme arrives, that is.

The crash in oil prices is a perfect example of this idea.

US Oil Fund ETF (NYSE: USO) - Weekly

View Larger Image

As the chart above clearly illustrates, the crash in oil prices has not abated. And there have been days/weeks this year in which the movement in the stock indices has been tied directly to the price of oil intraday. As we've discussed, this makes sense to some degree as no one really knows what the eventual impact of the crash will be. So, if you are worried about negative consequences, then following the price of oil is logical.

If nothing else, traders are known for being easily distracted. So, the oil crash theme has been interrupted several times lately with such things as stimulus in China and the big, new QE program (aka Mario Draghi's bazooka) just launched in Europe.

So, as we enter a fresh week of trading, the question of the day is what will traders focus their algos on now? Will it be the big anti-austerity party win in Greece? The renewed conflict in Ukraine? The state of the earnings season (which appears to be lackluster so far)? The projected liftoff in rates here at home? The impact of the rising dollar? China? The Russian ruble? The economy in Europe? Or will it simply be all about oil again?

Given that the QE program in Europe doesn't start until March, it would be logical to assume that traders may want to focus their attention elsewhere for a while. So, in my humble opinion, this is no time to be asleep at the wheel and it will be important to identify the drivers of the price action this week.

In sum, investors may want to continue to run with the bulls here - unless their opponents can find a way to push the deflated ball below the January lows. Stay tuned...

Turning to This Morning...

Overnight futures initially reacted negatively to the news that the anti-austerity Syriza party won big in the Greek election. With Alexis Tsipras likely to become the new PM in Greece, traders are concerned about the party's pledge to write-off up to half of Greece's debt. Next up on the worry list today is the conflict in Ukraine. The situation has taken recent turn for worse as rebel forces launched an assault on port city of Mariupol on Saturday. Kiev said thirty civilians were killed in shelling and that the Russians are increasing their presence in terms of troops and equipment. And then there is oil, which, while volatile, had been falling in the early going. Surprisingly, European bourses are not falling in response to the Greek election. Here at home, U.S. futures have now erased all of the early losses and currently point to a flat open on Wall Street.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.24%
    Hong Kong: +0.24%
    Shanghai: +0.93%
    London: -0.04%
    Germany: +0.78%
    France: +0.25%
    Italy: +0.40%
    Spain: +0.70%

Crude Oil Futures: +0.40 to $45.99

Gold: -$6.30 at $1286.30

Dollar: lower against the yen, euro, and pound

10-Year Bond Yield: Currently trading at 1.817%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +0.18
    Dow Jones Industrial Average: -13
    NASDAQ Composite: +4.51

Thought For The Day:

"Give me six hours to chop down a tree and I will spend the first four sharpening the axe" - Abraham Lincoln

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 Oil Crash
      3. The State of the U.S. Economy
      4. The State of the Global Economy

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 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 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: 1991
  • Key Near-Term Resistance Zone(s): 2075-90

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
  • Price Thrust Indicator: Neutral
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Neutral
  • 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: Moderately Overbought
          - Intermediate-Term: Moderately 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: Positive

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
Be Sure To Check Out the NEW Website!

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 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, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., a registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage and HCM 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.