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Will the Data Bring the Bears Out of Hibernation? image

In case you missed it, the Bureau of Labor Statistics reported Friday morning that Nonfarm Payrolls, which is one of the most closely followed gauges regarding the state of the economy, was a big "miss" for the month of March. While economists had projected that the economy would create 245,000 new jobs last month, it turns out that only 126,000 new jobs were born.

For those keeping score at home, this was the fewest number of new jobs created in 15 months and the second biggest "miss" by analyst estimates since November 2008. What's more the new job totals for the last two months were cut by a hefty 69,000, bringing the average for the first quarter down below 200,000.

Although markets were closed for trading Friday, the reaction in the futures market was swift. Bond yields dove as the 10-year quickly fell to 1.81% after the report (from Thursday's close of 1.904%). And S&P 500 futures dropped a quick 20 points.

At issue here is the concern that the economy, which had been humming along at the end of last year, may be falling victim to more than just the unseasonably cold weather and the West Coast port strike. Our furry friends in the bear camp remind us that the ongoing rally in the U.S. dollar may be impacting more than just the profits of multi-national corporations and that oil's swan dive is also putting a damper on the economy. Those seeing the glass as at least half-empty also point out that the U.S. consumer is most definitely NOT spending their savings from the gas pump.

If you will recall, the economic data has been coming in on the punk side for most of the year. And the only real bright spot has been the Nonfarm Payroll and Unemployment stats. After that one has to look long and hard to find data suggesting the economy is not slowing.

Is it Time for the Bears to Come Out of Hibernation?

So, with the economic data surprising to the downside and the earnings season expected to be uninspiring at best, should one be preparing for the arrival of the bears on Wall Street? Is it time to hunker down in cash and bonds? And should investors be looking for their helmets and curling up underneath their desks again?

Accompanying the fear that both the economy and earnings are about to be placed on the bear side of the ledger is the fact that this bull market is old by just about any measurement standard and stocks are now overvalued on an absolute basis. As such, it is fairly easy to argue that it might be time for one's portfolio to do some ducking and covering.

But... There is No Recession in Sight

While the economic data has indeed been disappointing this year, it is important to remember that the chances of a recession at the present time are about nil. And let's also remember that the biggest, baddest bear markets tend to be accompanied by economic recessions. So, unless there is some sort of external event that would toss the U.S. economy backwards, it is hard to see how something along the lines of 2000-02 or 2008 is going to materialize in the stock any time soon.

Don't Forget About QE

If there is one thing investors have learned over the last 5 years it is that central bank intervention in the form of "quantitative easing" (aka QE) is a powerful prop for what the bankers call "asset prices" (which is Fedspeak for stocks and real estate).

In short, investors now know that money goes where it is treated best. And with trillions in fresh cash being printed by the central banks of the world, investors have learned that an awful lot of those dollars, yen, and now euros have found their way into the U.S. stock and bond markets.

All of the central bank intervention has, at the same time, created a currency war as countries all strive to keep the value of their currency low enough to encourage trade. And in reality, this "era of QE" has put a floor underneath any and all declines seen in the U.S. stock market.

Here's the way the game has been played of late. Traders first begin to fret about this or that and program their computer to sell any and all advances. Stocks then move straight down for a spell (generally between 3 - 7 days) as the "fast money" all moves in the same direction at the same time. But then once the decline in the market reaches 3% to 5%, the buyers return (think QE cash being put to work) and the markets quickly go the other way - again in a straight line.

As such, one can argue that QE has been responsible for all of the V-Bottoms seen in the stock market over the past two and one-quarter years.

Yellen is Still Yellen

Although Friday's Jobs report was indeed an eye-opener, let's remember that the U.S. Fed is still part of the equation in the stock market these days. And the bottom line here is that unless the data suddenly does a U-Turn and begins to surprise to the upside early and often, a June "liftoff" in rates appears to be off the table.

A fair number of analysts have gone so far as to suggest that with data this weak, the Fed is likely to continue to err on the side of caution and rates will stay at zero throughout 2015.

Why does this matter, you ask? While it seems more than a little esoteric to the average investor, one has to keep in mind that the big hedge funds and investment banks still love their carry trades. And as long as rates remain at the zero-bound in the U.S., this little game can keep going. ("Party on, Wayne!")

The Real Question

So, the real question of the day is this. Is there anything different this time around? Will the streak of punk economic data turn out to be anything more than what can be blamed on the weather, oil, and/or the port strike? And will we see the data begin to improve as the tulips begin to pop up through the snow?

And what about earnings? Will analysts actually get it right this time around? I.E. will EPS really decline on a year-over-year basis? And given that everybody on the planet already knows about the impact of the rising dollar, will anybody care?

In sum, what investors are left with at the present time is a fair amount of uncertainty. And with uncertainty comes "sloppy" price action. In short, during times like this, real buyers stand aside and the algos have their way with the indices on a daily basis.

The end result is a volatile, back-and-forth type of environment that is likely to continue until investors get some clarity on the future of the economy, earnings, and the Fed's next move.

Turning to This Morning...

The vast majority of the global financial markets remain closed for the Easter holiday this morning. Most of the reaction in the press over the weekend is focused on the ideas that the economy should show signs of recovery in the near term and that a June rate hike is off the table. However, the overhang from Friday's jobs report remains the focus of today's trading in the U.S. It is also worth noting that the U.S. dollar is pulling back against the major currencies, which is igniting buying in commodities such as oil and gold. Analysts argue that the recent economic weakness means the greenback is overbought and due for a meaningful correction. Finally, stock futures in the U.S. point to a lower 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: -0.19%
    Hong Kong: closed
    Shanghai: closed
    London: closed
    Germany: closed
    France: closed
    Italy: closed
    Spain: closed

Crude Oil Futures: +$1.01 to $50.15

Gold: +$16.40 at $1217.30

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.847%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -13.80
    Dow Jones Industrial Average: -122
    NASDAQ Composite: -28.7

Thought For The Day:

The tragedy of life doesn't lie in not reaching your goal. The tragedy lies in having no goals to reach. - Benjamin Mays

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 U.S. Economy
      3. The State of the Earnings Season
      4. The State of the U.S. Dollar

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 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: 2040
  • Key Near-Term Resistance Zone(s): 2120

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
  • Price Thrust Indicator: Neutral
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Positive
  • Technical Health of 100+ Industry Groups: Moderately Positive

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: Oversold
          - Intermediate-Term: Neutral
  • 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: Moderately Positive

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

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research

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.