Daily State of the Markets

It May Be Frustrating, But…

It is said that Ms. Market will at times do whatever she can to frustrate as many investors as possible. So my assumption is that after a rip-roaring start to 2013 and only a single down day worth mentioning, a great many investors are frustrated these days. Those underinvested bulls are likely frustrated that they haven’t had the opportunity to “buy the dip” that everyone has been yammering on about lately. And of course, the bears have to be more than a little frustrated with the fact that they’ve been almost completely shut out of the game since the end of December.

If I had to place a bet, I’d put my money on the glass-is-half-empty gang to win the current round of the frustration game. After all, it appeared that our friends in fur had a stellar opportunity to start dancing to the downside on Monday. Stocks were coming off a fresh new high, the indices had become overbought, the trend was looking extended, sentiment was starting to get a bit giddy, and Europe was suddenly tanking. And I can tell you with absolute certainty that my friends in the bear camp were licking their chops at a chance to do some damage.

But before you could figure out “who was who” in the current drama playing out across the pond, the downside pressure evaporated. Just when you thought the bulls would step aside and let their opponents have a few days in the sun, the indices find themselves back to within spitting distance of new bull-market highs. As such, frustration is very likely the word of the day in the bear den right now.

This is not to say that the bears won’t come right back sometime soon. Remember, this bunch is nothing if not relentless and Europe IS in play again right now (there is an ECB meeting today, an EU summit this week, a scandal in Spain and an election coming up in Italy). But, as an objective observer of the action, I’ve got to say that the bulls remain in possession of the ball.

Everyone agrees that stocks are overbought. And most technicians will attest to the fact that the sentiment readings are now solidly in the danger zone. Therefore, the expectations among a great many market participants are that stocks simply must pull back in the near term. But this is where the frustration comes in.

You see, before the stock market was controlled by the headlines, news, and rumors from across the pond and before every tick in the euro was met with an algorithm for the S&P 500, stocks needed a reason to decline. And while it may be frustrating for the bears to hear, the bottom line is there doesn’t appear to be a reason for stocks to pull back at the present time. Remember, an overbought condition, in and of itself, is not a reason for stocks to fall.

Yet on the other side of the aisle, the bulls seem to have a handful of reasons to keep on keepin’ on. The economies of the world are improving, housing is rebounding, earnings aren’t half bad, valuations are fair, interest rates are low – and likely to stay that way for some time yet – and inflation is nowhere to be found. So, as long as Europe doesn’t implode and/or the folks in Washington don’t do something idiotic, it would seem that from a big-picture standpoint, the path of least resistance for the market is up. Especially with the public deciding to return to the game and the hedgies rotating out of the safety play of bonds and into stocks.

However, the simple fact of the matter is that stocks have indeed run a long way in a short period of time. And as such, the bulls have earned a rest. So, IF (note the use of capital letters) the bears can find a catalyst, a pullback to take some of the giddiness out of the move would be logical.

But the key point this morning is that unless the environment were to suddenly change, any pullbacks will likely be short and shallow as those underinvested and frustrated bulls should continue to buy the dips. Therefore, while it may be frustrating for both teams, sideways just might be the new down for a while.

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/blindsided 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 the European Debt Crisis
    2. The State of the U.S. Economy
    3. The State of the “Rotation Trade”

The State of the Charts

It appears that the Dow and S&P are currently trading in a very tight range. Unless the market breaks above or below the near-term support/resistance zones, this would suggest that we’ve got a consolidation phase on our hands. The bottom line is as long as the S&P is above 1495, we’d continue to side with the bulls.

  • Current Support Zone(s) for S&P 500: 1495
  • Current Resistance Zone(s): 1515

                                   S&P 500 – Last 3 Months
Loading chart © 2001 TickerTech.com

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
  • Intermediate-Term Trend: Positive
  • Long-Term Trend: Positive

                                   S&P 500 – Last 12 Months
Loading chart © 2001 TickerTech.com

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

  • Overbought/Oversold Condition:  The S&P remains overbought from both a short- and intermediate-term perspective.
  • Market Sentiment:  Our sentiment indicators remain solidly negative.

The State of the Economy

The overall health of the economy is a major input to the stock market. In order to help you stay up to date on all the important economic data, we publish a “State of the Economy” roundup each day. The report summarizes the day’s important economic data in an executive summary, quick-read format and then provides links to the most recent data, sorted by category. Here is a snippet from the recent report:

Most Recent Key Economic Releases:

Today’s economic releases include:  Weekly Jobless Claims, US Productivity and Unit Labor Costs, Bloomberg Consumer Comfort, and Consumer Credit.

Here is the latest State of the Economy Report

You can also sign up to receive an email alert whenever the “State of the Economy” report is published.

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 because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets 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.

Weekly State of the Market Model Reading: Positive – This tells us that we should continue to give the bulls the beneift of any doubt.

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

From The Equity Research Department

At StateoftheMarkets.com, our goal is to provide investors with everything they need to be more successful in the stock market. Here are the latest reports from our research department:

Remember to sign up for email alerts whenever our research department issues a report.

Turning To This Morning…

The overnight markets were mixed with Asia down and Europe up. Traders are waiting on the ECB rate announcement and Draghi’s press conference as well as the economic data to be released here in the U.S. As such, futures are trading close to breakeven at this point.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -0.64%
- Hong Kong: -0.34%
- Japan: -0.93%
- France: +0.33%
- Germany: +0.47%
- Italy: +0.98%
- Spain: +1.15%
- London: -0.23%

Crude Oil Futures: +$0.36 to $96.98

Gold: -$1.60 to $1677.20

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

10-Year Bond Yield: Currently trading at 1.987%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -0.22
- Dow Jones Industrial Average: +0.50
- NASDAQ Composite: -2.80

Thought For The Day…

If you want to live, give up your foolishness and let understanding guide your steps. -Proverbs 9:6

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

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

Positions in stocks mentioned: GDOT

Wondering what your short-term risk management strategy should be right now? Let Dave M. walk you through how his Daily Decision system works (a 100% rules-based system designed to guide your risk management strategy) Click Here to see Daveâ??s latest video presentation on the â??Adaptiveâ? Daily Decision System

For up to the minute updates on the market’s driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenningâ??s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites 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. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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 â??as isâ? 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.

The information contained in our websites and publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

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About the Author

David Moenning is a the Chief Investment Officer at Heritage Capital Management. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.