Daily State of the Markets

Yep, We’re Back To That…

To the casual observer, Thursday’s little decline in the stock market may not have looked like much. After all, the Dow dropped just 42 points (or -0.3%), the S&P fell -0.18%, and the NASDAQ was off a mere -0.11%. And given that neither the upper nor the lower end of the current trading range was breached, on the surface it looked like just another day of consolidation.

However, I spend the vast majority of my analytical capital looking at the “why” and the “how” of the market’s moves. To me, how or why a market moves is infinitely more important than the “what.” For example, yesterday’s measly drop of 40 Dow points doesn’t really tell the whole story. You see, from about 9:35 am eastern until about 11:45 am the decline was anything but measly. In fact, when there that many gaps down on a one-minute chart over a brief time span, one might call the action downright ugly.

What was interesting (well, to me anyway) is the fact that the S&P 500 dove approximately 1% in about 30 minutes on… wait for it… oh, that’s right, nothing. There were no economic reports, no headlines, and no surprises from across the pond. Sure, the popular press talked about Super Mario’s suggestion that the Eurozone economy wasn’t going to improve much until later this year as a catalyst. But seriously, is the idea that the Eurozone might continue to struggle for a few more months really a surprise to anyone?

We also heard some people talking about the “uncertainty” created by the delay of the latest and greatest EU Summit meeting (where exactly nothing is expected to be accomplished). And of course, the scandal in Spain and the election in Italy both continue to be of concern to some. However, when markets dive as fast as they did yesterday morning, there is usually something new to trigger the move. And the bottom line is there was nothing new to report on either subject yesterday.

No, if you wanted to understand what caused the stock market indices to fall off a cliff for a bit yesterday morning, you needed to dig deeper and to understand what causes the big boyz and their computer toys to take action. So, without further ado, I’m going to suggest that it was algos tied to the movement in the euro/dollar relationship that was to blame for the pyrotechnics.

With ECB President Mario Draghi effectively saying during his press conference that the euro was too high (although he also mentioned that the “appreciation in the euro is a sign of confidence returning”), traders started selling the euro in earnest. In turn, those same traders appeared to be buying the dollar. Then when you layer the comment about the economic weakness sticking around in the Eurozone for a while, well, that currency trade appeared to get very popular, very fast.

My point this fine Friday morning is that the big hedge funds and the Wall Street banks that can play this little game returned to a familiar trade yesterday: dollar up = stocks down. If you will recall, this trade was very popular during the summers of 2010-2012 whenever the Eurozone crisis raged. The thinking was that if the euro was falling it meant there was trouble in the Eurozone. In response, currency traders piled into the dollar as a “flight to safety.” And to finish off the trade, if folks were looking to the dollar for safety, then taking “risk off” by selling stocks made sense. So, with the dollar spiking (and the euro diving), stocks were hit with sell program after sell program for a period of about 45 minutes.

However, just before the lunch bell, the euro stabilized and the dollar’s rise leveled off. And just like that the sell algos stopped and the dip-buyers returned as the S&P managed to gain back about 10 points before the closing bell rang.

The question, of course, is if yesterday’s euro/dollar trade is likely to continue. If it does, then taking some risk off the table right about now certainly makes some sense. And then when you mix in the fact that stocks remain overbought, that February is traditionally a weak month for stocks, that sentiment is a bit too positive, that insiders are selling stocks in a big way right now, and that just about everybody is now looking for a correction, it is easy to see that stocks might be vulnerable right now.

But the key (again, for me anyway) is that the euro/dollar trade was able to knock the indices down very fast yesterday. So, since that “trade” was so effective for a while on Thursday, we’d best keep our eyes open and our ear to the ground for anything negative coming out of Europe. Yes, we’re back to that.

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 Dollar/Eur “trade”
    3. The State of the U.S. Economy

The State of the Charts

Although there has been some intraday pyrotechnics lately, we continue to see this as a consolidation phase. Our momentum indicators are indeed waning, but as I’ve been saying, the bottom line is as long as the S&P remains 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 moderately overbought from a short-term perspective and very overbought in the intermediate-term view.
  • Market Sentiment:  No change: 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:  Trade Deficit and Wholesale Inventories.

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…

Decent economic data continued to support China overnight while improving sentiment towards Europe has put a bid under the bourses across the pond. Here in the U.S., the futures are hovering around breakeven at the present time as the Northeast braces for “Nemo”.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: +0.57%
- Hong Kong: +0.16%
- Japan: -1.30%
- France: +0.58%
- Germany: +0.23%
- Italy: +1.05%
- Spain: +1.05%
- London: +0.44%

Crude Oil Futures: +$0.36 to $96.19

Gold: -$0.30 to $1671.00

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

10-Year Bond Yield: Currently trading at 1.942%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +1.26
- Dow Jones Industrial Average: +5
- NASDAQ Composite: +4.60

Thought For The Day…

Can you live in that moment… with clear eyes & love in your heart, with joy in your heart? If you can you’re perfect. -Friday Night Lights

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.

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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.

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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.