Daily State of the Markets

A Sign Of The Times?

This week, I attended the NAAIM (National Association of Active Investment Managers) conference in Dallas. I don’t attend very many of these types of things because when you are on the road, it can be difficult to keep up with the nuances of the market action. And as long-time readers know, I’m kind of obsessed with staying on top of “the what” and “the why” of the market. As any conference goer can attest, the agenda, meeting schedule, and the impromptu gatherings in the bar that can easily lead into dinner and beyond, can all combine to keep you away from the market drivers. But the good news for me this week was that (a) I had a laptop going with a great internet connection the vast majority of the time and (b) not much happened while I was trying to keep our meetings running smoothly.

Although I think the conference wound up being pretty good in the end, it wasn’t without a logistical challenge or two as one speaker missed their flight to Dallas, another was snowed in by Nemo, while another wound up with the flu. Thus, I spent more time than usual scurrying around this week figuring out who was going to go to the podium next. (And for the record, if you are an investment advisor and utilize anything other than buy-and-hope in your practice, you really owe it to yourself to check out NAAIM as it is a great organization full of great people. The website is www.NAAIM.org)

On the plane ride home yesterday, which was an adventure in and of itself since I discovered Wednesday afternoon that my flight was scheduled for MARCH 13th at 7:13pm and not February 13th, I finally had some time to return my focus on the state of the markets. And in short, I came to the conclusion that the action so far this week appears to be a sign of the times and perhaps a good summary of the environment.

The bottom line is this. Yes, stocks are overbought and I agree that the sentiment indicators are worrisome. In addition, I absolutely concur that stocks could pull back for almost any reason at almost any point in time here. But aside from the one decent down day seen on February 4th (where the S&P lost -1.15%), the market has ignored any and all bad news. Dips have been bought almost each and every day. And as such, the bears have been completely shut out of the game.

There is talk of the great “rotation trade” where the underperforming hedgies (and yes, the masters of the universe that charge “2 and 20” are, as a group, underperforming yet again this year) are said to be rotating out of bonds and into “risk assets” (which were once upon a time called equities or stocks). Heck even FINRA got into the act today by issuing a warning about bonds. In an investor alert, the Financial Industry Regulatory Authority Inc. told investors that in the event of rising interest rates, â??outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops.â?

I don’t know about you, but I’m of the mind that when regulatory agencies start telling the public that they could catch their lunch when rates rise, more than a couple managers might also be thinking that it just might be time to do some rotating themselves. And while I don’t have concrete proof of “the rotation” the action in the SPY (SPDR Trust S&P 500 Index ETF) and the IEF (iShares 7-10 Year Treasury Bond ETF) kinda says it all for me as stocks are going up while bond ETFs have been going down. Any questions?

Another sign of the times is the fact that the public appears to be returning to the stock market. While I wouldn’t call it an avalanche of cash, the fund flows data clearly shows that Mr. and Mrs. John Q. Public have been putting money into stock funds lately. As I reported yesterday, new highs in the stock market tend to beget more new highs – and fund flows are a big part of this. So, if the media continues to jump on the bull market bandwagon (yes, AFTER big gains – that’s the way they “roll”) then this trend could easily continue for some time.

Although I have started almost every day recently bracing for a big drop in stock prices (I’m fairly confident that the HFT gang still knows how to hit the sell button early and often if provided with a decent catalyst), the much anticipated pullback simply has not materialized. This despite the fact that just about every “fast money” trader on the planet has been calling for a correction for some time now. As such, I’m also going to call this a sign of the times.

And finally there was the move that Warren Buffett made yesterday. In case you missed it, Mr. Buffett’s Berkshire Hathaway teamed up with 3G Capital to buy HJ Heinz Inc. In what was reported as the largest food company acquisition in history at $28 billion, Buffett and friends provided HNZ stockholders with a one-day boost of nearly 20%.

Why do you care, you ask? For starters, understand that Buffett is a Graham and Dodd oriented “value guy.” Therefore, even my simplistic mind can understand that the gang at Berkshire must have seen some value in the shares of HJ Heinz. And as the thinking goes, if there is value in ‘them thar hills’, then the M&A game might start to pick up again soon – especially if investors perceive that the risk on/off environment that has persisted over the last few years has now morphed into something a little less volatile.

So, is the overbought, buy-the-dip, environment ready to collapse? Or is the fact that stocks have not been able to pull back to any meaningful degree something to consider? Is the fact that the public is buying stock funds again significant? And should we see The Oracle of Omaha’s move as a positive or a one-off? While I could certainly be wrong here and I’m certainly not going to override my models based on this assumption, I am thinking that all of the above is indeed a sign of the times – well, for now anyway.

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 U.S./Global Economy
    2. The State of the European Debt Crisis
    3. The State of “the Trade” (As in the “rotation trade”)

The State of the Charts

While stocks are overbought and overdue for a pullback, any and all intraday dips have been bought over the past eight sessions. And in my book, that says a lot.

  • Current Support Zone(s) for S&P 500: 1513, 1500
  • Current Resistance Zone(s): 1550-65

                                   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: 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 the short- and intermediate-term perspectives.
  • 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:  Empire Manufacturing, TIC Flows, Industrial Production and Capacity Utilization, and University of Michigan Sentiment.

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…

With the exception of Japan, which fell more than 1% on a rebound in the yen, the overnight markets were fairly quiet. Not surprisingly, the U.S. futures are also not showing a lot of movement at this time. Recall that this is an options expiration Friday and that the G-20 are meeting in Russia.

Pre-Game Indicators

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

Major Foreign Markets:
– Shanghai: closed
– Hong Kong: +0.13%
– Japan: -1.18%
– France: +0.09%
– Germany: -0.15%
– Italy: -0.07%
– Spain: -0.56%
– London: +0.04%

Crude Oil Futures: -$0.42 to $96.89

Gold: -$7.60 to $1627.90

Dollar: higher against the yen, euro, and pound

10-Year Bond Yield: Currently trading at 1.996%

Stock Futures Ahead of Open in U.S. (relative to fair value):
– S&P 500: -1.78
– Dow Jones Industrial Average: -5
– NASDAQ Composite: -3.64

Thought For The Day…

Making predictions is difficult, especially about the future. – Yogi Berra

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

David D. Moenning
Founder and Chief Investment Strategist

Positions in stocks mentioned: none

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 the Chief Investment Officer at Sowell Management 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 29 years.