Daily State of the Markets

“Let Me Get This Straight…”

To be honest, making sense of the stock market action (which is the primary objective of my oftentimes meandering morning market missive) can be challenging at times. For example, one minute the focus is on the economy and the next it’s on the Fed. On the subject of Bernanke’s Bunch, one day the worry is that the Fed is going to pull the punch bowl from the QE party and the next, well, the data indicates that QEinfinity is still the name of the game. Oh, and just in case that isn’t confusing enough, we’re told that all of the above is bad. Ughh.

In case you are not aware, my son Don, who has a degree in economics and is definitely much smarter than I am, has been working with me for more than five years now. On Wednesday afternoon, he pinged me with a somewhat sarcastic comment on the state of the market action. “Let me get this straight,” he said. “Stocks are going down on fears that the Fed might be able to start removing their stimulus from the economy. But if the economy is improving – so much so that the Fed needs to take action – doesn’t that mean that profits would likely improve as well? And correct me if I’m wrong, but isn’t that a good thing?”

Although he knows full well that markets “trend” on the fundamentals of the market but “trade” on prevailing sentiment, my son still has trouble at times separating his economics background from what I loosely term “stock market logic.” I explained that a certain segment of the “fast money” crowd believes that the only reason that stocks have been rising is due to the liquidity being continuously pumped into the economy by the Bernanke cavalry. Thus, if the Fed even hints at turning off the spigot, this group of market masters will fall all over themselves to avoid “fighting the Fed.”

While he definitely wasn’t buying the validity of the explanation, he did understand that sometimes it is “the trade” of the day that matters most. So, if traders were selling on fears that interest rates were going to rise, then that was simply the reality of the day.

However, yesterday’s action caused this discussion to be resurrected. In case you missed it, there were seven economic reports released in the U.S. on Thursday and one pretty big report in Europe. In short, the reports didn’t exactly paint a picture of robust economy. The preliminary PMI’s in the Eurozone were weak. Weekly Jobless claims rose. The Flash PMI was below consensus. Bloomberg’s Consumer Comfort rose but there was worry about oil prices. The LEI was light. Existing Home Sales were in line. And the Philadelphia Fed Business Outlook index was an abject disaster.

After the slew of reports, my son sauntered into my office and said, “Let’s talk about that Fed pulling the punch bowl thing… It appears that the general tone of today’s reports is negative – especially that Philly Fed number. And doesn’t weak economic data mean that the Fed isn’t likely to stop the QE injections? So, based on your explanation of yesterday’s action, shouldn’t stocks be rising on this “bad” news? And since stocks are getting hit again, can the bears really have it both ways?”

I laughed, complimented him for the analysis, shrugged my shoulders and said, “Yes, it appears that the bears can actually play both sides of the fence on this one.” I then proceeded to tap dance a bit with my answer. “Sometimes, the reason behind a move just doesn’t matter. Traders have been expecting a correction for quite some time now and thus, we are in an environment where any reason can be a good enough reason to sell.”

I added that the vast majority of the down move so far had been algo-driven and that while advancements in computing have been impressive over the last few years, computers still don’t have the ability to reason. And with algos racing other algos to get on the right side of the move and all the computers following the same trends on a millisecond basis, the reason behind this type of move really doesn’t have to make a lot of sense.

My conclusion was that stocks were overbought, sentiment had gotten too optimistic, and that the market was “set up” for a fall. As such, almost any excuse was good enough to start the decline. However, I suggested that the two-day dance to the downside was probably enough for a “just because” type of move and that the market’s true focus should become apparent in the next couple of days.

So, if there are indeed strong concerns about the Italian election, the sequester, the economy, the Fed, housing, China, and/or anything else you can think up, those fears will likely dominate the action and the decline will continue. Thus, I’m of the mind that we need to watch the support zone at S&P 1500 very carefully as this area might be a spot where the bulls say “enough is enough.” However, if this line in the sand is breached, the bulls might be in for some additional discomfort. My only hope is that the next discussion with my son doesn’t start with, “Let me get this straight…”

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 Fed Policy
    3. The State of the “Sequester”

The State of the Charts

After sprinting higher with only minor interruptions since New Year’s eve, the bulls are finally being tested. And while the sentiment has gone from optimistic to pessimistic in a matter of 48 hours, the bottom line from a technical standpoint is that support in the 1500 range held yesterday. Of course, that could change in a hurry. But for now, the technical picture isn’t too bad.

  • Current Support Zone(s) for S&P 500: 1500-1495
  • Current Resistance Zone(s): 1515, 1530

                                   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 Negative
  • 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: Moderately Negative
  • Price Thrust Indicator: Moderately Positive
  • Volume Thrust Indicator: Moderately Negative
  • 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 is now moderately oversold from a short-term perspective and remains moderately overbought from an intermediate-term view.
  • Market Sentiment:  Our sentiment indicators are starting to improve a little, but remain negative on balance.

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:  After yesterday’s barrage of data, there are no reports scheduled for release today.

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 – Our weekly model tells us that we should continue to give the bulls the benefit 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 combination of a rally in Japan, a better than expected IFO Business Climate reading in Germany and St. Louis Fed President Bullard telling CNBC that Fed policy will remain easy for a long time has created a rebound in U.S. stock futures. The question, of course, is if it can last.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -0.51%
- Hong Kong: -0.54%
- Japan: +0.68%
- France: +1.66%
- Germany: +0.88%
- Italy: +1.37%
- Spain: +1.34%
- London: +0.71%

Crude Oil Futures: +$0.39 to $93.23

Gold: +$1.60 to $1580.20

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

10-Year Bond Yield: Currently trading at 1.984%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +8.63
- Dow Jones Industrial Average: +79
- NASDAQ Composite: +15.11

Thought For The Day…

There is no pillow so soft as a clear conscience. -French proverb

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: 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.

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.

Employees and affiliates of HCM and Ridge 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 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.

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.