Daily State of the Markets

Will The Worry Stick?

Our furry friends in the Bear camp tried their darndest to play the worry card last week. And given the fact that the S&P 500 wound up with the first losing week of the year, I guess we will have to admit that they succeeded to some degree. However, given the “excuses” offered for the two-day dance to the downside and the quick rebound on Friday, I’m not entirely sure that the glass-is-half-empty gang will be able to convince investors that they should be quaking in their boots right now.

On Tuesday, stocks broke to new highs for the current bull market cycle. At the close, it appeared that despite the kicking and screaming by the nattering nabobs of negativity about the overbought condition and all the bad stuff still “out there,” a new leg of the uptrend was about to begin. But after being shut out of the game for just about every session of the year so far, the bears then proceeded to find a way to scare people on Wednesday. And before you could figure out which type of algo was being run, Tuesday’s breakout had turned into a fakeout.

Although the majority of the damage done last week occurred in less than two hours (over Wednesday afternoon and Thursday morning), suddenly fear was in the air. Suddenly traders were no longer confident that the Fed would continue to support the economy. Suddenly there were worries about China. Suddenly traders cared about Europe again. And although the data has been pretty darn good of late, suddenly the U.S. housing market was a concern. Believe it or not; in just two short hours, the worry was back and the bears looked to be making a comeback.

The problem was that if one was objective in their view, the impetus for all the worry was a bit of a stretch. If you will recall, the sell programs started in earnest on Wednesday after the Fed minutes indicated that “many” FOMC members were concerned about the long-term impact of extended quantitative easing. While the argument that the Fed might pull the punch bowl from the QE party sooner than had been anticipated seemed to make sense on Wednesday, by Friday morning the idea seemed almost silly.

Remember that Ben Bernanke’s Fed emphasizes transparency. Thus, if Gentle Ben was contemplating any kind of change, we’d likely hear about it first. In addition, the minutes indicated that (a) there didn’t appear to be any discussion about the potential timeframe for the tapering or outright ending of asset purchases, (b) there was no strategy for said tapering discussed, and (c) there was a rather vigorous defense of the QE programs by the more dovish members of the FOMC (which likely included Chairman Bernanke and Vice Chair Janet Yellen).

Then on Thursday, six of the seven economic reports in the U.S. and the only report in Europe that really mattered, were all weaker than expected. In short, after this batch of data, the idea that the Fed would stop supporting the economy any time soon didn’t have a lot of support.

And finally on Friday, St. Louis Fed President James Bullard told CNBC that the FOMC was likely to keep rates low for a “very long time.” So, the folks screaming that the sky really is going to fall sometime soon because of the Fed really didn’t have a leg to stand on. As such, stocks rallied Friday, with the Dow and S&P both erasing Thursday’s entire decline – and then some.

Whenever stocks move up and down as quickly as they did last week, we assume that one of the moves was “false” or, at the very least, not completely justified. Not surprisingly, the bears will contend that the fakeout move was Friday’s as the Italian election and the sequester is bound to put worry back in the game come Monday. (Italians go to the polls on Monday and March 1st is the deadline for the sequester – although we have learned that a deadline in Washington is really nothing more than a general guideline).

On the other side of the court, our heroes in horns contend that the “B.S. buzzer” could be heard sounding loudly after Wednesday’s decline and that Thursday’s drop was merely technical in nature.

So, will stocks start another dance to the downside this week or resume this year’s joyride to the upside? To be sure, I don’t have an answer as my goal is to merely try to stay in tune with the environment. Thus, I’ll be watching last week’s levels for clues. But from my perch, the question of the day is if the worry will stick.

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

For the first time in 2013, the bulls were tested last week. While there is no telling whether or not the pullback has ended, Friday’s action would seem to suggest that we may have seen the bulk of the decline. At the very least, the action shows that we now have a clearly defined range to work with and that a move above or below these levels will indicate the direction of the next move.

  • Current Support Zone(s) for S&P 500: 1500-1495
  • Current Resistance Zone(s): 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: Neutral
  • 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: 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:  Although our sentiment indicators are starting to back away from the extreme levels seen recently, the indicators as a whole 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:  Chicago Fed Nationaly Activity Index and Dallas Fed Manufacturing.

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 continues to tells us 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…

Futures in the U.S. are following the global markets higher in the early going. Chinese markets rallied despite the weakest HSBC PMI reading in four months while European markets are surging in spite of UK’s debt downgrade. Some suggest the low voter turnout in Italy and the likely selection of a QE dove for the BOJ as catalysts for the move. However, the early exit polls in Italy should start rolling in around 9:00am eastern, which will be something to watch.

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: +0.16%
- Japan: +2.43%
- France: +1.88%
- Germany: +2.48%
- Italy: +2.38%
- Spain: +1.92%
- London: +0.75%

Crude Oil Futures: +$1.07 to $94.20

Gold: +$18.80 to $1591.60

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

10-Year Bond Yield: Currently trading at 1.972%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +8.95
- Dow Jones Industrial Average: +64
- NASDAQ Composite: +20.62

Thought For The Day…

The way I see it, if you want the rainbow, you gotta put up with the rain. -Dolly Parton

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.

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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.

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.

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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.