David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. 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.

Daily State Of The Markets: Stuck In The Middle With You

The question of the day would seem to be if the stock market’s fundamentals, which look to be faltering a bit lately, will trump the tailwinds provided by the money printing programs of the BOJ and ECB.

Stocks rallied in front of the launch of the latest QE program as this time, it was the ECB’s turn to announce they would be turning on the printing presses. And by now, it is clear that traders are well versed in the QE play book. As we’ve mentioned a time or two, a great deal of the freshly minted currency (and remember, it matters little what color the cash is these days) printed by central banks has wound up in the U.S. stock and bond market. So, with the ECB committing to printing money to the tune of more than €1.1 trillion over the next 19 months, the fact that stocks were advancing prior to the announcement wasn’t exactly surprising.

However, there may be a fly in the ointment here as stock market fundamentals are suddenly in question.

Punk Earnings Not Part of Bulls’ Plan

The most recent earnings reports from some very big names have come in surprisingly weak over the past few days, which has created a buzz in the bear camp. In short, there is talk that (a) dollar strength, (b) the crash in oil, and (c) a slowdown in global economic growth are all starting to impact the big, blue chip names – and not in a good way.

Just yesterday, investors were treated to some really crummy numbers from the likes of Caterpillar (NYSE: CAT), Procter & Gamble (NYSE: PG), United Technologies (NYSE: UTX), and Microsoft (NASDAQ: MSFT). And to make matters worse, some of the forecasts for the future from company management were downright discouraging.

Nor Punk Economic Data

Also on the macro front is the topic of the U.S. economy. To this point, the general consensus has been that the U.S. has finally reached “escape velocity” as the most recent GDP prints have come in well above expectations. Therefore, stock market bulls have been able to buy any and all dips in the stock market, comfortable in the knowledge that the economy is humming along, inflation is low, and rates aren’t likely to be a problem any time soon.

But… the recent spate of weaker-than-expected economic data may be causing some investors to rethink this premise.

I have the privilege of sitting on both CONCERT Wealth Management’s Investment Committee and the Economics subcommittee. At our last Economics meeting, I posed the question to the team (which includes a former Fed economist) if the recent data was worrisome from a purely economic standpoint.

The answer provided was fairly simple. The team acknowledged that the recent data had been weaker than consensus, but that there were no negative trends in place at this time. As such, the economists weren’t worried.

However, if nothing else, the stock market is a discounting mechanism of future economic growth. And with the Durable Goods report stinking up the joint for the fourth time in the last five months, it isn’t surprising to see stocks falter a bit.

Where Does This Leave Us?

So, where does this leave things for investors? On the one hand, we have a growing economy, low inflation, low rates, and record earnings. And on the other we have a crash in oil prices, worries about disinflation/deflation, economic slowdowns in places like Europe and China, the struggles in Russia and other oil-producing emerging markets, and now, concerns about earnings and the economic data here at home.

In my humble opinion, the answer can be summed up by the title of a song from the one-hit wonder Stealers Wheel, “Stuck in the Middle With You”. And a quick glance at the chart of the S&P 500 makes this point fairly clear.

S&P 500 – Daily

Our take on the technical picture is that the price action since the beginning of December represents a consolidation of the big run seen in October/November. The key is that prices are currently tracing out what is commonly referred to as a “wedge” pattern as there are both uptrend and downtrend lines intact at this time.

Next, it is worth noting that the S&P is now stuck in the middle of the wedge pattern as traders attempt to sort out the conflict between the most recent inputs. Again, the bottom line appears to be a question of whether the fresh cash coming into the markets will trump the crummy earnings and punk data seen lately. And the market’s response so far seems to be to seek an equilibrium point in preparation for the next round of inputs.

Speaking of inputs, Apple’s (NASDAQ: AAPL) earnings crushed estimates after the close yesterday, which should quell the fear that iPhone sales might be slowing. And later today, we will get the latest from Janet Yellen and her merry band of central bankers.

So, the key here is to sit tight and to listen to the message from the Fed, the earnings, and the upcoming economic data for clues as to which team has the stronger argument at this time. But for now, Ms. Market seems to be saying that she is stuck in the middle.

Turning to This Morning…

The keys to today’s market so far include Apple’s blow-out earnings, the political situation in Greece, the ongoing pain in oil, the Dollar, and the FOMC announcement scheduled for 2:00pm eastern today. In case you missed it, Apple crushed it with their earnings report after the close yesterday, blowing by the estimates and reporting record revenues, net profits, and iPhone sales. As you might expect, shares of AAPL are trading up by more than $9 at the moment. Next up is the fact that all the tough talk out of Greece’s new government officials are taking a toll on the country’s stock market, with bank shares being hit particularly hard. Greece’s stock market is down about 15% already on the week. “King Dollar” is also getting a lot attention at the present time as the impact of the nearly 20% rise in the greenback is being felt by some of the big, blue chip names. On the oil front, prices are once again trying to stabilize, but futures are pushing lower in the early going this morning. And finally, there is the Fed, where today’s announcement is expected to be a non-event (i.e. don’t expect Janet Yellen to say anything about the possibility of pushing back the first rate hike). Finally, futures are pointing to a rebound at the open on Wall Street today.

Pre-Game Indicators

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

Major Foreign Markets:

Japan: +0.16%

Hong Kong: +0.22%

Shanghai: -1.40%

London: -0.19%

Germany: +0.27%

France: -0.52%

Italy: -0.49%

Spain: -1.27%

Crude Oil Futures: -0.95 to $45.25

Gold: +$0.80 at $1292.50

Dollar: higher against the yen, euro, and pound

10-Year Bond Yield: Currently trading at 1.821%

Stock Indices in U.S. (relative to fair value):

S&P 500: +13.55

Dow Jones Industrial Average: +83

NASDAQ Composite: +61.70

Thought For The Day:

“All our dreams can come true if we have the courage to pursue them.” -Walt Disney 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/blind-sided 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. Economy

2. The State of the Earnings Season

3. The State of Fed/ECB Policy

4. The State of the Oil Crash

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

(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately Positive

(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive

(Chart below is S&P 500 daily over past 2 years)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Key Near-Term Support Zone(s) for S&P 500: 1995-75
  • Key Near-Term Resistance Zone(s): 2075-90

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 (Short-Term): Neutral
  • Price Thrust Indicator: Neutral
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Neutral
  • Technical Health of 100 Industry Groups: Neutral

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.

  • S&P 500 Overbought/Oversold Conditions:– Short-Term: Neutral- Intermediate-Term: Moderately Oversold
  • Market Sentiment: Our primary sentiment model is Neutral.

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.

  • Weekly Market Environment Model Reading: Positive

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