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: Where Will The Focus Be?

On Friday, we noted that the S&P 500 had recently experienced two 5-day declines within ten days of the first one starting. Although the number of historical occurrences are few (the pattern had only been seen 4 other times in history) and the result would seem to be counterintuitive, we also noted that such price action has tended to be bullish for stocks over the ensuing weeks and months.

In fact, the S&P 500 was significantly higher in three of the four prior occurrences. However, the fourth prior case of double 5-day declines saw prices move lower – to the tune of about 5 percent – over the next three months. The key here was in this case, a third 5-day decline quickly ensued.

Therefore, one could argue that unless we see another 5-day decline or the S&P move below the January 15 low, stocks ought to move higher from here.

One could also argue that over the past two months, the market has been consolidating the big gains seen during the mid-October/November rally, which produced gains of more than 11%. And given that stocks tend to exit a sideways consolidation pattern heading in the same direction they were moving when the pattern began, the bulls tell us that new highs are likely.

One-Way Streets

It is also worth noting that the vast majority of the market’s trends have been one-directional lately – meaning that prices have tended to move in a straight line before reversing and going the other way.

S&P 500 – Daily

This has been especially true since the beginning of December. Since the modest new all-time high hit on 12/5, stocks effectively moved straight down for seven days, then straight up for the next eight days, and then the 5-day declines began. Then just last week, stocks rallied for four consecutive days.

The question, of course, is why has the action been so schizophrenic? Why have stocks moved straight up for a few days and then at the drop of a hat, proceeded to move straight down?

Part of the answer is likely the millisecond trend-following game played by the big boys and their fancy computer toys. However, another key is that there are an awful lot of moving parts in the market these days.

Lots of Moving Parts

The theory here is that traders tend to lock onto a particular theme and then ride it for a while. Well, until the next theme arrives, that is.

The crash in oil prices is a perfect example of this idea.

US Oil Fund ETF (NYSE: USO) – Weekly

As the chart above clearly illustrates, the crash in oil prices has not abated. And there have been days/weeks this year in which the movement in the stock indices has been tied directly to the price of oil intraday. As we’ve discussed, this makes sense to some degree as no one really knows what the eventual impact of the crash will be. So, if you are worried about negative consequences, then following the price of oil is logical.

If nothing else, traders are known for being easily distracted. So, the oil crash theme has been interrupted several times lately with such things as stimulus in China and the big, new QE program (aka Mario Draghi’s bazooka) just launched in Europe.

So, as we enter a fresh week of trading, the question of the day is what will traders focus their algos on now? Will it be the big anti-austerity party win in Greece? The renewed conflict in Ukraine? The state of the earnings season (which appears to be lackluster so far)? The projected liftoff in rates here at home? The impact of the rising dollar? China? The Russian ruble? The economy in Europe? Or will it simply be all about oil again?

Given that the QE program in Europe doesn’t start until March, it would be logical to assume that traders may want to focus their attention elsewhere for a while. So, in my humble opinion, this is no time to be asleep at the wheel and it will be important to identify the drivers of the price action this week.

In sum, investors may want to continue to run with the bulls here – unless their opponents can find a way to push the deflated ball below the January lows. Stay tuned…

Turning to This Morning…

Overnight futures initially reacted negatively to the news that the anti-austerity Syriza party won big in the Greek election. With Alexis Tsipras likely to become the new PM in Greece, traders are concerned about the party’s pledge to write-off up to half of Greece’s debt. Next up on the worry list today is the conflict in Ukraine. The situation has taken recent turn for worse as rebel forces launched an assault on port city of Mariupol on Saturday. Kiev said thirty civilians were killed in shelling and that the Russians are increasing their presence in terms of troops and equipment. And then there is oil, which, while volatile, had been falling in the early going. Surprisingly, European bourses are not falling in response to the Greek election. Here at home, U.S. futures have now erased all of the early losses and currently point to a flat open on Wall Street.

Pre-Game Indicators

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

Major Foreign Markets:

Japan: -0.24%

Hong Kong: +0.24%

Shanghai: +0.93%

London: -0.04%

Germany: +0.78%

France: +0.25%

Italy: +0.40%

Spain: +0.70%

Crude Oil Futures: +0.40 to $45.99

Gold: -$6.30 at $1286.30

Dollar: lower against the yen, euro, and pound

10-Year Bond Yield: Currently trading at 1.817%

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

S&P 500: +0.18

Dow Jones Industrial Average: -13

NASDAQ Composite: +4.51

Thought For The Day:

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe” – Abraham Lincoln 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 Fed/ECB Policy

2. The State of the Oil Crash

3. The State of the U.S. Economy

4. The State of the Global Economy

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

(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: 1991
  • 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): Positive
  • 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: Moderately Overbought

    – 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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