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.

Tip of the Day: It’s Still All About Oil

If nothing else, Tuesday’s joyride to the upside in the stock market demonstrated that this market remains all about oil. As such, it shouldn’t surprise investors to learn that stock futures in the U.S. are following oil lower this morning.

However, there are several other inputs for market participants to mull over in the early going. First, the People’s Bank of China took stimulative measures by cutting the RRR (Required Reserve Ratio) by 50 basis points overnight. The RRR governs the amount of cash that banks have to keep in reserve at the PBOC. Also in China, the HSBC Services PMI came in with a reading of 51.8, which was well below expectations for 53.4.

Next up, the Services PMI readings in Europe showed some improvement for a change. The Eurozone’s read on the services sector was reported at 52.7, which was above the preliminary reading of 52.3 and last month’s level of 51.6.

Sticking with the economic data, ADP reported that private sector job growth in the U.S. remained above the 200,000 level for the 10th consecutive month in January. ADP says the economy added 213,000 new jobs last month and revised both December and November’s totals higher.

On the oil front, the API inventory data showed that stockpiles of crude continue to be larger than expected. The report reinforces the view that the recent bounce in oil (which many are putting in the dead-cat category) may have been overdone. After surging more than 18% over the last three sessions, WTI futures are lower by 2.45% at this time.

So, given Wall Street’s propensity to overdo EVERYTHING and to change directions early and often lately, it looks like stocks will give back some of yesterday’s big gains at the open.

Current Market Environment

It would be logical to think that after more than two months of back-and-forth, up-and-down behavior, it was time for the stock market to pick a direction and go with it. However, it is important to recognize that the latest pop to the upside has been sponsored by a bounce in oil, which will most likely wind up being placed in the dead-cat category when all is said and done. The bad news is that the impressive two-day joyride to the upside hasn’t really resolved anything in terms of the trend of the market. But the good news is our indicators have actually been improving over the past week.

Technical Take

Although we are now looking at the 8th directional trend change since the beginning of December and prices have moved up in earnest since the bears failed to score from the one-yard line on Monday morning, not much has really changed from a technical perspective. The bottom line on a chart basis is that the S&P 500 is STILL in the wedge pattern that has been in place since the middle of December. And as we’ve been saying for some time, the key to the next important trend will be which trendline the index breaks out of in a meaningful way first.

S&P 500 – Daily

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Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +1.98%
    Hong Kong: +0.51%
    Shanghai: -0.96%
    London: -0.65%
    Germany: -0.39%
    France: -0.25%
    Italy: -0.47%
    Spain: -0.65%

Crude Oil Futures: -$1.55 to $51.50

Gold: +$1.60 at $1278.50

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

10-Year Bond Yield: Currently trading at 1.800%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -6.28
    Dow Jones Industrial Average: -36
    NASDAQ Composite: -16.35

Thought For The Day:

“Every saint has a past. Every sinner has a future.” -Warren Buffett

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 Oil Crash
      2. The State of the U.S. Economy
      3. The State of Fed/ECB Policy
      4. The State of the Earnings Season

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: 1995-75
  • Key Near-Term Resistance Zone(s): 2060-90

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.

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