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In the early going, the word of the day appears to be "improvement." China's Flash PMI reading improved to an 18-month high with a reading of 52.0. This suggests that growth is accelerating in the manufacturing sector of the world's second largest economy, which, of course, is a good thing.

Across the pond, the eurozone's Flash PMI's also saw improvement. The Composite PMI came in at 54.0, which was an improvement over June's reading and a multi-month high. In addition, Germany's flash PMI improved to a 3-month high.

Here at home, U.S. Initial Claims for Unemployment Insurance (aka weekly jobless claims) fell to an 8-year low. On the earnings front, Facebook's earnings were impressive. Ford's earnings improved.

Finally, the U.S. stock futures point to, yep, you guessed it; improved prices at the open. However, our market environment model remains stuck in neutral as there is very little momentum in the current market.

Looking at the charts...

While the NASDAQ 100 stepped lively to a new cycle-high and the S&P 500 did technically finish at a new all-time high, one would be hard pressed to call yesterday's action a breakout. The bottom line is the major indices are not marching to the beat of the same drum at the present time. Therefore, it is probably best to view the current technical picture as rangebound. We will be watching the upside resistance levels on the Dow as well as the 2,000 mark on the S&P 500, which appears to be acting like a magnet of late. However, given that there is little "oomph" behind the current move, traders may be preparing for a "pop and drop" at the 2000 level. While the bears have not been successful in their efforts in quite some time, it is important to note that they have not gone away. Therefore, we should probably expect to see our furry friends put up a fight at the big, round number on the S&P.

S&P 500 - Daily

However, for those investors who focus solely on big-cap tech names, you are probably loving life at the present time. Look at the chart of the NASDAQ 100 below...

NASDAQ 100 - Daily

One has to go all the way back to March 2000 to find a higher close, which, of course was during the tech bubble days. Therefore, it is clear that the NDX represents market leadership at this time.

Where's The Beef?

While it would be easy to be resolutely bullish if you focused only at the NDX and/or the S&P 500 at this time, this would also be irresponsible.

The bottom line for this market is (a) the troops are not following the generals and (b) the momentum indicators are flashing warning signs. The key here is that during a healthy market advance, one usually sees breadth thrust buy signals going off and the major indices confirming the move. However, at this stage of the game, this is simply not the case.

As a result, investors should remain cautious. And it is for this reason that most of our risk-managed strategies have taken their foot off of the gas at this point in time. Better safe than sorry, right?

Pre-Game Indicators

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

Major Foreign Markets:

- Japan: -0.29%

- Hong Kong: +0.71%

- Shanghai: +1.28%

- London: +0.14%

- Germany: +0.49%

- France: +0.86%

- Italy: +1.61%

- Spain: +1.77%

Crude Oil Futures: -$0.12 to $103.00

Gold: -$6.40 at $1298.30

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

10-Year Bond Yield: Currently trading at 2.502%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: +3.19

- Dow Jones Industrial Average: +35

- NASDAQ Composite: +6.06 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 Geopolitical "Issues"

2. The State of Fed/ECB Policy

3. The State of the Earnings Season

4. The Outlook for U.S. Economic Growth 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: 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 12 months)

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: 1955(ish)
  • Key Near-Term Resistance Zone(s): 2000

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

Signal Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.

Price Thrust Indicator: Neutral

Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.

Volume Thrust Indicator: Negative

Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.

Breadth Thrust Indicator: Neutral

Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.

Bull/Bear Volume Relationship: Moderately Positive

Indicator Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.

Technical Health of 100 Industry Groups: Neutral

Model Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.

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: Overbought

    - Intermediate-Term: Overbought

  • Market Sentiment: Our primary sentiment model is Negative .

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 Market 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: Moderately Positive Thought For The Day...

When things aren't adding up in your life, it's time to start subtracting...

Source: Daily State Of The Markets: The Word Of The Day Is 'Improvement', But...