Daily State Of The Markets: Thoughts From The Road - Part II

 |  Includes: DIA, IWM, QQQ, SPY
by: David Moenning

When trying to succeed in the stock market, at least half of the battle is learning to identify the type of environment you are dealing with. If the two devastating bear markets that occurred since the turn of the century taught investors anything, it was that employing the same pedal-to-the-metal growth approach that can produce strong gains during a bullish market can be a recipe for disaster in a bearish environment.

The point is that investors need to be able to adapt to changing market environments and to recognize that different strategy tools are needed for different markets. So, in today's missive, we will continue to review the key points to the current market environment.

Yesterday, we noted that our market models are neutral, that there is plenty to worry about in the current environment and that the bulls have earned the benefit of the doubt. However, there were six additional bullet points that made my list of "thoughts from the road" last week.

All Dips Have Been Bought

Although the battle cry "buy the freaking dip" was really born in the 1990's, it has been a highly successful approach since the Credit Crisis ended on March 9, 2009. More specifically, BTFD has become the dominant strategy since the European debt crisis faded to black in the latter half of 2012.

S&P 500 Weekly

Take a look at the chart above. Note that since the fall of 2012, the dips have all been bought - and bought quickly. It is clear to see that the declines on the weekly charts all display a "V-bottom" pattern as traders have consistently plowed into stocks during each and every decline. In fact, you have to go back to early 2012 to find a decline that produced a lower-low once a pullback began.

The key here is to recognize that while the current market action has certainly been a bit sloppy, the BTFD strategy remains entrenched in this market. Well, for now, anyway.

Current Market is "News Driven"

The next important thing to know about this market is that the action is being driven by the geopolitical news out of Russia. Yes, the Fed matters. Yes, earnings matter. And yes, the economic data is worth paying attention to.

However, the bottom line is this market is being pushed around by the headlines relating to troop movements in Russia/Ukraine and what appears to be a developing trade war.

Therefore, it is important to recognize that the headlines can cut both ways. As investors learned on Friday, any news suggesting that tensions are easing can cause the algos to go into buy-mode in the blink of an eye.

Finally, history shows that a "news driven" market can disappear from the scene as quickly as it arrived.

A Meaningful Correction is Long Overdue

Given the age of the current bull market and the length of time that has passed since the last decline of 10 percent or more, it is safe to say this market is overdue for a meaningful correction.

There have been countless articles written on this subject but the key point to understand is that age alone does not cause the death of a move. No, something will need to come along to cause the current "buy the dip" mindset to change.

However, the inordinate amount of time that has passed since the last big correction DOES mean that risk is elevated at this time.

Divergences Abound

As was detailed in our recent series on reasons to exercise some caution toward the stock market, there are a great many divergences in this market. And while such conditions can and often do remain intact for quite some time, the message here is that the market's engine is not hitting on all cylinders at the present time.

Again, this situation is not enough to kill a bull market. But, it does tell us that all is not hunky dory.

Bears Have Been Unable to Capitalize

Yet through it all, we must recognize that the bears have been unable to get much of anything going to the downside. And from my perch, this says a lot.

So, The Bottom Line Is...

Perhaps the key takeaway at this point in time is that this remains a Bull Market until proven otherwise. No, this bull is not young and spry anymore. And it is true that the recent move higher left a lot to be desired from a technical perspective. However, there is just no telling how long this bull will run. So, we might as well enjoy the ride while it lasts.

Turning To This Morning

Russia is once again the focal point of the markets this morning as the FT is reporting that Russia is sending 280 trucks filled with "humanitarian aid" to the Ukraine. The concern is that the move actually represents an escalation of the conflict and could mark the beginning of an outright invasion. In addition, confidence indices in Germany and eurozone show that the trade war with Russia is causing hopes for economic improvement to crumble as the ZEW indexes dove in July. European markets are lower on the economic concerns and U.S. futures have given up gains, now pointing 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: +0.20%

- Hong Kong: +0.17%

- Shanghai: +0.12%

- London: -0.16%

- Germany: -0.72%

- France: -0.66%

- Italy: +0.75%

- Spain: +0.58%

Crude Oil Futures: -$0.85 to $97.23

Gold: +$4.80 at $1315.30

Dollar: higher against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.429%

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

- S&P 500: +0.93

- Dow Jones Industrial Average: -4

- NASDAQ Composite: +0.34 Thought For The Day:

Do what you feel in your heart to be right - for you'll be criticized anyway. -Eleanor Roosevelt