Daily State Of The Markets: Indicator Revie - It's Getting Tense Out There, But...

| About: SPDR S&P (SPY)

Good morning and welcome back. Since the focus has been jumping around a bit lately, it will be interesting to see which issues catch the interest of traders on this fine Monday morning. But first, let's stay disciplined and start the week off right by reviewing the state of our major indicators and models.

The first step is a review of the price/trend of the market. Here's my current take on the state of the technical picture...

  • To be sure, the action has been weak over the past couple weeks
  • Intraday strength has consistently been used to sell into
  • The focal points have been shifting - but most are negative
  • Dollar and rates are going the wrong way for traders
  • China continues to be a focus
  • Earnings parade will kick into high gear over next two weeks - listen for "the message" and watch guidance
  • Cyclical bull uptrend line appears to be in trouble as prices closed below the trendline Thursday and Friday
  • It may be an overused cliché, but S&P is currently at a truly critical juncture from near-term perspective

S&P 500 - Daily

From a longer-term perspective (e.g. looking at a weekly chart of the S&P 500)...

  • Break below 2120 could put the near-term trend at risk
  • But, the long-term trend remains solidly intact
  • Bears would need to first violate 1975 on weekly chart to get something meaningful going
  • A weekly close below the January low of 1865(ish) would put the bears in charge
  • On intermediate-term basis, a weekly close below 2035 would be problematic
  • But for now, bulls still in control

S&P 500 - Weekly

Next, let's look at the "state of the trend" from our indicator panel. These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

  • Important to recognize that stocks remain in a mean-reverting mode (this changes the way indicators are used)
  • Short-term buy signal given by my version of channel breakout system on Friday
  • Channel breakout buy signal would be reversed with close below 2114
  • Cycle Composite is modestly positive this week, negative next week, then predominantly positive for rest of year (big picture view)
  • Short-term trend negative
  • Intermediate-term trend neutral
  • Long-term trend positive
  • Any questions?

Now we turn to the momentum indicators...

  • This board became u-g-l-y last week
  • Trend & Breadth Confirm models both negative
  • Short-term Volume Relationship model went negative last week
  • All three Thrust indicators now negative
  • But... In recent years, this situation has usually been quickly reversed (usually by a central banker)
  • Longer-term volume relationship still in good shape

Next up is the "early warning" board, which is designed to indicate when traders may start to "go the other way" -- for a trade.

  • While not a screaming buy, this board is starting to show improvement
  • Stocks oversold from short- and intermediate-term perspective
  • But Intermediate-Term Overbought/Sold Model requires a reversal of the model's trend to turn green
  • Sentiment models starting to line up
  • Daily Sentiment model now positive
  • VIX model is VERY close to issuing a buy signal (note these are often early)
  • I'd like to see the "stars align" a bit more here before getting excited about the next rally
  • However, the table appears to be getting set for the traditional seasonal year-end strength

Now let's move on to the market's "external factors" - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.

  • Usually, this board doesn't see much movement - This is NOT the case this week
  • Absolute Monetary model declining within the positive mode
  • Relative Monetary model went neutral recently
  • Clear that monetary conditions are weakening here
  • Economic model took a dive this week - now neutral
  • However, historical return of stock market about the same when Economic model moderately positive and neutral
  • Component econ model remains strong
  • Further weakness in overall Economic model would be problematic
  • Inflation model remains neutral but trend of model is still rising
  • Component inflation model also trending higher and now in Moderate Inflation zone
  • Valuation situation also seeing some change as Median P/E actually improved last month
  • Note the average return on this board now below the historical average of about 10% per year

Finally, let's review our favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.

  • Another one bites the dust... the Risk/Reward model moved to neutral this week
  • Average return still above historical average
  • Overall board rating remains moderately positive

The Takeaway...

The technical action has been more than a little sloppy lately - I'll go so far as to call it weak. The key is there seems to be a plethora of negative issues for traders to focus on each day. It is worth noting that the indicators are weakening across the board. As such, stocks could continue in a "price discovery" mode for a while longer. The good news is that (a) this type of situation usually leads to v-bottoms and (b) the calendar says the tailwinds from the year-end seasonal strength should begin to blow in the next few weeks. So, if you remain upbeat about the bigger picture situation (I am) and are looking to buy a dip, this is your chance.

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 Earnings Season

2. The State of Global Economies

3. The State of Global Central Bank Policies

4. The State of U.S. Dollar

5. The State of German/European Banks

Thought For The Day:

Keep in mind that not every person's opinion is worthy of your attention and/or consideration...