David Moenning's Instablog

The State Of The Speculation

Tue, 18 Jun 2013 09:01:46 -0400

Daily State of the Markets
Tuesday, June 18, 2013

Good Morning. For the fifth day in a row (and the eleventh out of the last twelve), the DJIA experienced intraday volatility exceeding 100 points yesterday. While volatility in and of itself isn't a big deal these days, we do have to recognize that this represents a change in the market's character over what we had seen in the first five and one-half months of the year. And until we either hear from Mr. Bernanke or the trading range breaks, we can probably expect the manic depressive behavior to continue.

I was traveling during much of Monday's session and as such, I didn't have access to the minute-by-minute action on the charts. Yet, even via the finance app on my iPhone I was able to pick up the monster dive that took the Dow down 150 points in about half an hour. And as usual, I wanted to know why the move had occurred.

Obviously, the quick dance to the downside was tied to algo-driven sell programs - that's never in question these days. No, it was the trigger that I was looking for.

Within just a moment or two, I had identified the culprit. A headline from the Financial Times read: "Fed likely to signal tapering move is close." And just like that, the S&P 500 fell 15 points and the DJIA dropped 150.

But here's the problem. The article didn't say anything new on the subject. And the article did not quote any Fed officials. No, just the inference that the Fed might be close to tapering the amount of money going into their QE program every month was enough to send the algos into overdrive.

But upon closer inspection, the article really represented speculation on the part of the author. Sure, Mr. Kaminska cited some correlation between the number of Bloomberg stories with the keywords "tapering" and "volatility." And yes, the author did reprint a portion of an article written by somebody else talking about Jon Hilsenrath's recent article. But other than that, this article, yes, the one that moved the market 150 points in a matter of minutes, contained little to no substance.

My immediate response was to the move was to wonder aloud if the FT article had trumped the Hilsenrath article from Thursday. It seemed odd to me that the market was keying off of some article from across the pond instead of the position taken by "Hilsy." Did the FT know something that Hilsenrath didn't? Did the FT have a new comment from someone on the inside? In a word, no.

In fact, the author of the FT article later tweeted several comments that seemed to ease the markets fears. First, Kaminska tweeted that the Fed doesn't leak information to anyone - including him. Then he said that he believes the Fed's tapering will begin in September. And Kaminska tweeted that he doesn't know anything for sure.

So there you have it. Once again, the alogs picked up on a headline and assumed it was accurate. But in the words of my friend and colleague Curt Bergquist, this was "an article about an article about an article... now that's award winning reporting." In other words, the algo's didn't "read" the article, they just were programmed to react to the headlines. And then once the humans got involved and realized that this was a non-story, the indices rebounded a bit. But not before the computers scared the heck out of anyone watching who wasn't privy to what was happening.

In sum, this is the state of the speculation regarding what the Fed may or may not do next. The good news is we only have to wait another day and one half for the current ride to end.

Publishing Note: My apologies... I managed to misread my schedule yesterday. It is tomorrow that I have an early meeting and will not publish morning report. Regular "State" reports will return on Thursday.

Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

Turning to This Morning...

The speculation of what Ben Bernanke is likely to say at his press conference on Wednesday continues unabated. At this time, it appears that traders are positioning themselves for a dovish statement from the FOMC as U.S. futures are pointing to a higher open. However, as we saw yesterday, the mood can turn on a dime so it is best to stay flexible.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: +0.13%
- Hong Kong: +0.00%
- Japan: -0.20%
- Germany: -0.03%
- France: -0.07%
- Italy: +0.61%
- Spain: +0.67%
- London: +0.83%

Crude Oil Futures: +$0.29 to $98.06

Gold: -$7.90 to $1375.40

Dollar: lower against the yen and euro, higher versus pound

10-Year Bond Yield: Currently trading at 2.195%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +5.01
- Dow Jones Industrial Average: +52
- NASDAQ Composite: +9.94

Thought For The Day...

"Some men see things as they are and ask why. I dream things that never were and ask why not?" -Robert F. Kennedy/George Bernard Shaw

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Will We Be 'Talking Taper' Soon?

Mon, 17 Jun 2013 09:09:06 -0400

Daily State of the Markets
Monday, June 17, 2013

Good Morning. The question of the day is whether or not the Federal Reserve Board will begin "talking taper" at this week's FOMC meeting. Although we will find out soon enough (it is a safe bet that Ben Bernanke will address the subject at his press conference which will be held at the end the Fed's two-day meeting on Wednesday), this won't keep traders around the globe from speculating on the issue of when and by how much the Fed will start cutting back on their stimulus programs. And this, in turn, is likely to keep markets volatile until we get the word from the Fed Chairman this week.

While there has been a fair amount of public discussion by Fed governors recently on the topic, so far at least we haven't heard anything official out of the FOMC. The bottom line is this has kept the market on pins and needles - and will likely continue to do so over the coming days.

However, if one steps back from the blinking screens for a moment, the idea that stocks have been moving up and down violently every time the subject is broached is sort of silly. Remember, there is absolutely zero discussion currently of the Fed raising rates. Bernanke's bunch has made it very clear that rates will continue to stay low for an "extended period." Heck, we're not even talking about the FOMC actually stopping the QE programs any time soon. No at this stage, traders are fretting over the idea of the Fed simply reducing the amount of stimulus it is providing to the economy each month.

Stocks rallied furiously on Thursday in response to a blog by the WSJ's well known Fed watcher, Jon Hilsenrath. Mr. Hilsenrath opined that the Fed Chairman is none to happy about the way the markets have reacted to the idea of QE tapering. (Recall that bond yields have spiked higher over the past month and that any further increase in rates could put a crimp in the economic recovery.) And since Hilsenrath is purported to be a public mouthpiece for Bernanke, traders now expect to hear dovish comments out of the FOMC this week.

We should remember that Ben Bernanke is one of the world's renowned experts on the Great Depression. And given that one of the big mistakes made back then was that government officials prematurely assumed everything was fine, Bernanke has made it clear over the past four years that he plans to err on the side of caution. In other words, the Fed isn't likely to pull the punch bowl too soon unless the economy is showing signs that it has finally has established "escape velocity" and can grow steadily and strongly without assistance from the Fed. In short, as long as inflation is low and unemployment is high, Bernanke is likely to continue to prime the pump with economic stimulus.

On the subject of the economic recovery, it should be obvious to anyone paying close attention that the economy is not exactly hitting on all cylinders at the present time. Sure, housing has perked up. And yes, we are starting to see some signs of improvement in the jobs market. But, the pace of economic recovery is anything but robust at the present time as we continue to see data come in on the disappointing side from time to time.

While I can easily be accused of oversimplifying the matter this morning, I'm going to suggest that the bond market may be getting ahead of itself at this stage and that the Fed isn't likely to say much of anything about raising rates or even when the FOMC might start to cut back (i.e. taper) on its stimulus efforts. So, while everyone else may be "talking taper" right now, the data hasn't convinced me that the Fed will be.

Publishing Note: I have an early meeting on Tuesday and will not publish morning report. Regular "State" reports will return on Wednesday.

Turning to This Morning...

In light of the fact that there were no negative developments over the weekend, traders have returned to their desks with a more positive view this morning. And with Japanese stocks rising for a second consecutive day and European bourses higher, U.S. futures are following suit in the early going.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -0.28%
- Hong Kong: +1.22%
- Japan: +2.73%
- Germany: +1.32%
- France: +1.70%
- Italy: +0.64%
- Spain: +1.19%
- London: +0.80%

Crude Oil Futures: +$0.76 to $98.61

Gold: -$2.80 to $1384.80

Dollar: higher against the yen, lower versus euro and pound

10-Year Bond Yield: Currently trading at 2.117%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +11.778
- Dow Jones Industrial Average: +106
- NASDAQ Composite: +26.52

Thought For The Day...

Only those who dare to fail greatly can ever achieve greatly. - Robert F. Kennedy

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Do The Bears Have A Case?

Wed, 12 Jun 2013 08:24:14 -0400

Daily State of the Markets
Wednesday, June 12, 2013

Good Morning. This time the bears refused to be run over. This time, after a quick 50-point swing upwards in the S&P 500, the short-sellers were rewarded for selling into some resistance. This time, the good economic news (the NFIB Small Business Index hit the second highest level since December 2007) was ignored. And this time, there may actually be a question as to which way the next move in the stock market is going to go.

To be fair, the bears have had a rough go of it this year, so they probably deserve a day or two in the sun. In short, all of those deep-thinking macro doom-and-gloomers haven't been rewarded for their negativity. Once again, hedge funds are dramatically underperforming the S&P 500. This was the group who were so sure that the sequester debate would lead to disaster, that the economy was in trouble, that Europe was going to actually implode this year, that the slowdown in China was going to tank the global economy, and that the new highs in the stock market, which were driven by "monetary meth," would certainly give way to the next great bear market.

Instead of another debacle, our furry friends in the bear camp have been tortured almost daily for six straight months as the market indices have marched merrily higher in the face of all those concerns. While I may contend that investors have shunned bonds, commodities, and the emerging markets, leaving only the U.S. stock market as a viable alternative, those in the glass-is-half-empty camp contend that the rally in stocks has been all about "hopium" and the money being created by the central bankers of the world on a daily basis.

I might also contend that the upward mobility in the stock market since mid-November has been based on the idea that there isn't another calamity on the horizon and that the U.S. economy may have finally turned the corner. While the term "escape velocity" hasn't been used by the Fed and the economy isn't exactly hitting on all cylinders at the moment, there is little doubt that housing is on a roll and that the jobs market is improving. And the bottom line is that with these to areas on the rise, as long as rates and inflation remain low, stocks are the place to be.

However, everybody knows that all good things come to an end. In addition, everybody in this business knows that Wall Street has a tendency to overdo just about everything it ever does. As such, one must always be on the lookout for when the music stops and the trend changes directions.

Although I am not suggesting that the end is nigh or that we are on the precipice of the next bear market. However, I am willing to recognize that the game has been rather lopsided of late and that it rarely stays that way for long. Therefore, it is probably a good idea to be on the lookout for something that could trigger an extended run for the bears.

While stocks have not broken down and we rate the current short-term trend as neutral, there are a handful of issues cropping up that could give the bears an edge at some point soon. Japan is one example. The move in the yen, the Japanese Government Bonds and the country's stock market has been swift. And since the moves have all been driven by central bank intervention, there is room for disappointment here.

Next up there is Europe. Yes, again. Don't look know but Greece got smoked yesterday on the usual fears. More importantly, there are concerns that Germany's high court may muck up the works by declaring the ECB's bazooka (which isn't even in existence yet) unconstitutional. Oh, and if you had your t.v. on yesterday, you undoubtedly saw the violence that continues to erupt in Turkey (and for the record, yes, I am aware of the fact that half of Turkey lies in Asia).

Then there was the scare in Georgia yesterday that got people's attention for a bit. There was the intraday spike in oil that could be a concern if it continues. And finally, there is the ongoing tie-up between the movement in the yen and the stock market.

So, while yesterday's triple-digit loss in the stock market may not be something to run and hide over, we do have to recognize that some of these issues may be enough for the bears to capitalize on at some point. As such, we're keeping our eyes open and will be watching the important support zones closely.

Publishing Note: I have early commitments on Thursday/Friday and will publish morning commentaries as time permits.

Turning to This Morning...

Improved sentiment in Europe has U.S. stock futures rebounding this morning. Better than expected Industrial Production numbers as well as expectations that Germany's high court will defer any decision on the constitutionality of the OMT until after the elections in September are being cited as the key drivers behind the bounce in Europe and U.S. futures.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: closed
- Hong Kong: closed
- Japan: -0.21%
- Germany: +0.04%
- France: +0.48%
- Italy: +0.11%
- Spain: +1.74%
- London: +0.27%

Crude Oil Futures: +$0.19 to $95.57

Gold: +$0.50 to $1377.50

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

10-Year Bond Yield: Currently trading at 2.198%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +10.89
- Dow Jones Industrial Average: +99
- NASDAQ Composite: +18.76

Thought For The Day...

The less you know, the more you believe. -Bono

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

What Do The Cycles Say For June?

Tue, 11 Jun 2013 08:27:18 -0400

Daily State of the Markets
Tuesday, June 11, 2013

Good Morning. The argument as to what comes next for stocks falls along party lines at this point. The bulls contend that they were tested last week and that the all-important line in the sand held. As such, our furry friends suggest that new highs for the major indices are only a matter of time. Yet on the other side of the aisle, the bears are telling anyone who will listen that the "hopium highs" won't last and a retest of the recent lows is the likely outcome in the next week or so.

So, given that (a) we prefer not to take sides in such arguments, (b) stocks appeared to go into pause mode yesterday and (c) our indicators are fairly neutral at the present time, I thought this would be a good time to check in on our cycle composites.

As I've explained a couple times already this year month, the projection of the Cycle Composite (which includes the 1-year seasonal, the 4-year Presidential, and the 10-year decennial cycles) is one of the inputs to our Market Environment Model. And while I would never trade solely on this indicator, it has proved to be very useful on occasion. As such, I am willing to check in on these indicators on a regular basis.

So far in 2013, the projection for the cycle composite has been pretty darn good. And since 2009, the cycles have been very helpful in calling the major moves of the market. However, during the month of May the market got a bit out of whack with the cycle composite. In short, the cycles called for a pullback during the middle of the month while the indices simply marched merrily higher until the last week.

However, after this brief inversion, the S&P 500 appears (the key word here) to be back on track. Therefore, it might be worth our while to see what the cycles project for the rest of June.

The cycle composite itself (which combines the three cycle projections) calls for a choppy uptrend during the sixth month of the year with stocks moving higher into July. So, if things play out according to the composite, we can expect to see the current sloppy period in the market continue for another couple of weeks. And I'm sorry to say that it looks as if there could be some volatile days involved.

Looking at the composite's components, the one-year cycle calls for a steady uptrend followed by a dip near the end of the month. The four-year Presidential cycle is less encouraging as it projects a lot of sideways action. And finally, the ten-year cycle is the most upbeat and calls for some sloppiness mid-month and then a resumption of the uptrend as the month comes to a close.

The good news is that if we can survive the choppy period that all three cycles project for June, there is a bright light at the end of the tunnel. You see the cycle composite suggests that the first half of July will include some upside fireworks and take the S&P to new highs.

But from there, it may be time to dust off the old risk management strategies as a fairly strong pullback is forecasted for the latter part of July.

After reviewing the various cycles, I will offer the following observations:

With the S&P sporting a gain of +15.2% and the DJIA up more than +16% year-to-date, and more than six months to go before the end of the year, we should probably expect the game to become more difficult at some point soon. So, while the current one-way market has certainly been enjoyable, even the cycles suggest that all good things come to an end eventually.

Turning to This Morning...

Disappointment over the Bank of Japan's decision to stand pat with the country's current stimulus plans, spiking bond yields, and fear over what Germany's high court may have to say about the constitutionality of the ECB's unlimited bond buying program (the OMT) has put traders around the globe in a "risk off" mode this morning. All major stock markets fell hard overnight and U.S. futures point to a decline of nearly 1% at the open this morning.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -1.39%
- Hong Kong: -1.20%
- Japan: -1.45%
- France: -2.05%
- Germany: -1.89%
- Italy: -2.41%
- Spain: -2.85%
- London: -1.79%

Crude Oil Futures: -$1.22 to $94.55

Gold: -$11.50 to $1374.50

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

10-Year Bond Yield: Currently trading at 2.289%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -15.34
- Dow Jones Industrial Average: -120
- NASDAQ Composite: -28.54

Thought For The Day...

One chance is all you need. -Jesse Owens

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

The Price Of 'Perfection'

Mon, 10 Jun 2013 08:23:00 -0400

Daily State of the Markets
Monday, June 10, 2013

Good Morning. The title of this morning's missive is "The Price of Perfection." The first point that needs to be made is that using the word "perfection" in anything related to the stock market may get me in trouble with Ms. Market. As anyone who has been in this business for any length of time knows, angering the lady in charge of this game can bring a Louisville Slugger to your forehead in a big hurry. However, my hope is that she will read far enough to get the point of the report before reaching for the bat with my name on it.

To me, the word "perfection" in the stock market means getting the majority of the big moves "right." Note that I did NOT say the goal was to get ALL the moves (big or small) right. While I hate to disappoint those new to the game, the simple truth is that there is no Holy Grail system or indicator that can get all of the market's moves right. This is simply impossible and don't let anybody tell you differently.

One of the tricks to succeeding at this game is to identify what you are trying to accomplish. For example, if you are fast-money trader type, you may be striving to make money on your "hot dot" trades on a daily basis. However, I can say from experience that getting in on the Tesla's (TSLA) is more difficult than it looks. But if this is your goal, I say go for it and would recommend that you read "Way of the Turtle" by Curtis Faith and the entire "Market Wizard" series by Jack Schwager. By reading what made very successful traders tick, you can learn a lot - mostly about what mistakes to avoid.

However, this approach isn't for me. Call me an old fogy if you must, but I've been there and done that. And although I've written about this subject a fair amount already this year, I'm going to "go there" again this morning. The bottom line is my objective is to get what we can, when we can, from the market's big moves.

You see, getting the important moves right is where the really big money is made. Not missing out on a substantive move is what makes your year. And in short, this is our goal.

Below is an example of what I'm talking about. This is a chart of the S&P 500 weekly from late 2008 through Friday. The black rectangles indicate the type of uptrend I want to capture while the red ovals show the type of decline I'd like to try and either avoid or profit from.

S&P 500 Weekly From 2009
(click to enlarge)

I'd like to make two other key points this morning. First, please note that not every move on these weekly charts is surrounded by a rectangle or an oval. This is due to the fact that you simply can't get all the moves right and you have to understand that going in. A perfect example of this is the wild and woolly moves in the fall/winter of 2011. These moves were simply too fast and too violent for most traders to "capture" or profit from.

Going back a little farther, the picture becomes even clearer. Below is a chart of the S&P 500 on a weekly basis from 2005 through 2008. As you can see, missing or profiting from the 2008 massacre was a big deal.

S&P 500 Weekly 2005-2008
(click to enlarge)

For those with an open mind, I think you will agree that getting the big moves right can be quite beneficial over time. But... It is vital to understand that doing so comes at a price!

There A Price To Be Paid For "Perfection"

This brings me to the title of this morning's missive. You must first recognize and then be willing to pay the price for anything even remotely related to "perfection" in this game. Remember, nobody gets it right all the time and there simply is no free lunch available at the corner of Broad and Wall.

Put another way, you have to have realistic expectations about what you can and can't accomplish. Understanding the plusses and minuses of an approach will help you stick with it when the going gets tough (and trust me, the going WILL get tough at times). For it is the ability to stick with your strategy when things are difficult that separates the successful investors from the "strategy hoppers" who tend to have a keen ability to know what they "should have done" after every market move.

I have a confession to make; I struggled with this very problem for many years. I didn't want to make mistakes. I didn't want to get whipsawed. And I definitely didn't want to "look dumb." However, I finally learned that making mistakes and "feeling dumb" was the price I had to pay for what I call "perfection."

The big problem is that times change and markets change. Thus, one has to remain flexible and be able to adapt to a changing environment. And it is for this reason that I think it is important to incorporate a healthy dose of trend-following into our approach - if for no other reason than the fact that unlike so many indicators, price can't deviate from itself.

However - and this is critical - I'm of the mind that a trend-following approach should only be used at certain times. As I've written a time or twenty, we believe in staying in tune with the overall market environment. For this reason, we let our Market Environment Model tell us what to do the vast majority of the time. When the model is positive, history says the odds favor the bulls - so you should be long. And conversely, when the model is negative, history has shown that this is when it is okay to play the short side of the game.

But when our Environment model is neutral, THIS is when things get tricky. I like to call these market environments "iffy" because there is just no way of knowing which team is going to dominate the game next. Therefore, THIS is when we believe it is important to keep things simple and just stay in tune with the trend.

When the market is "iffy" such as it is now, the goal isn't to be a hero. You aren't trying to "nail" every little 2-3% wiggle and giggle in the market. No, the goal is to be READY for the next BIG MOVE.

Makes sense, right? But here's the problem. When one employs a trend-following approach in a neutral or "iffy" environment, you WILL get whipsawed. You WILL look/feel dumb. And your patience WILL be tested as our research shows that only 53% of the trend-following trades we make in an "iffy" environment are profitable. And of course, this means that 47% of the time we are going to be "wrong" and look/feel dumb.

However, years of experience has taught me that using such an approach is the best way to be ready for the market's next major move. Why not just sit in cash and wait for the Environment Model to go positive, you ask? In short, waiting for the market to "prove" that its okay to get back in the water is expensive because. Unfortunately, waiting for "proof" can cause one to miss out on the early part of the next big move.

So, the bottom line is this: if you want to capture the big moves and you want to "be there" for the early part of the move, there is a price to be paid. And in short, that price is "looking dumb" when things are neutral or "iffy."

This approach may not make work for everybody as "looking dumb" and sticking to the strategy can be emotionally challenging when markets are being difficult. But remember, if you are shooting for some semblance of "perfection" in this game, you need to be willing to pay the price of admission.

Turning to This Morning...

After falling into what the press calls "bear market territory" (i.e. 20% or more), Japanese stocks rebounded nearly 5% overnight. However, the slew of weaker than expected data out of China over the weekend is keeping the enthusiasm for risk assets in check on both sides of the Atlantic this morning. European bourse are mostly lower and U.S. futures are currently sporting only modest gains. And with no economic news to speak of, traders are likely to keep prices within the recent range today.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -1.39%
- Hong Kong: +0.18%
- Japan: +4.94%
- France: -0.17%
- Germany: +0.96%
- Italy: -0.61%
- Spain: -0.15%
- London: -0.11%

Crude Oil Futures: -$0.52 to $95.51

Gold: -$0.60 to $1382.40

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

10-Year Bond Yield: Currently trading at 2.176%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +1.77
- Dow Jones Industrial Average: +8
- NASDAQ Composite: +1.38

Thought For The Day...

Never get so busy making a living that you forget to make a life... unknown

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Looking For The Line In The Sand

Thu, 06 Jun 2013 08:19:07 -0400

Daily State of the Markets
Thursday, June 6, 2013

Good Morning. The price action of the past two and one-half weeks makes it clear that stocks have entered a correctional phase of some sort. The next logical question, of course, becomes how low will the pullback go? There are several ways to try to answer this question. For example, a garden-variety pullback generally runs somewhere between -2% to -5%. So, with the current decline being -3.6%, one could argue that we might be closer to the end than the beginning.

Another way to determine the potential damage a pullback might inflict is to look at the key technical levels. For example, first there is the issue of support and resistance zones. Then there are trendlines to consider and where a "lower low" would come into play. Next, if you want to get fancy, you can utilize Fibonacci retracement levels. And finally, there are the popular moving averages that seem to attract a lot of attention from the press.

The problem with a market that has been making fresh all-time highs for a while (such as this one), is that during the first pullback, support levels are virtually nonexistent. And this is most definitely the case with the current market. From a near-term perspective, there is some support at S&P 1600 for example (the top horizontal black line on the chart below), but after that you have to go down to the 1540-1560 zone to find any real support on the charts.

S&P 500 Daily
(click to enlarge)

Next, let's turn to the issue of key trendlines. As I've detailed in recent reports, there is an uptrend on the charts that has been in place for almost six months now. Thus, this becomes an important line in the sand for our two teams. The current level that puts this trend in play (shown in the circle on the chart) is just above the 1600 level on the S&P 500.

Also in the circle on the chart is the 50-day simple moving average (at 1604.17). While this is not exactly a sophisticated indicator, it has been generally adopted as a key trend identifier. As long as the market is above its 50-day and the 50-day itself is moving up, all is right with the world as far as the bulls are concerned. But if prices cross below and then stay below the 50-day, well, that's a horse of a different color. And since the S&P hasn't spent more than one day below its 50-day since December, this is something to pay attention to.

Then there is the question of a "lower low" on the chart, which is also something that even amateur technicians such as myself watch for. In short, as long as an index is making a series of higher highs and higher lows, then the trend is up. Yep, sometimes it is indeed that simple. For the record, it would take a drop below 1540 in order for the S&P to put in a "lower low."

And finally there is the Fibonacci retracement levels to consider. Leonardo Pisano Bigollo - known as Fibonacci - was a 13th century Italian mathematician generally viewed as the most talented in his field during the Middle Ages. Although Leonardo did not actually discover the number sequence that today bears his name, he did use it in one his books. But I digress. The key here is that markets tend to retrace .25, .382, .50, and .618 of a move in both directions. So, if you find yourself wondering how low a market pullback might go, consulting the "Fib numbers" can be helpful.

If we look at the intraday low of the recent rally that occurred on November 16 and the most recent high of 1687.18 from May 22, we can apply the Fibonacci retracement matrix. For the S&P 500, the .25 retracement occurs at 1601.66, the .382 is at 1556 and the .50 is at 1516. So again, these are levels to pay attention to.

S&P 500 Daily With Fibonacci Retracement Levels
(click to enlarge)

If we now take a step back from the charts and look at our various levels, it becomes obvious that there are some very important levels that could come into play in the near-term. Clearly the most obvious and important level on the chart is at S&P 1600. This is the first level of support, the current level of the 50-day moving average, the current level of the key uptrend line, and the first Fibonacci retracement level. Therefore, I'm going to opine that a meaningful breach of the 1600 level that lasts for more than a couple days, would be very significant to the chart watcher crowd.

Because of this, we can probably expect (a) the 1600 level to act like a magnet in the next few days and (b) a battle over this important line in the sand to likely ensue. As such, whichever team emerges victorious in this fight will likely control the ball for a while.

Finally, please remember a couple things. First, chart analysis is more art than science. And second, computer algorithms don't pay attention to levels once they get on a roll. Therefore, it is important not to get too caught up in exact levels on the charts. But at least now we know what levels to be watching intently.

Publishing Note: I have an early meeting on Friday morning and will not publish a report. State of the Markets reports will return on Monday.

Turning to This Morning...

Although Asian markets continued to struggle, European bourses and U.S. futures are sporting a bit of a rebound this morning. However, with more jobs data this morning, Mario Draghi's press conference due to start shortly, and the Big Kahuna of economic reports (the Nonfarm Payrolls) due out tomorrow morning, the near-term trend is likely to remain a question mark today.

Pre-Game Indicators

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

Major Foreign Markets:
- Shanghai: -1.27%
- Hong Kong: -1.05%
- Japan: -0.85%
- France: +0.48%
- Germany: +0.30%
- Italy: -0.06%
- Spain: +1.31%
- London: +0.14%

Crude Oil Futures: +$0.50 to $94.24

Gold: +$4.20 to $1402.70

Dollar: lower against the yen, euro, and pound

10-Year Bond Yield: Currently trading at 2.090%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +7.55
- Dow Jones Industrial Average: +58
- NASDAQ Composite: +12.01

Thought For The Day...

"I have no special talents. I am only passionately curious." - Albert Einstein

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.