Daily State Of The Markets: Pricing Equilibrium (For Now)

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

The Fed remains the focus at the present time, although with the earnings parade now officially underway, this could easily change in the near-term. But during Wednesday's session, the Fed was still the name of the game.

First, we had some additional "fedspeak" from Fed governors Dudley and Powell, both of whom mentioned that a June "liftoff" in rates might still be on the table. Never mind the fact that both men also stuck with the party line saying that the FOMC remains "data dependent." No, it was the mere mention of June in their respective commentary that got the algo traders riled up again intraday on Wednesday.

Then there was the release of the minutes from last month's FOMC meeting - and the obligatory hysterical trading that quickly ensued (what's 9 S&P points down and then 13 quick points up among friends, right?).

At first blush, the Fed minutes didn't appear to contain any major surprises. The meeting minutes showed that Fed officials were still split on the timing of the so-called liftoff in rates (which, by the way, was NOT news). According to the minutes, "some members" favored raising rates in June while "others" wanted the initial rate hike to come later in the year, and then two called for a 2016 liftoff.

When all was said and done, the S&P closed about where it stood before the Fed minutes were released. As such, it appears that cooler heads prevailed once the algos had played their games with prices for half an hour or so. The key takeaway would seem to be that while the Fed is clearly split on when rates should begin to move up, that was BEFORE March's dismal Nonfarm Payrolls report was released.

The bottom line here seems to be that we will have to wait and see what the data looks like in the coming months. If the economic soft patch is quickly reversed then the weather can be blamed and a June rate hike might still be a possibility. And if it takes a while for the data to thaw out, then the Fed will likely be looking at September. And so it goes.

The next point I'd like to make on this fine Thursday morning is that the S&P 500 appears to be positioned in the absolute center of the current trading range. Therefore, one could argue that stocks are sitting at an equilibrium point, waiting for the next input to tip the scales.

And based on the fact that we will get the earnings from some big name starting next week, it is a decent bet that the reports from the banks and some of the big tech names might provide the catalyst necessary to break the current logjam. So stick around, this probably going to get very interesting, very soon.

Technical Take

One of the best ways to identify the bounds of a trading range is the use of a technical indicator called a Donchian Channel. The indicator was developed by Richard Donchian and is a simple trend-following breakout system. In short, the indicator plots the highest high and the lowest low over a set number of time intervals. In a sideways or range-bound environment, the indicator effectively creates the upper and lower "breakout/down" levels. And right now we would appear to have a textbook case for the use of a Donchian Channel as a break above 2115-20 would be a clear breakout to the upside while a break below 2040ish, would be an obvious break of support. And for now anyway, everything in between could be considered just "noisy" price action.

S&P 500 Index - Daily

Turning to This Morning...

The primary stories in the market this morning include word that Greece is actually planning on making the scheduled payment to the IMF today, the ongoing joyride to the upside in Hong Kong (the Hang Seng is up +6.6% in the last 2 days alone), and the unofficial start of the earnings parade. While none of these are big market movers, we will note that Alcoa's earnings may be representative of the trend expected from the Q1 reporting season. As the majority of companies seem to be able to do, AA beat managed to exceed EPS estimates but was light on the revenue side. And while the earnings season doesn't really start heating up until next week, investors will want to pay particular attention to revenues and company guidance as it relates to the impact of the stronger dollar. U.S. stock futures are currently pointing to a modest gain at the 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: +0.75%

Hong Kong: +2.70%

Shanghai: -0.92%

London: +0.82%

Germany: +0.53%

France: +1.03%

Italy: +0.80%

Spain: +0.66%

Crude Oil Futures: +$1.05 to $51.47

Gold: -$4.10 at $1199.00

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 1.887%

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

S&P 500: +2.05

Dow Jones Industrial Average: +34

NASDAQ Composite: +9.39

Thought For The Day:

Every time you smile at someone, it is an action of love, a gift to that person, a beautiful thing. -Mother Teresa 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 Fed/ECB Policy

2. The State of the U.S. Economy

3. The State of the Earnings Season

4. The State of the U.S. Dollar 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: Neutral

(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: 2040
  • Key Near-Term Resistance Zone(s): 2120

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"...

  • Price Thrust Indicator: Positive
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Neutral
  • Technical Health of 100+ Industry Groups: Moderately Positive 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: Neutral

    • 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.

    • Weekly Market Environment Model Reading: Moderately Positive