Daily State Of The Markets: Poised To Break Up, Or...

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

The "discussion" in the market continues to revolve around four key areas: (1) When the Fed is going to raise rates, (2) The impact of the dollar's rally on earnings, (3) The state of the U.S. economy, and (4) The ongoing mess in Greece. To be sure, the primary focus on an intermediate-term basis would appear to be the question of what the Fed is going to do - and when. The party line out of the Fed appears to be taking shape as there has been a flurry of Fedspeak lately. Just yesterday we heard from Fed Governors Rosengren, Mester, and Lockhart,and then some guy named Bernanke.

Thursday, Boston Fed's Rosengren said that the Fed's criteria for raising rates has not been met. Rosengren, who is a non- voting member of the FOMC, said in a speech on monetary policy at the Chatham House in London repeated that "the incoming data would need to improve to fully satisfy the Committee's two conditions for starting to raise rates."

Next up, Cleveland Fed's Mester reiterated the data dependent theme as it relates to the Fed's decision on raising rates. In a speech to the Forecasters Club of New York, Mester, who is also a non-voting member, said she is fine with "relatively soon" being the descriptive term used with regard to the question of when the Committee will raise interest rates. Ms. Mester added that the data must show growth has regained momentum following the latest round of weak Q1 economic statistics.

In addition, Atlanta Fed's Dennis Lockhart, who is a voting member this year, chimed in saying that there is no preconceived plan for raising interest rates. Lockhart, who was speaking at the Palm Beach County Business Leaders Luncheon, also hit on the theme of the Fed's data dependence. Lockhart stated, "The FOMC has also emphasized that the decision will be data-dependent. I consider this an essential discipline around our decision making on this matter. To me, data dependency means there is no preconceived plan. Data dependency means the decision will be based on the best evidence we have of the reality and trajectory of the economy."

Heck, even Ben Bernanke, who has announced that he join the "dark side" and go to work for Citadel, was out with comments about what the Fed could to with regard to influence interest rates.

The key takeaway is that despite all the talk out of the Fed, the stock market has barely budged recently. As such, analysts can assume that the key themes the Fed governors have been stressing would appear to be baked into stock prices at this point in time. As such, it is a safe bet that the market will soon find some other shiny object to attract its attention in the near-term.

Technical Take

With the S&P 500 sitting at the top end of the trading range that has been intact for some time now (which, of course, followed another range which dominated the face of trading for months), the question of the day is if the market is poised to break up and out of the top end of the range - an event that would, on the surface, appear to favor the bulls - or break down and begin another trip through the range. For much of the last six months, the game plan has been for traders to sell into each and every new high. And based on the early action this morning, it appears that the fast-money has decided to implement this game plan once again.

S&P 500 Index - Daily

Turning to This Morning...

Once again, an "excuse" has emerged for the hot-money on Wall Street to hit the sell button early and often. According to the news wires, U.S. stock futures took a sudden, sharp dive early Friday morning after a change in the short-selling rules for Chinese index futures. It appears that Chinese regulators will now allow fund managers to lend stocks for short selling, media reports said Friday - and the futures sold off hard on the news. And just to keep traders on their toes, the situation in Greece is escalating again as concerns about a default grow. As a result, European bourses are down hard across the board this morning. And here at home, U.S. stock futures are currently pointing to a weak 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: -1.17%
Hong Kong: -0.31%
Shanghai: +2.20%
London: -0.83%
Germany: -1.74%
France: -1.23%
Italy: -1.93%
Spain: -1.76%

Crude Oil Futures: -$0.57 to $56.14

Gold: +$6.70 at $1204.70

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

10-Year Bond Yield: Currently trading at 1.853%

Stock Indices in U.S. (relative to fair value):
S&P 500: -11.34
Dow Jones Industrial Average: -112
NASDAQ Composite: -33.60
Thought For The Day:
"A clever person solves a problem. A wise person avoids it." - Albert Einstein
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 Earnings Season
3. The State of the U.S. Economy
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: Moderately Positive
(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"...

  • Trend and Breadth Confirmation Indicator (Short-Term): Positive
  • Price Thrust Indicator: Positive
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Positive
  • 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: Moderately Overbought
    - 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: Positive