Daily State Of The Markets: Let's Talk This Out...

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

With the DJIA having bounced a nice, neat 1,000 points off the January 12, 2015 low, the question of the day is if we've seen the bottom of the recent correction - or - if the current rally is simply the traditional oversold bounce that tends to accompany meaningful declines.

Obviously it is nearly impossible to know the answer to this question. However, sometimes a good old fashioned debate can help one determine which team the odds seem to favor at this time. So this morning, I'd like to present my "on the one hand, and yet on the other" view of the recent stock market action.

On the One Hand...

Let's start with the good news. It is positive that the bulls were finally able to put on a good show on Friday. And it's a plus that Friday's launch party occurred after several days of "waffling." The glass is half full gang tells us that this means last week's action can be seen as "base building."

It is also a modest positive that stocks did not immediately reverse course on Monday - especially after the weak open. You see, instead of flushing lower and giving up a big slug of Friday's gains, the bulls appeared to be able to hold the line on Monday.

Next, don't look now fans, but the situation with oil may be improving. Well, the "situation" as it relates to the U.S. stock market anyway.

By now everybody knows that stock prices have been tied to oil for quite some time now. However, on Monday oil went down - a lot - and stocks, well, they didn't follow suit. So, while one day does not a trend make (unless you can trade in milliseconds, of course), one can argue that the correlation trade may be starting to wane. And yes, that would be a good thing.

In addition, stocks didn't follow china lower on Monday. Or the punk economic news that was presented from just about every reach of the globe. Oh, and stocks didn't even follow through on the early action in the U.S. futures and European markets. No, for once, it appeared that stocks may have had a mind of their own.

It is also positive that some leadership other than utilities was present yesterday as both the Semis and the Transports helped the bulls get up off the mat in the first half-hour of trading and push the indices back toward breakeven. That's definitely good "pin action."

Next, it is a plus that we've seen some "oomph" behind the recent move up as a couple of our momentum thrust indicators flashed green last week. (However, it is worth noting that these signals are much easier to come by in today's market.)

And finally, it is worth noting that our "early warning" models are not yet telling us that it is time to think about "going the other way" from a trading perspective. This means that the bulls probably have some time left on the rally clock.

On the Other Hand...

Unfortunately, that's about all I could come up with for the plus column.

On the negative side of the ledger, Exhibit A would be the weekly chart of the S&P 500. Take a look at the chart below and see if you don't agree with its placement in the minus column.

S&P 500 - Weekly

Although I am a firm believer that chart reading is not nearly as effective as it was years ago due to high-speed trading, algorithms, broad-based ETFs, and the fact that technical analysis is now available to the masses on their phones, it is pretty easy to see that the current trend of the S&P (which began last summer) is quite different than the one that had been in place for the prior 2.5 years.

Next, we need to recognize that (A) stocks are no longer oversold on a short-term basis (just the opposite, actually) and (B) investor sentiment indicators are no longer positive. Thus, the oversold/emotional tailwinds that likely helped the bulls put in a bottom, have stopped blowing. And from my point of view, this means that stocks are now "on their own."

The bears will also point out that stocks did not "follow through" on Friday's joyride to the upside during Monday's session. However, this one has its own "on the other hand" counterpoint as the textbooks say that a follow-through day can occur between 3 and 5 days from the initial blast. Thus, the bulls have some time here to recharge the batteries before attempting another charge.

Leadership is another concern. The bottom line is when utilities are your mo-mo leaders, it usually isn't a good thing from a big picture standpoint. On this subject, Carter Worth reported Monday that the spread between the performance of the DJIA and the Utilities sector in January was 12.9%. Mr. Worth also pointed out that the only other time since 1900 that the spread was over 10% was... wait for it... January 2007. Yikes.

Where To From Here?

Perhaps the biggest item of note from Monday's action was the potential decoupling of stocks and oil prices. So, this is definitely something to watch this week.

In terms of where we go from here, my take is as follows. If the bulls hope to produce something more than an oversold (aka dead cat) bounce, then the rally should resume - and accelerate - in the next few days. However, if the bears are to regain control, we are likely to see an "abrupt rally failure."

The complicating factor here is the likelihood of a "retest." As we saw during the Sept/Oct period, the market typically bounces and then retests the low after a meaningful decline. So, if the bears start to look strong again sometime this week, the next important test will be the 1860 area on the S&P 500. And if that level is "tested," I will argue that it's anybody's ballgame.

The bottom line here is that the action of the next few days looks to be important from a near-term perspective.

Turning to This Morning

Politics are in focus this morning as the race for the White House is now officially underway. Some argue this is one of the reasons for the weakness seen in the stock market this year. However, the primary focal point continues to be oil. Crude futures are falling again this morning (-3.16% at the present time) and this time, stock markets on both sides of the Atlantic appear to be taking notice. Europe is down about 1% or more across the board on the decline in PPI and U.S. futures are, as usual, following suit.

Today's Pre-Game Indicators

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

Major Foreign Markets:

Japan: -0.64%

Hong Kong: -0.76%

Shanghai: +2.27%

London: -1.68%

Germany: -0.97%

France: -1.74%

Italy: -1.47%

Spain: -1.64%

Crude Oil Futures: -$0.94 to $30.68

Gold: -$2.70 at $1125.380

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

10-Year Bond Yield: Currently trading at 1.929%

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

S&P 500: -15.30

Dow Jones Industrial Average: -137

NASDAQ Composite: -19.40

Thought For The Day:

"Remember that not getting what you want is sometimes a wonderful stroke of luck" - Dalai Lama

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 Oil Crisis

2. The State of Global Central Bank Policy

3. The State of China's Renminbi

4. The State of the Stock Market Valuations

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 6 months, and long-term as 6 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: Negative

(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Neutral

(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: 1905
  • Key Near-Term Resistance Zone(s): 1950-1980

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): Neutral
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator(NASDAQ): Negative
  • Breadth Thrust Indicator (NASDAQ): Neutral
  • Short-Term Volume Relationship: Neutral
  • Technical Health of 100+ Industry Groups: Negative

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: Oversold

  • 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: Negative