When there is no data to key off of, as has been the case so far this week, traders and their computers are basically left to on their own to ponder the big picture. And based on the action of the last four days, it doesn't appear that anyone is feeling especially optimistic right now.
One Reason Stocks are Falling
Usually, the catalysts behind a 3.7 percent decline in the market are fairly obvious. News, data and/or rumors tend to give traders cause to move the market in one direction or the other. However, this time around, the issues are more muddied and investors who have become accustomed to the market rebounding quickly from each and every decline may be left scratching their heads right about now.
One of the drivers behind the bulls' run for the roses over the past nine months has been the idea that central bankers around the world have been targeting asset prices with their policies. In plain English, this means that Mr. Bernanke and specifically his counterpart in Japan have been trying to push prices of stocks and real estate higher.
The thinking behind what is commonly called the "wealth effect" is that when folks see the value of their homes, their 401Ks, and their mutual funds rise, they feel better about their financial situation. And when people feel better about their finances, they tend to spend more, which in turn, stimulates the economy. What's not to like, right?
Based on the steady improvement seen in the housing market over the past year and the new all-time highs in U.S. stock market indices, it is safe to say that Bernanke's bunch has achieved at least part of their goal. However, due to a variety issues, the outlook for further success of the Fed's stimulus strategies may be coming into question.
With the Federal Reserve currently buying up more than one trillion dollars per year of bonds, rates have stayed low - artificially low - for some time. Until just recently, the thinking was that Mr. Bernanke and his merry band of central bankers would continue to err on the side of caution when it came to the economy. In short, Bernanke has pledged to do whatever it takes to make darn sure the U.S. doesn't wind up in a deflationary cycle.
And if this meant that rates had to stay low - again, artificially low - for an "extended period" and that asset prices would inflate along the way, so be it.
The Fly in the Ointment
The problem is that there appears to be a fairly large fly in the ointment right now. First, in an ongoing effort to make the Fed even more political than it already is, President Obama has declared that he's seen enough from Ben Bernanke. In what can only be categorized as a sacking, the President recently announced that the Fed Chairman would not be seeking another term come January 2014. According to the latest poll, Obama's close economic advisor, Mr. Larry Summers, is the front runner for the appointed post.
As a quick aside, does anyone besides me find it annoying that the most important financial/economic position in the country and perhaps the word is an un-elected one? But I digress...
The problem here isn't whether anybody thinks Larry Summers will do a decent job. No, the issue is that "Gentle Ben" will be leaving. And based on the discussions being held by Fed Governors in the media, so too will Mr. Bernanke's policy to err on the side of caution and easy money.
So, while everybody knows that the Fed's uber-easy monetary policy would end at some point, now there is an actual spot on the calendar to point to. Instead of Bernanke continuing to pump money into the system until unemployment comes down to 6 percent or so, or until inflation reaches a level that becomes a problem (which would undoubtedly include more wealth effect, by the way), now traders and investors have to decide whether or not the game will change completely in the next four to five months.
In short, this creates uncertainty. And as everybody knows, traders hate uncertainty. So, what do traders do when uncertainty rises? Yep, that's right; they sell.
The key is that because (a) the Fed is "talking taper" and (b) Bernanke is leaving, the Fed appears to have lost control of the bond market. Rates are spiking as the yield on the 10-year has moved from 1.63 percent to 2.88 percent in just a little over three months. In what may be the most publicized market move in history, investors are selling bonds. And the bottom line is this isn't likely to change any time soon.
So, with traders feeling fairly confident that the era of artificially low rates is coming to a close in the near future, it appears that there are simply more sellers than buyers in the bond market these days. And with the Fed ready to back away a bit in the near-term, well... you get the idea.
Publishing Note: My vacation time has finally arrived. I am traveling with family in France for the better part of the next 2.5 weeks. Thus, my oftentimes meandering morning market missive (aka "Daily State of the Markets") will be published as time and energy levels permit.
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 Level of Interest Rates 2. The State of Fed/Global Central Bank Policies 3. The Outlook for the U.S./Global Economy
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: Negative (Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Neutral (Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Positive (Chart below is S&P 500 daily over past 12 months)
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:
- Near-Term Support Zone(s) for S&P 500: 1640, 1600
- Near-Term Resistance Zone(s): 1657, 1680
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: Moderately Negative
- Price Thrust Indicator: Neutral
- Volume Thrust Indicator: Moderately Negative
- Breadth Thrust Indicator: Moderately Negative
- Bull/Bear Volume Relationship: Positive
- 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.
- Overbought/Oversold Condition: The S&P 500 is oversold from a short-term perspective and is moderately overbought from an intermediate-term point of view.
- Market Sentiment: Our primary sentiment model is negative .
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 because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: Neutral - This tells us to be cautious at this time.
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Turning To This Morning...
Overnight markets were red across the board as the Asian indices had an especially rough time. European bourses are also down more than 1 percent across the board this morning. However, a better than expected earnings report from Home Depot (HD) and a modest drop in interest rates has spurred some buying in U.S. futures. And after being down nine of the last eleven sessions, a rebound at the open is probably to be expected. But with no economic news scheduled once again, we will have to wait and see if the upbeat mood can last.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets: - Japan: -2.63% - Hong Kong: -2.30% - Shanghai: -0.63% - London: -0.60% - Germany: -1.14% - France: -1.49% - Italy: -1.63% - Spain: -2.21%
Crude Oil Futures: -$0.68 to $106.42
Gold: -$0.20 to $1365.50
Dollar: higher against the yen, lower vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.817%
Stock Futures Ahead of Open in U.S. (relative to fair value): - S&P 500: +3.99 - Dow Jones Industrial Average: +37 - NASDAQ Composite: +7.37
Thought For The Day...
A good leader takes a little more than his share of the blame, a little less than his share of the credit. - Arnold Glasow
Looking for Guidance in the Markets?
The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.
The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.
The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.
The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.
All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!
Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:
- State's Chart of the Day - Eeach day we highlight a top rated stock with a positive technical setup
- The Risk Manager Report - Stay in tune with the market's risk/reward environment
- The 10.0 Report - These are the REAL best-of-breed companies
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- State's Market Models - Each week we quantify the "state of the market" with a series of models
- The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day
At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly actionable portfolios with live trade alerts.
Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.
Wishing you green screens and all the best for a great day,
David D. Moenning Founder and Chief Investment Strategist StateoftheMarkets.com
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
Positions in stocks mentioned: none
The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com 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 TopStockPortfolios 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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