Back To Normal For Stocks Now, Right?

Traders breathed a sigh of relief on Wednesday after Harry Reid confirmed that he and his Republican counterpart had come to an agreement to raise the debt ceiling and reopen the government.

While there is still a fair amount of work to be done and there could be hiccups along the way, the current thinking is that the politicians have once again, to paraphrase the famous words of Winston Churchill, found a way to do the right thing after they exhausted all alternatives.

While some will argue that Wednesday's 206 point gain on the DJIA (NYSE:DIA) was driven by short-covering, the rally did increase the total on the six-day anticipatory run to nearly 600 points. And things looked even better over on the S&P 500 (NYSE:SPY), NASDAQ (NASDAQ:QQQ), Russell 2000 (NYSE:IWM) and S&P Midcap 400 (NYSE:MDY) where the broader indices either finished at new highs, at new cycle highs, or came pretty darn close to a previous high-water mark.

Glad That's Over!

So... now that the big, bad debt event is in the rear-view mirror, things will get back to normal again in the stock market, right? Instead of focusing on every headline, comment, and/or rumor out of D.C., won't traders now turn their attention to issue of the day - corporate earnings? And after that, won't such mundane issues as economics and valuations become important again?

In a word, no.

It is important to recognize that while the deal announced by Senate leaders on Wednesday will reopen the government and raise the debt ceiling, it does so only until January 15 and February 7, respectively. As such, it won't be long until the boys and girls will be back to calling each other names, pulling each other's hair, and pushing one another on the playground again. In fact, the country will be lucky to get through the upcoming holiday shopping season before the bickering and threats start anew.

Preparing For The Next Go 'Round

Since the next opportunity for the professional politicians to shut down the government is just ninety days away, some investors may want to begin preparing their strategy now. One idea would be to take the gains for the year and go home. And frankly, the idea of putting 2013's stock market gains, which are likely in the range of 20 percent to 30 percent at this point, in the bank may be very appealing to a wide swath of investors.

Under the assumption that the Government Crisis Play Book will work again, the "fast money" crowd may be looking at the calendar and making plans to start a short-selling campaign once the insults start to fly before New Year's Eve.

However, the bulls may decide to ignore the entire ordeal this time around. After all, the S&P's pullback during the latest edition of fun and games in Washington was just a hair over four percent. And given that each successive budget/debt crisis since 2011 has produced shorter and shallower declines, there is probably a fair number of investors that will pass on hitting the panic button next time.

Checking The Calendar, It's Almost Time For...

There are a couple other reasons why investors may not want to jump off the bull bandwagon any time soon - and both have to do with the calendar.

First, the time of year when stocks display a strong tendency to move higher (aka the Year-End Rally) is almost here. The bottom line is that one of the most favorable parts of the year is during the November through April period. And unless my Outlook calendar is messed up again, November 1 doesn't appear to be too far away.

And then there is the issue of "performance anxiety." Don't look now fans, but the S&P 500 is up nearly 21 percent in 2013. The problem is that a great many fund managers are underperforming by a rather large margin this year (the HFRX Hedge Fund Index is up less than 5 percent year-to-date). This has traditionally meant that managers who may have been overly bearish throughout the year tend to throw in the towel and get long, in the hopes of playing some catch-up during the last couple months of the year.

So, Back To Normal Then?

So, while the focus may come off of Washington D.C. for a while, it is unlikely that the stock market is going to get back to "normal" (whatever that is) any time soon. But one can always hope, right?

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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 Earnings Season 2. The State of Fed Policy 3. The Outlook for the U.S. Economy 4. The Budget Games in Washington

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: Positive (Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: 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 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: 1695-1705
  • Near-Term Resistance Zone(s): 1725

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: Positive
  • Price Thrust Indicator:Positive
  • Volume Thrust Indicator:Neutral
  • Breadth Thrust Indicator:Moderately Negative
  • Bull/Bear Volume Relationship: Moderately 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 overbought from a short-term perspective and is moderately overbought from an intermediate-term point of view.
  • 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 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: Positive

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...

Now that the debt-ceiling deal has been inked by the President, it appears that traders have gone into "sell the news" mode. Recall that stocks have rallied on the expectation that a deal would get done for the past 5-6 days. As such, it appears that the "buy the rumor, sell the news" trade may now be underway as the deal didn't really solve anything. In short, most analysts feel that the deal simply kicked the can down the road for another three months. In addition, punk earnings from the likes of IBM and Goldman Sachs are helping to push U.S. stock futures lower in the early going.

Pre-Game Indicators

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

Major Foreign Markets: - Japan: +0.83% - Hong Kong: -0.57% - Shanghai: -0.19% - London: -0.07% - Germany: -0.43% - France: -0.28% - Italy: -0.67% - Spain: -0.19%

Crude Oil Futures: -$0.59 to $101.70

Gold: +$37.90 to $1317.20

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

10-Year Bond Yield: Currently trading at 2.627%

Stock Futures Ahead of Open in U.S. (relative to fair value): - S&P 500: -4.24 - Dow Jones Industrial Average: -116 - NASDAQ Composite: -9.17

Thought For The Day...

Success is not counted by how high you have climbed but by how many people you brought with you. - Wil Rose

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!

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Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

State's Chart of the Day - Each day we highlight a top rated stock with a positive technical setup.

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Mission Statement

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

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