Putting Fear Back In The Market Mix

There are times when the market's moves do not appear to have a clear-cut driving force behind them.

Monday's decline of about one-half percent was a decent example of this. Stocks fell for a third consecutive session and although the damage wasn't terribly significant, the fact of the matter is that there is some fear returning to the mix.

Those Who Don't Know History...

Believe it or not, this is a good thing. Remember, trees don't grow to the sky - even in the most bullish environments. And history shows that when the game becomes too lopsided, when one team is totally dominant for an extended period of time, it usually ends badly (think 1999). Therefore, the pattern witnessed this year where the market takes three steps forward and then pulls back for a bit is really quite healthy.

Card-carrying members of the glass-is-at-least-half-empty club contend that when stocks fall without any real reason, the indices are actually cracking under their own weight. The thinking is that if stocks decline just for the heck of it, it means that the buyers have been exhausted, momentum has waned, and the joyride to the upside is over. As such, investors are warned to look out below.

If A Bear Is Chasing You, Climb a Tree

It is right about this time that the long-frustrated bears, the folks that have missed out on the 19 percent gain in the S&P 500 so far this year, take to their soap boxes. From bully pulpits, the Debbie downers tell us that the gains seen in the market will be fleeting, that things will turn ugly when the Fed pulls the punch bowl, that the economy has yet to reach escape velocity and that we'd all best be prepared for the day of reckoning. In short, our furry friends opine that the sky will indeed fall this time, just you wait.

To be sure, this uber-negative position has not been a good stance to take for the past two years. But instead of poking fun at the bear camp, we should probably be thanking them for their service. For without the occasional bout of fear, the runs in the market would always be one-way affairs.

Playing the Game, Washington-Style

We should thank all the traders that are concerned about headline risk relating to the goings-on in Washington these days. Honestly, does anyone REALLY believe that the boys and girls playing politics in our nation's capital will cause the government to default on its debts? Haven't we seen this movie before? Doesn't everybody know that the two sides will play the blame game and then fight, scratch and claw until the very last second before caving and extending the debt ceiling?

And yet, the fact that there have been government shut-downs before keeps the fear of what might happen alive. This causes some traders to take profits after a strong year of gains. This fear causes the dip-buyers to take a knee on the sidelines for a while. And it emboldens the perma-bears to put on some short positions as they dream of 2008 revisited.

In short, this is what makes a market. This is what keeps things from getting completely out of hand, and this is what ultimately sets up the next rally.

Frankly, the odds don't seem to be with the bears at this time. Even if one embraces the idea that the politicians could have a brain cramp and screw things up, history suggests that a deal will get done at the eleventh, twelfth, or even thirteenth hour (remember the "sequester" deadlines that weren't really deadlines?) Then when the fear of the big, bad events passes, buyers return, shorts cover, and the algorithms have a field day.

But the bottom line is that the worry about the debt debate, and what the Fed may or may not do, and who will be the next Fed Chairman, and what the earnings will look like next quarter, etc., all are adding some fear to the mix right now. And the key point here is that adding a little fear once and awhile is a good thing.

Click Here For More "Daily State of the Markets" Commentary

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).

T1. The State of Fed Policy T1. Fun and Games in Washington (I.E. the Debt Ceiling) 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: Moderately 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: 1700, 1685
Near-Term Resistance Zone(s): 1730

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: Neutral
Price Thrust Indicator: Positive
Volume Thrust Indicator: Positive
Breadth Thrust Indicator: Positive
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 modestly overbought from a short-term perspective and is neutral 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

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...

With the focus still on the question of when the Fed will begin tapering asset purchases and the ongoing debt debate in Washington, traders are continuing to curb their enthusiasm about stocks around the globe. Asian markets were lower overnight while European bourses are modestly higher. U.S. futures are currently pointing to a mixed-to slightly lower open.

Pre-Game Indicators

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

Major Foreign Markets: - Japan: -0.06% - Hong Kong: -0.82% - Shanghai: -0.59% - London: +0.12% - Germany: +0.19% - France: +0.62% - Italy: +0.76% - Spain: +0.40%

Crude Oil Futures: -$0.1 to $103.43

Gold: -$12.90 to $1314.10

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

10-Year Bond Yield: Currently trading at 2.695%

Stock Futures Ahead of Open in U.S. (relative to fair value): - S&P 500: -3.44 - Dow Jones Industrial Average: +1 - NASDAQ Composite: +1.30

Thought For The Day...

Sooner or later, those who win are those who think they can. -Richard Bach

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!

Got Research?

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

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

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.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided as is without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in our websites and publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.