Traders Sing 'The Who': We Won't Get Fooled Again

With a fifth consecutive down day now in the books, which just happens to be the first such occurrence of the year, those coming to work dressed in their bear costumes were seen rejoicing Wednesday evening.

Despite the fact that the S&P 500 is off less than two percent (-1.898 percent, to be exact) from its recent all-time high, those that see the glass as half-empty once again believe that their time has come. After all, if the market can't produce a single up day after the "no taper" blast, things can't be in very good shape, right?

On the other side of the field, the bear opponents see things a little differently. Instead of the world coming to an end on account of the looming government shutdown or even an imminent tapering of QE, those donning the rose-colored Revos these days suggest another view. In short, the bulls contend that the current malaise seen in the market is more likely attributed to traders taking a wait and see approach to the mess in Washington than a rush to the exits.

One analyst, who obviously has good taste in music, suggested that The Who's classic Won't Get Fooled Again is the most appropriate analogy for this market.

A Blast From the Past

Please forgive the brief trip down memory lane. Anyone growing up in the 1970s is obviously intimately familiar with this classic rock 'n roll anthem. (Most of the younger baby boomers probably still proudly own the original vinyl copy of the album.) And now that the song's refrain will likely be stuck in your head for the rest of the day, it's time to get back to the matter at hand: how the title of one of the all-time great songs fits in with the stock market.

In short, traders are not looking to get fooled again by Washington's antics.

Ever since the fall of 2011, when the games the politicians played cost the U.S.A. its triple-A credit rating, traders have sold stocks in response to the fear of what might come next. Whenever the issue of the nation's debt ceiling or the government's budget is broached, the algorithms go into high gear, reacting violently to every word that comes out of the politicians' mouths. And based on the sheer volume of commentary that emanates out of Washington each day, this has led to a great deal of volatility along the way.

Thus, the fast money has learned to sell each and every time the politicians take to the microphone and then buy 'em back (at the speed of light, of course) when the issue ultimately gets resolved. While history shows that there have been some fairly significant pullbacks surrounding these big governmental debates, the key is the market ultimately moved higher once the issue at hand moved to the back burner.

Learning A Lesson?

This time around though, it appears that traders may not be biting.

In short, they don't want to get fooled again. Armed with the knowledge of the way this game has turned out over the past two-plus years, this time there doesn't appear to be any big selling pressure.

There is no panic. There is no real fear.

The bottom line is that everybody now understands that our elected officials will likely find a way to avert disaster (political disaster, that is) and keep the country running.

So, perhaps traders have learned a lesson. Perhaps everyone is waiting to buy the anticipated dip. Perhaps no one wants to expose new money to the violence that could occur if Washington screws the pooch this time. And perhaps the bears aren't interested in pressing their bets here.

But from this man's perspective, the key is that nobody wants to get fooled again. Cue the air guitar.

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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).

T-1. The State of Fed Policy T-1. 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: Neutral (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: 1680
Near-Term Resistance Zone(s): 1700

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: Moderately Positive
Volume Thrust Indicator:Neutral
Breadth Thrust Indicator:Neutral
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 neutral 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...

Not much new to report in the early going. While Japan was higher overnight on hopes for a new tax cut, the rest of the overseas markets are in the red at this time. Here at home, traders will be hoping to avoid a sixth straight losing session and are sure to be watching the first revision to U.S. GDP, Weekly Jobless Claims, and Pending Home Sales. At this point, U.S. futures are pointing to a modestly higher open. However, the pre-market futures action has meant little of late.

Pre-Game Indicators

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

Major Foreign Markets: - Japan: +1.22% - Hong Kong: -0.36% - Shanghai: -1.97% - London: -0.02% - Germany: -0.11% - France: -0.27% - Italy: -1.41% - Spain: -0.06%

Crude Oil Futures: +$0.48 to $103.14

Gold: +$0.50 to $1336.70

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

10-Year Bond Yield: Currently trading at 2.630%

Stock Futures Ahead of Open in U.S. (relative to fair value): - S&P 500: +3.48 - Dow Jones Industrial Average: +38 - NASDAQ Composite: +13.0

Thought For The Day...

The worst thing about being lied to is simply knowing you weren't worth the truth. -Unknown

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.

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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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