Washington, D.C. Antics Aside, The Stock Market Environment Is...


With stocks having been down six of the last seven sessions, it is hard to argue that the short-term trend is anything but negative.

The S&P 500 (NYSE:SPY) is below its 5-day moving average and the 5-day is now below both the 10-day and 18-day moving averages. And, with Congressional leaders still miles apart on a deal to avert a government shutdown, it appears that the recent trend could continue for a while.

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The Latest In The D.C. Drama

The latest update on the drama is the House has passed a new Continuing Resolution which, if passed by the Senate, would keep the government funded through December 15. The GOP-led measure offered up a compromise by backing off their prior position of "defunding" Obamacare; proposing instead to delay the implementation of Obamacare for one year and repealing the tax on medical devices intended to fund the so-called healthcare reform law.

While this would appear to be relatively good news on the surface, it is important to recognize that there is no chance that this bill will be approved by the Democratic-controlled Senate. In addition, the White House has made it clear that the President will not enter this debate - except for the occasional press conference filled with name-calling and finger-pointing, of course. As a result, the popular press suggested Sunday that a government shutdown looks likely.

How Will Stocks React?

So how does this development impact stocks? Based on the recent action, probably not in a good way. However, the coming week could certainly provide any number of catalysts for stocks to move in either direction. For example, the deadline for a government shutdown isn't until Tuesday (which is like a year in Washington terms). As such, the bulls argue that a deal could still get done. And if a gov't shutdown doesn't happen, those wearing the rose-colored Ray Ban's suggest that stocks ought to reverse course and test the upside of the recent range.

On the other side of the aisle, the bears contend that even if a deal to keep the government running is somehow reached, the debt ceiling still needs to be addressed. Recall that Treasury Secretary Jack Lew announced last week that the government will run out of cash on October 17. Thus, any celebration tied to avoiding shuttering most of D.C. could be short-lived.

Other Considerations

While all eyes are on D.C. at the present time, we need to keep in mind that the coming week is also chock full of economic data, including the "Big Kahuna" - the September Jobs Report slated for release on Friday morning at 8:30 am eastern daylight time (give or take 10-20 milliseconds, of course). As usual, this will be the most scrutinized number on the planet due to the fact that the FOMC is targeting the unemployment rate as a trigger to changes in the Fed's monetary policy.

But before the Nonfarm Payroll totals and the Unemployment Rate are announced, traders will get a peek at the Chicago Purchasing Managers Index on Monday (the August reading was 53.0), the ISM Manufacturing Index and Construction Spending reports on Tuesday (analysts are looking for a reading of 54.0 on the ISM Manufacturing Index vs. 55.7 last month), ADP Employment (e.g. private-sector job creation), and then Initial Jobless Claims, Factor Orders and the ISM Non-Manufacturing Index on Thursday. So, it ought to be an action-packed week to say the least.

What Do The Indicators Say?

When the outlook for the market becomes cloudy, it is usually a good idea to turn to the indicators for clues as to status of the current environment. Below is a brief rundown on some key indicators.

Bond Yields: The bond market can often be a key "tell" as to the outlook for the economy, inflation, and Fed policy.

10-Year T-Bond Yield - Daily

The key takeaways from the chart of the 10-year yield are (a) the recent "taper tantrum," which caused yields to spike appears to have ended and (b) rates have settled down to more normalized levels over the past month. However, the move has not been "emotional" and as such, there does not appear to be any panic in the air at the present time in relation to the games being played in Washington.

Big Picture Models: These models are designed to provide a read on the overall environment from a "big picture" standpoint. Coming into this week, the overall reading of the model was neutral with five of the indicators positive, four negative and one neutral. Here's the rundown:

  • Trend/Breadth Confirm Indicator: Moderately Positive
  • Cycle Composite: Moderately Positive
  • Supply/Demand Volume Relationship: Positive
  • Sentiment Model: Negative
  • Economic Model: Negative
  • S.T. Trend: Negative
  • Intermediate-Term Trend: Positive
  • State of Industry Groups: Positive
  • Risk/Reward Model: Neutral
  • Monetary Model: Negative

The Bottom Line...

One of the keys to long-term success in the market is to remove emotion and stay objective. This is where a disciplined, rules-based, repeatable process comes in. And based on the status of some key indicators/models, the overall "big picture" environment appears to be neutral. However, it is important to recognize that there are a fair amount of cross-currents at the present time, which indicates that a flexible stance is recommended.

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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. Fun and Games in Washington (I.E. the Debt Ceiling) 2. The State of Fed Policy 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 Negative (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 moderately oversold 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...

The games being played in Washington are impacting the markets around the world negatively this morning. Given that the Democrats and Republicans remain far apart on coming to terms with funding the government, it appears that the U.S. government will shut down starting Tuesday. Analysts project that a protracted shutdown would cost GDP about 1.4%. Thus, traders worry that the fragile U.S. economy will once again stumble if lawmakers fail to reach an agreement on the debt ceiling.

Pre-Game Indicators

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

Major Foreign Markets: - Japan: -2.06% - Hong Kong: -1.50% - Shanghai: +0.69% - London: -0.75% - Germany: -0.96% - France: -1.25% - Italy: -1.70% - Spain: -1.08%

Crude Oil Futures: -$1.22 to $101.65

Gold: -$1.70 to $1337.30

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

10-Year Bond Yield: Currently trading at 2.598%

Stock Futures Ahead of Open in U.S. (relative to fair value): - S&P 500: -13.75 - Dow Jones Industrial Average: -125 - NASDAQ Composite: -24.45

Thought For The Day...

Being perfect is about being able to look your friends in the eye and know that you didn't let them down. -"Friday Night Lights"

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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