Market Commentary

Yesterday’s stock market action once again reinforced the idea that the key driver of this market remains the outlook for monetary policy. With the S&P 500 looking it was down for the count and ready to break the all-important support at 1980, traders got word that the Chinese leader Xi Jinping was considering replacing the head of the PBoC. The immediate thinking was that such a move would liberalize monetary policy in the world’s second most important economy and that more stimulus would likely ensue.

In addition, “Super Mario” (ECB President Mario Draghi) also lent the bulls a hand by saying that (a) monetary policy would remain accommodative for a very long time, (b) that the ECB was united in their view that inflation needs to return to the 2% annualized target range, and (c) that governments need to do more to boost growth.

Finally on the monetary front, there was more talk about the Fed needing to be patient in terms of its plan to tighten rates. For example, Chicago Fed’s Evans said the Fed should be “exceptionally patient” and willing to allow modest overshooting of inflation target. NY Fed President Dudley also argued economy needs to run “a little hot” for a while. In addition, both referenced the Fed’s premature tightening during the Great Depression. And then Minneapolis Fed President Kocherlakota said inflation likely to remain below 2% target for next four years.

On the economic front, New Home Sales surged in the month of August. This put a dent in the bear camp’s worry that the housing market was slowing faster than anticipated and would soon become a drag on the economy. In addition, the new “Inversion Rules” from the Treasury department did not appear to be as harsh as had been feared and would not deter deals in the future.

Now toss in the fact that the market had been down for 3 consecutive days, which, for the past two years has been a buy signal for the fast money crowd, and boom – the rally was on.

Turning to this morning, things were fairly quiet overnight. European markets are mostly higher as traders continue to focus on Draghi’s dovish stance. In Asia, the Nikkei went on a tear and finished at new seven-year highs. And here at home, U.S. futures point to a slightly lower open at the present time.

Current Market Outlook

By now it is quite clear that monetary stimulus remains the focal point of the market. In short, any mention of anything that could possibly delay rate hikes in the U.S. or add to stimulus measures in Europe/China is viewed as a positive by traders and their computers. However, it is important to keep in mind that this market is not hitting on all cylinders at the present time. As such a cautious stance remains warranted.

Looking At The Charts

The good news is that the S&P 500 stopped falling at the exact spot that it needed to yesterday. The fact that the 1980 level held during the opening round of selling caused traders to “go the other way” from a technical standpoint. However, the bad news is that stocks remains stuck in a trading range. And with stocks no longer oversold, it is anybody’s ball game at this point. We will continue to focus on the key lines in the sand on the chart of the S&P 500, which by now are very well defined.

S&P 500 – Daily

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +1.28%
    Hong Kong: -0.24%
    Shanghai: +0.06%
    London: -0.08%
    Germany: +0.51%
    France: +0.35%
    Italy: +0.79%
    Spain: +0.77%

Crude Oil Futures: +$0.29 to $93.06

Gold: -$8.00 at $1211.30

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

10-Year Bond Yield: Currently trading at 2.549%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -2.85
    Dow Jones Industrial Average: -5
    NASDAQ Composite: -6.06

Thought For The Day:

Make sure your worst enemy doesn’t live between your own two ears. -Laird Hamilton

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 Fed/ECB Policy
      2. The Level of Interest Rates
      3. The Level of the U.S. Dollar
      4. The Outlook for U.S. Economic Growth

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: Moderately 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 2 years)

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:

  • Key Near-Term Support Zone(s) for S&P 500: 1980
  • Key Near-Term Resistance Zone(s): 2005-20

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 (Short-Term): Negative
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Negative
  • Bull/Bear Volume Relationship: Moderately Positive
  • Technical Health of 100 Industry Groups: Neutral

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.

  • S&P 500 Overbought/Oversold Conditions:
    – Short-Term: Neutral
    – Intermediate-Term: Moderately Oversold
  • 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.

  • Weekly State of the Market Model Reading: Neutral

Greg Franklin, AAMS

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