Is It Time To Worry? The Charts Say No
It's really getting ugly out there.
After Monday's 136 point decline on the DJIA, which just happened to be the eleventh losing session seen in the last thirteen for the venerable index, the popular press was ready to declare the corner Broad and Wall a disaster area.
Although the Dow is by far the worst performing index (the corrective phase has knocked off 740 points or 4.73 percent since the September 18 high) it appears that the media is attempting to dredge up the extreme emotions that surrounded the 2011 debt/budget fight.
Below is a list of headlines seen on Monday after the closing bell on sites such as MarketWatch and CNBC:
- "Social Security now at risk if debt ceiling isn't raised"
- "One month shutdown may trigger 20%-30% correction"
- "Fear gauge jumps"
- "S&P ends at 4 week low"
- "Dow below 15,000"
- "Debt ceiling flashback: Remember how bad 2011 was?"
- "China warns US 'clock is ticking'"
To be fair, none of the headlines were overly inflammatory. None suggested that the sky is indeed falling this time around. And after actually reading the articles, it is safe to say that most were fairly accurate.
However, to the average investor, someone who doesn't look at the correlations of market indices, the internal indicators, or the important technical levels, those headlines could very easily create some angst.
And perhaps that is the point. More than a handful of politicians, including the President of the United States, has gone on record suggesting that there is too much complacency in the markets right now. The thinking is that if stocks were in panic mode, Congress might start to feel some heat.
But with the so-called deadline (and it does appear that term is used loosely these days) still more than nine days away and the stock market just hanging around, the concern is that the politicians still have plenty of time to push the envelope on their game of political brinkmanship.
Where Everyone Stands
Let's break it down.
The President cancelled a trip to Asia and called everyone to his office to announce that he was not going to negotiate this matter. The Tea Party Republicans are not going to do anything unless/until "ObamaCare" is repealed or defunded.
The Democrats believe they are #winning and thus have no reason to deviate from the current game plan. And the end result is that nothing, absolutely nothing, is happening.
Stocks/Bonds Not Worrying (Yet?)
Each day that the impasse continues creates more doubt that a deal won't get done. Each passing day causes traders to fear the worst. And each passing day causes just about everyone in the country to fret about the politicians doing the unthinkable: defaulting on U.S. Government debt.
While the press continues to sport emotional headlines on the subject intended to evoke a response (well, actually the goal is to get you to read the article and maybe click on an advertisement or two), the markets have actually held up pretty darn well.
As was mentioned at the outset, the DJIA is the worst performer of the major indices. But take a look at the chart below. Is this the picture of panic? Doesn't the current selloff look orderly? Is there any technical reason to throw up one's arms run for the hills?
Now take a gander at a chart of the S&P 500. Sure, the last couple weeks haven't been great. And yes, the index did fail to hold above the old highs. However, note the thin blue line drawn onto the chat which represents the uptrend that has been intact since June (and yes, that could be extended back to March if one so desired). The point is that despite all the doom and gloom out there in the press, the index most often associated with the overall stock market is still in an uptrend.
S&P 500 Daily
Next up is the NASDAQ, also known as the "technology-ladened" stock market index. If the first question that comes to mind is whether or not this chart covers the same time period the charts of the DJIA and S&P 500 shown above, you have earned a gold star. The bottom line here is that there is no panic and no consternation evident. Heck, there isn't even a pullback to be found on the chart. As such, it is safe to say that there does not appear to be much fear in four-letter-land at this stage.
Ditto for the chart of the Russell 2000. While the index is struggling a bit with the uber-short moving averages plotted on this chart, the price of the index is still above the August highs, and the 18-day moving average (the teal line) is still moving up. Thus, by definition, the trend of the Russell is still positive.
Russell 2000 (Smallcaps) Daily
A similar pattern can also be seen on the chart of the Midcap index as well as the yield of the 10-year Treasury note. The bottom line is this: While the press and certain politicians may be trying to stir up some fear, there doesn't seem to be any real panic in the markets at this point in time.
But then again, tomorrow is another day and the deadline clock is ticking.
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 Gov't Shutdown and 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: Negative
(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 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: 1660
- 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 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: 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...
Same song, different day. Traders in Europe and the U.S. continue to fret about what could happen should the U.S. Government default on its debt. However, there does not appear to be any panic in the air so far today. As such, today's session will likely once again be driven by the hopes/expectations that a deal can get done sooner rather than later.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +0.30%
- Hong Kong: +0.89%
- Shanghai: +1.09%
- London: -0.77%
- Germany: -0.06%
- France: -0.33%
- Italy: -0.02%
- Spain: -0.48%
Crude Oil Futures: +$0.31 to $103.54
Gold: -$4.70 to $1320.40
Dollar: lower against the yen and pound, higher vs. euro.
10-Year Bond Yield: Currently trading at 2.639%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.07
- Dow Jones Industrial Average: -2
- NASDAQ Composite: -1.04
Thought For The Day...
The dictionary is the only place where success comes before work. - Mark Twain
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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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.
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Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
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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