Hold The Champagne, Congress Is Just Getting Started

Stocks finished in the green for a third consecutive day on Monday as hope for a deal that would avert a debt default and reopen the government grew throughout the session.

Things started off a bit on the rocky side however as the DJIA was down more than 100 points two minutes after the opening bell. It turns out that the optimism which had pushed stocks up on Friday had quickly reversed after the politicians failed to make any substantive progress over the weekend.

And before investors could pour that first cup of coffee, there was a sea of red numbers scrolling wildly at the corner of Broad and Wall.

For those keeping score at home, the DJIA has advanced an eye-popping 825 points over the past week. The S&P 500 has moved up by 3.2 percent since last Wednesday's low and the NASDAQ closed out Monday's session just a whisker away from its highest close since the spring of 2000.

And speaking of new highs, both the Russell 2000 (small-caps) and the S&P 400 (mid-caps) indices finished Monday's session at fresh all-time highs. So, it will suffice to say that the fear of what might happen to the country should Congress do the unthinkable isn't sending investors underneath their desks at the present time.

"Hopium" Revisited

Despite all the fear mongering and the doom-and-gloom being espoused by the popular press, word that Senate Majority Leader Harry Reid was "optimistic that a deal would be reached this week" managed to turn traders' frowns upside down around mid-morning on Monday.

Then the reports that the White House was scheduled to meet with Congressional leaders Monday afternoon gave the dip buyers a reason to get busy again and for shorts to continue to cover. In short, the market once again appeared to be running on "hopium."

The Latest Plan

Since the deadline clock continues to tick and time is running out, here's the latest on the debt/budget drama... On Sunday, Senate leaders (Harry Reid and Mitch McConnell) began working on plan in response to talks breaking down between White House and House Republicans. It was more of the same as Obama rejected the House proposal that would have raised the debt ceiling for 6 weeks in exchange for immediate negotiations on 2014 spending levels and a long-term deficit reduction deal.

The President's rejection was not terribly surprising since the House bill would not have reopened the government and also restricted the Treasury from using "extraordinary measures" to extend the debt ceiling deadline. However, on Monday, Senate Majority Leader Reid said that he was optimistic about a deal that he and Senate Minority Leader McConnell had been working on.

Perhaps the most encouraging development was the cancellation of a meeting between Obama, Biden, Boehner, Reid, McConnell, and Pelosi. At first, the algos knocked stocks back Monday as the headline that the meeting was being cancelled hit the wires. However, within minutes the indices recovered when it was announced that the reason for the cancellation was the Senators were making progress and needed more time.

Reading The Fine Print

At this stage, the market assumes that Senators Reid and McConnell will be able to broker a deal to raise the debt ceiling and reopen the government. In addition, since the plan is expected to be bipartisan in nature and originates in the Senate, it is further assumed that Speaker Boehner will bring such a measure to a vote in the House - and that it will pass.

However, before the champagne corks start to fly and the celebration begins, investors should read the fine print.

According to reports, the current plan being worked on by Reid and McConnell will be another "kick the can" type of solution and would only provide enough funding for the government to operate until January 15, 2014. The problem is January 15 is also the date when the second round of automatic "sequestration cuts" from the 2011 Budget Control Act kicks in. As such, the "solution" to the current problem actually sets up another round of "sequester" battles.

And given that this Congress can't seem to agree on anything - ever - it would appear that the current mess is likely to stick around for at least a couple more months. So, in short... here we go again.

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).

      1. The Games Being Played in Washington (I.E. the Gov't Shutdown and Debt Ceiling)
      2. The Outlook for the U.S. Economy
      3. The State of Fed Policy
      4. The State of the Earnings Season

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 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
  
• Near-Term Resistance Zone(s): 1725

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: Positive
  
• Price Thrust Indicator:Neutral
  
• Volume Thrust Indicator:Moderately Negative
  
• 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 overbought from a short-term perspective and is neutral from an intermediate-term point of view.
  
• Market Sentiment: Our primary sentiment model is neutral .

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...

Although earnings season is now rolling along, all eyes remain on the negotiations in Washington D.C. The bottom line is that traders expect a deal to get done today or tomorrow. However, if there is any further delay, the action could be swift and harsh. As such, this is no time to be asleep at the wheel.

Pre-Game Indicators

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

Major Foreign Markets:
- Japan: +0.26%
- Hong Kong: +0.51%
- Shanghai: -0.21%
- London: +0.88%
- Germany: +0.82%
- France: +0.64%
- Italy: -0.09%
- Spain: +0.50%

Crude Oil Futures: -$0.64 to $101.77

Gold: -$14.20 to $1261.90

Dollar: higher against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.718%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.24
- Dow Jones Industrial Average: +1
- NASDAQ Composite: +3.11

Thought For The Day...

We make a living by what we get, we make a life by what we give. - Winston Churchill

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:

State's Chart of the Day - Each day we highlight a top rated stock with a positive technical setup.

The Risk Manager Report - Stay in tune with the market's risk/reward environment.

The “10.0” Report - These are the REAL best-of-breed companies.

The Insiders Report - See what the people who know their company's best are buying.

ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.

The SOTM 100 Portfolio - The top rated stocks in each market sector.

State's Market Models - Each week we quantify the "state of the market" with a series of models.

The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

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.