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Market Overview

Have The Worries Returned To Broad and Wall?

Have The Worries Returned To Broad and Wall?

After finishing in the green nine of the last ten days, it wasn't exactly surprising to see the bears attempt to get back in the game on Wednesday and for the stock market to pull back a bit.

After all, the S&P had stepped lively to a gain of six percent in just two weeks and 11.5 percent since late-June, which is the very definition of an overbought condition.

In short, it was only a matter of time before something came along to give the bears a raison d'être and cause the buyers to stand aside.

Is Anyone Left to Buy?

One of the problems with just about everyone in the game having access to news, data, and charting tools at the drop of a hat (well, okay, the data actually hits screens much faster than the time it takes for a hat to fall to the floor - think about that for a while!) is that everybody under the sun knows that the trend is up and has been for two weeks. Everybody knows that the stochastics are screaming about an overbought condition. Everybody knows there is a gap on the chart of the S&P 500 at 1733.45 and that it will likely be filled sooner rather than later. And everybody knows that the move has become extended.

When a trend moves in a straight-up fashion, the issue becomes who is left to buy? Okay, perhaps that's more of an old school view. Nowadays, the better question might be who in their right mind would chase stocks higher at this juncture?

Today's market participants tend to be more trading oriented than the soccer mom's trading internet stocks in the late 1990's. Today, everyone wants to be the "fast money." As such, today's traders are well aware when markets become overbought and have been trained to wait for a pullback before committing fresh capital to the long side.

A Self-Fulfilling Move

After a straight-up move such as has been seen over the past two weeks, the idea of a pullback becomes a bit of a self-fulfilling prophecy. Everybody knows that only the "dumb money" buys high. No, today's sophisticated traders only buy the dips!

So, Wednesday's little dip was not at all surprising. In fact, the only real surprise is that stocks didn't finish down more. With the buyers waiting for a dip, the sellers would appear to have the upper hand in this type of situation. Thus, today's action could be quite telling. But more on that in a minute.

The Worries

Whenever the bulls are on a roll, something usually comes out of the woodwork to trigger the start of a pullback, a correction, or at the very least, a "sloppy period." And Wednesday was no exception.

Here's the run down on the issues traders were suddenly fretting about.

Money Market Rates in China: Money market rates in China jumped by the highest amount since July after regulators suggested that cash conditions could be tightened to address the risks of inflation stemming from the ongoing run-up in house prices.

Chinese Bank Write-offs: A Bloomberg report noted that China's large banks had tripled the amount of bad loan write-offs compared to the levels seen in the first half of the year.

European Banks (Yes, Again): The ECB put the focus back on Europe's shaky banking system by outlining some details of the stress tests the central bank wants to apply to all eurozone banks. The European bank index dove nearly 2 percent on the report.

Earnings Disappointments: While the earnings season has been largely positive, there was some spin in the press yesterday about high-profile earnings misses. Caterpillar (NYSE: CAT) let the charge here by missing the EPS estimate by 13 percent, missing on revenues, and guiding lower. In addition, semis were under attack all day thanks to Altera's (NASDAQ: ALTR) report, which resulted in a decline of 13.5 percent. Even a former consumer discretionary leader, Panera Bread (NASDAQ: PNRA) got into the act by falling 5.7 percent on the session after cutting both its Q4 and full-year outlooks.

Overbought Conditions: This was touched on above. But to drive the point home, Bespoke Investment Group reported that all ten S&P 500 sectors closed Tuesday in extreme overbought territory (defined as at least two standard deviations above 50-day moving averages). Bespoke noted that going back to 1990, there have only been two days when there has been a similar reading. Thus, the "overbought condition" seemed to be one of the go-to excuses for the session.

Something Serious or Just Excuses Du Jour?

So there you have it; the reasons that the Citadels of the world were likely running "ignition algos" to the downside yesterday. However, the question of the day is if any of the issues detailed above are worthy of traders' full attention for more than a day or two.

Since using a crystal ball is not a strong option for most investors, it is probably best to simply watch the action closely for the rest of the week. If stocks are hit hard, then one could argue that the recent joyride to the upside has ended. However, if the pullback is weak and the buyers appear anxious to get back to work, there could easily be some additional upside ahead.

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. Overbought Condition
      2. The State of Fed Policy
      3. 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: Positive
(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: 1728
  • Near-Term Resistance Zone(s): 1760

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:Positive
  • Volume Thrust Indicator:Neutral
  • Breadth Thrust Indicator:Positive
  • Bull/Bear Volume Relationship: Moderately Positive
  • Technical Health of 100 Industry Groups: 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 overbought 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.

Thought For The Day...

Life is change. Growth is optional. Choose wisely. -Unknown


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Mission Statement

At, 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

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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