Understanding The Romp Higher

It is probably a safe bet that Wednesday's ramp higher into the close left more than a few folks scratching their heads. The move created fresh all-time highs for the S&P 500 and the venerable DJIA. But wait, hadn't the market been hit hard just a couple days back? And after nearly three weeks of sideways action, wasn't everyone under the sun looking for a meaningful correction to begin? So, what gives?

The start to Wednesday's trading offered no sign of what was to come. The Bank of England had gotten the bears' attention by talking about raising rates sooner than had been expected. And there was a fair amount of disappointment over the results of China's latest long-term planning session. And before one could pour a second cup of coffee, the S&P 500 had opened down nearly 0.5 percent.

The opening sell algo pushed the S&P below the prior day's low and to hear the bears tell it, things were about to get ugly.

The Bears Thought They Had a Case

The fact that the market opened lower wasn't surprising. European bourses were down across the board and Asian markets finished with big red numbers. In addition, the glass-is-half-empty crowd could be heard touting the sentiment indicators, which were starting to get a little frothy, and the idea that valuations were becoming stretched.

The bear camp went on to cite the slowdown in revenue growth, the lackluster GDP numbers, and the fact that the gains in housing are unsustainable. Now toss in the overbought condition and fact that the Fed was back to "talking taper" again, and well, it appeared that the traders in the bear caps might just have the edge.

As a result, the bulls could be heard nervously talking about the important support just below. The general thinking was that as long as the S&P stayed above last week's algo-induced low at 1747, things would be okay. But again, there wasn't exactly a lot of swagger seen in the bull camp Wednesday morning.

Everybody knows that regardless of where one starts counting, this bull is getting old. Everybody knows that there is some froth in the mo-mo names. And everybody knows that this type of environment has a tendency to end with a bang.

And They're Off

However, within minutes of the opening bell, the market stabilized. And within an hour, the early losses were erased. And then right before the time traders were heading to lunch, the buy algos arrived. Just like that, the bulls were off and running.

However, most traders recognized that there were some important earnings coming after the bell (Cisco for one) and some fairly important economic data (Retail Sales, US Productivity, and Weekly Jobless Claims) this morning. As such, it was assumed that the move up that had occurred at about 12:15 eastern wouldn't last.

Then The Fireworks Started

But then a funny thing happened. Instead of the expected intraday pullback, another round of buy algos hit the tape. And then another. And then, with less than an hour left in the session, stocks spiked higher, and higher. Boom, there were new all-time highs.

The question of the day, of course, was what had triggered the spike to new highs? There hadn't been any big headlines. Nope, just a lot of algo-induced buying.

Still All About the Fed

Turns out that rumors of what was in Janet Yellen's prepared testimony started making the rounds. And the algos apparently liked what they read.

First there was the fact that Ms. Yellen would say that 7.3% unemployment is too high.

Then there was the comment about the Federal Reserve needing to do more to support the economic recovery.

And finally, the future Fed Chair wrote, "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."

Suddenly QE-Infinity was back. Suddenly, traders were reminded of the recent papers written by Fed officials talking about lowering the unemployment trigger. And suddenly, the "Dectaper" seemed like a really silly idea.

Although the algos will start fresh again today and they could always reverse yesterday's "breakout" on the charts in a matter of minutes, it would appear that this market is still all about the Fed. And with Janet Yellen's prepared remarks sounding pretty darned dovish, the bulls may be looking to start the year-end rally earlier than normal this year.

Click Here For More of Dave M's "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 State of Fed Policy
      2. The Outlook for 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: 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: 1775
  
• Near-Term Resistance Zone(s): none

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: Moderately Positive
  
• Volume Thrust Indicator: Negative
  
• Breadth Thrust Indicator: Negative
  
• 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 modestly overbought 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.

Thought For The Day...

Try sending positive thoughts to someone who could use an lift - you never know, it just might help...

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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!

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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.

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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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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.

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