Good morning. Let me cut right to the chase this morning by saying that unless the bulls can get their act together and produce some buying that is driven by more than algorithmic-induced trend-following and/or short-covering, is prompted by more than an oversold condition and a search for the "capitulation low," and lasts more than a day or two, it may be time to admit that our furry friends in the bear camp could be waking up from a long slumber.

Trust me when I say that I do not use these words lightly. Long-time readers know that I abhor making "market calls" and simply refuse to make a prediction about what is expected to happen next. No, the key to this oftentimes meandering morning market missive is to identify what IS happening in the market, to identify and understand what the drivers of the action are, and to attempt to figure out the best way to play the game given the overall environment.

Thus, my key point on this fine Friday morning (futures prices not withstanding) is that the game MAY (key word) be changing from a big-picture standpoint in the stock market.

The Way the Game Has Been Played

For years now, every decline in the stock market has been met with a V-bottom as buyers quickly came out of the wood work to put freshly minted QE money to work each and every time stock prices went the wrong way for a few days. From a macro point of view, with Europe and most of the emerging markets struggling mightily, everybody knew that the U.S. stock market was the best place to be. As such, a drop of 3% in the S&P 500 was simply a signal that it was time to go the other way again.

I have opined that this "buy the dips" environment was likely to persist until the ECB and BOJ stopped printing money on a monthly basis -or- until something changed fundamentally. And my concern, dear readers, is that the litany of negatives that traders are battling at the present time may indeed be (or become) that change.

Exhibit A in my fear/worry/concern is the action in the market itself. The key is that we did not see a V-bottom in response to the August 2015 decline. No, we saw an old fashioned "bottoming process" that took a couple of months to complete. Then, of course, the October rally, which was sponsored by the ECB saying it was thinking about printing euros until the cows came home, reversed the entire decline. As such, it appeared that the game of buying the dips was ongoing.

However, this time around there was no new high. In fact, the S&P failed to even make a meaningful attempt at the old high in October. Nope, something appeared to be different this time around.

In my humble opinion, the difference was that Super Mario lost some of his powers last fall as it became evident that the ECB was no longer united in the idea of "doing whatever it took" on the QE front.

And from my perch, since then, the stock market action has changed. You see, with central bank policy now "divergent" in places like the U.S./UK and the ECB/BOJ, it has become evident that what I'll call the "QE Put" is either (a) no longer in play or, at the very least, (b) not as strong as it once was.

In response, there has been no new high in stock prices. No, it has been quite the opposite. Instead of a marginal new high driven by the F.A.N.G's, the stock indices have rolled over. Instead of complacency and confidence that the game will continue uninterrupted for years to come, the "troops" failed to stop following the leaders (take a look at a weekly chart of the small- and mid-caps and you'll see what I mean). And instead of that maddening, sideways trading range, we now have a meaningful downtrend that is threatening to worsen today.

The Time is Now

So here's the deal. The bulls need a stop. Right here. Right now.

While yesterday's rebound had the making of being the beloved reversal day, it now appears to have been, well, at the very least, a false start. My concern is that Thursday's move appeared to be a bit different from the usual "it's time to go the other way" V-bottoms that traders tend to universally endorse. In short, the effort was lackluster. And with (a) China falling hard again overnight, (b) oil continuing to sink, and (c) stock markets in Europe and the U.S. futures falling precipitously in the early going today, it looks like that rebound try will be tested today.

Don't get me wrong. I'm not saying that stocks must turn on a dime at this time. I'm merely saying that unless the bulls can put in a move that causes the bears to fret a little or to question if the move has become overdone, we should probably recognize that this period of "price discovery" to the downside may stick around a while.

So, as I've been saying for many months now, it is probably a good idea to continue to exhibit some caution - well, for now, anyway.

Today's Pre-Game Indicators

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

Major Foreign Markets:
Japan: -0.54%
Hong Kong: -1.50%
Shanghai: -3.55%
London: -1.81%
Germany: -2.29%
France: -1.97%
Italy: -2.41%
Spain: -1.79%

Crude Oil Futures: -$1.69 to $29.51

Gold: +$19.10 at $1092.70

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

10-Year Bond Yield: Currently trading at 1.995%

Stock Indices in U.S. (relative to fair value):
S&P 500: -42
Dow Jones Industrial Average: -362
NASDAQ Composite: -104

Thought For The Day:

Sometimes the biggest problem is in your head. You've got to believe. -Jack Nicklaus

Here's wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research

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 China's Renminbi
2. The State of Oil Prices
2. The State of the Earnings Season
3. The State of Global Central Bank Policy

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 6 months, and long-term as 6 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: Negative
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Neutral
(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: 1860
• Key Near-Term Resistance Zone(s): 2000(ish)

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(NASDAQ): Negative
• Breadth Thrust Indicator (NASDAQ): Negative
• Short-Term Volume Relationship: Negative
• Technical Health of 100+ Industry Groups: Moderately Negative

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: Oversold
  - Intermediate-Term: Oversold
  
• Market Sentiment: Our primary sentiment model is Positive

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 Market Environment Model Reading: Moderately Negative

Indicator Explanations

Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.

Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.

Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.

Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.

Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.

Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.

Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market 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.

Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning 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 is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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.

Advisory services are offered through Sowell Management Services.