Today's market action is likely to focus on the upcoming earnings season as Alcoa kicks off the parade of numbers after the close. However, keep in mind that the real flow of company reports doesn't start until next week. In overnight news, there continues to be rumblings regarding Russia/Ukraine and Iraq. Although neither situation seems to be capturing traders' attention at this time. The early action continues to look sloppy as both macroeconomic and earnings data disappointed across the pond and foreign markets followed Wall Street's lead. U.S. futures point to modest losses at the open on Wall Street.
In economic news, it will be another fairly quiet day. We will get the JOLTS report at 10:00 am eastern and we got the the NFIB Small Business Optimism Index for June. After three straight monthly increases, the NFIB index pulled back in June and came in below expectations.
The fact that stocks pulled back on Monday should not have been surprising. The major indices had enjoyed a nice run, the Dow had broken through another big, round number, stocks had become overbought, and, in short, the advance had become extended. However, we should take note that once again, it was the former high flying momentum names that led the charge to the downside. While the internet, biotech, and social media names have enjoyed a nice run higher off the May bottom (the First Trust Internet ETF (FDN) had gained 15% since 5/8, the Global X Social Media ETF (SOCL), was up 21.7% from 5/7, and the iShares Biotech ETF (IBB) had soared 23.5% since mid-April), they reversed hard on Monday. And while one day does not a trend make, this remains an area to watch as "mo-mo meltdowns" have been known to drag the market down with them over time. But for now our models remain positive and tell us to continue to side with the bulls.
Yesterday's action in the S&P 500 is easy to dismiss as the current rally has paused on several occasions since it began in mid-April. And the fact that the Dow pulled back to the 17,000 level after last week's blast to new highs was to be expected. However, the action on the charts gets progressively worse as one peruses the NASDAQ, midcaps, and smallcaps. For example, yesterday's drop on the NASDAQ erased the last two days of gains, the S&P midcap index finished where it had ended four sessions ago, and the Russell 2000 smallcap index dove an eye-popping -1.8%. As such, it would appear that the tale of two tapes has returned and remains something to keep an eye on.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: -0.43%
- Hong Kong: -0.00%
- Shanghai: +0.30%
- London: -0.55%
- Germany: -0.49%
- France: -0.47%
- Italy: -1.18%
- Spain: -0.75%
Crude Oil Futures: -$0.10 to $103.43
Gold: +$7.00 at $1324.00
Dollar: higher against the yen, euro and pound.
10-Year Bond Yield: Currently trading at 2.600%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -2.95
- Dow Jones Industrial Average: -22
- NASDAQ Composite: -3.16
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 Outlook for U.S. Economic Growth
2. The State of Global Growth
3. The State of Fed Policy
4. The State of the Geopolitical 'Issues' in Ukraine and Iraq
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:
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"...
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.
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 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.
Weekly State of the Market Model Reading: Positive
Good, better, best. Never let it rest. Until your good is better and your better is best. -Tim Duncan
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, StateoftheMarkets.com
President, Chief Investment Officer Heritage Capital Management