Professional money manager Paul Schatz is filling in for Dave M. this morning. Below are Paul's views on the current state of the market.

To reiterate a comment I think I have made each and every week for at least three years, the bull market may be old and wrinkly, but it’s not dead. It continues to be the most disavowed and hated bull market of the modern investing era and that’s why it will live on. On an almost daily basis, another “market professional” comes out of the woodwork on why stocks should not be at these levels.

Several good friends of mine in the industry have been calling for a 20% decline since early 2012. They tell me that the stock market is manipulated and is heading for doom. Those are the same people who when on the correct side of the market, tell me that it’s all just the normal functions of the capitalist system. To me, it all sounds like sour grapes and rationalizing a wrong position. I have been wrong many times in my 25 year career and will be wrong many more times before all is said and done. It’s okay to be wrong, but it’s not okay to ignore the evidence and stay wrong.

Given my long-term view, that doesn’t mean that the stock market won’t pullback or correct from time to time. It’s been just about three years since the last full fledged 10%+ correction which ended up being roughly 20%. Stocks are long overdue for significant downside, but that doesn’t mean it will happen tomorrow. I have been in the pullback (4-8%) camp for several weeks and remain there today.

At this point I see three possible scenarios for stocks over the coming months, two of which can be seen below. The first one is labeled “bullish scenario” as it has the current bounce running out of steam sooner than later, followed by a decline that exceeds last week’s low by a small margin into the “cushion zone”.

The “cushion zone” is an area where the market spent most of its time between mid February and late May recharges its batteries for that powerful spring rally to all time highs. On the way back down, it’s also the area where stocks should find some cushion as if someone leaped off a ledge and into a giant mattress. That zone should cushion the market’s fall and start a new rally to all time highs next month.

On the other hand, the chart below is the “bearish scenario” which has the stock market actually rallying further than the “bullish scenario” in the very short-term, but stopping before hitting new highs. From there, stocks roll over again, similar to the path we saw in 2011, falling more than 10% and through the “cushion zone”.

The good news is that we won’t have to wait long to eliminate one of the aforementioned scenarios. There is a third path that is also possible, but I won’t fully flesh that out for now.

Paul Schatz

Paul Schatz is President and Chief Investment Officer of Heritage Capital, LLC, in Woodbridge, CT. Paul developed and manages all eight of the firm's currently offered investment programs.

Editor's Note: Be sure to check out Paul's Blog: Invest For Tomorrow

Turning To This Morning

The geopolitical concerns in both Ukraine and Iraq appear to be easing a bit this morning. In addition, weaker than expected data on Industrial Production, Retail Sales, and Fixed Asset Investment in China has renewed talk of further stimulus in China. In Europe, markets are higher after the BOE's inflation report and comments from Governor Carney. Here at home, U.S. futures are pointing to a stronger open on Wall Street.

Pre-Game Indicators

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

Major Foreign Markets:
    - Japan: +0.35%
    - Hong Kong: +0.81%
    - Shanghai: +0.02%
    - London: +0.33%
    - Germany: +1.08%
    - France: +0.74%
    - Italy: +0.70%
    - Spain: +0.51%

Crude Oil Futures: -$0.04 to $97.33

Gold: -$3.50 at $1307.10

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

10-Year Bond Yield: Currently trading at 2.467%

Stock Indices in U.S. (relative to fair value):
- S&P 500: +9.50
- Dow Jones Industrial Average: +66
- NASDAQ Composite: +19.18

Thought For The Day:

"The secret of getting ahead is getting started." - Mark Twain.

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 the Geopolitical 'Issues'
      2. The State of Fed/ECB Policy
      3. The Level of Interest Rates
      4. The Outlook for U.S. 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: Neutral
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately Negative
(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:

• Key Near-Term Support Zone(s) for S&P 500: 1900(ish)
• Key Near-Term Resistance Zone(s): 1960

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): Neutral
Indicator Explained

Price Thrust Indicator: Negative
Indicator Explained

Volume Thrust Indicator: Negative
Indicator Explained

Breadth Thrust Indicator: Neutral
Indicator Explained

Bull/Bear Volume Relationship: Moderately Positive
Indicator Explained

Technical Health of 100 Industry Groups: Neutral
Indicator Explained

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: Moderately Oversold
        - Intermediate-Term: Moderately 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 State of the Market Model Reading: Neutral
Indicator Explained

Looking For Guidance in the Markets?

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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.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com
President, Heritage Capital Research
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Positions in stocks mentioned: none

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

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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 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 StateoftheMarkets.com 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.