After a third consecutive losing session for the stock market, it appears that the mood may be improved today - at least in the early going, anyway. We will note that buying after 3 down days has been a profitable strategy for the last couple years. Thus, it will be interesting to see if traders continue to play the BTFD game ("buy the freaking dip!") or will continue to focus on the negative seasonality and the weak economic data from across the pond.

Speaking of weak economic data, the IFO Business Climate in Germany fell for a fifth straight month in September. The current reading is the lowest level since April 2013 and underscores the recent weakening in conditions. "Super Mario" (aka ECB President Draghi) told Europe 1 radio this morning that monetary policy will remain accommodative for a long time. Draghi also noted that rates will remain low and reiterated the bank's unanimous commitment to use available instruments to bring inflation back toward 2%.

Sticking with the monetary stimulus theme, there are signs that the recent pushback out of Chinese officials toward the concept of additional stimulus seems to be an easing. Official China Securities Journal said in a front-page editorial that lowering interest rates and adjusting the exchange rate may be the right policy combination for China.

Finally, in the overnight markets, Chinese indices extended their recent rally overnight, European bourses are sporting green screens, and U.S. stock futures point to a modest bounce attempt at the open on Wall Street.

Current Market Outlook

As the saying goes, "risk happens fast" in the stock market these days. Last week's new highs have been greeted with nothing short of a smack-down as talk of the "death cross" in the Russell 2000 and a potential "Alibaba top" have dominated the discussion on trading desks. This market continues to be a tale of two tapes with the blue chip indices appearing to be in a consolidation phase while the small and midcap indexes are trending lower. In short, this is the very definition of a neutral market environment. The concern however, is that we are seeing a topping process as technical divergences and narrow leadership are usually present when bull markets end. And while an oversold bounce would be logical at some point in the next day or two, we continue to believe the environment warrants caution at this time.

Looking At The Charts

The key question from a chart perspective is if the current pullback will be another in a long string of dip-buying opportunities or morph into something far more sinister. The contrasting action seen on the charts of the S&P 500 and Midcap 400 really tell the whole story. While the S&P 500 remains in a sideways consolidation range at this point, the Midcaps appear to be tracing out an intermediate-term double-top. Therefore, we will argue that the near-term price action takes on added importance. Stocks are oversold from both a short- and intermediate-term time frame. But the all-important line in the sand currently stands at 1980 on the S&P 500.

S&P 500 - Daily

Midcap SPDR Trust (MDY) - Daily

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.24%
    Hong Kong: +0.36%
    Shanghai: +1.48%
    London: +0.01%
    Germany: +0.22%
    France: +0.63%
    Italy: +1.07%
    Spain: +0.06%

Crude Oil Futures: -$0.03 to $91.53

Gold: -$0.60 at $1221.40

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

10-Year Bond Yield: Currently trading at 2.539%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +2.93
    Dow Jones Industrial Average: +39
    NASDAQ Composite: +6.98

Thought For The Day:

It's a funny thing, the more I practice the luckier I get. - Arnold Palmer

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/ECB Policy
      2. The Level of Interest Rates
      3. The Outlook for U.S. Economic Growth
      4. The State of the Geopolitical 'Issues'

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: Negative
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately 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 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: 1980
• Key Near-Term Resistance Zone(s): 2005

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

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: Moderately Oversold
  
• 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.

• Weekly State of the Market Model Reading: Neutral

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

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research - A CONCERT Advisor
Be Sure To Check Out the NEW Website!

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.