If you've been paying attention, it should come as no surprise to learn that US equities continued to remain under pressure last week. For those keeping score at home, take note that the S&P 500 suffered the second largest weekly pullback of 2015 and has now finished lower in four of the last five weeks.

With no glaring headlines since the FOMC meeting to drive the action, one has to fo a little digging to identify the issues the market seems to be struggling with. And while this market can and often does change directions in the blink of an eye (which takes, on average, between 300 and 400 milliseconds), traders seem to currently be focused on the Fed, the expectations for the upcoming earnings parade, the ongoing spate of punk economic data, as well as valuation concerns in areas such as biotech and semiconductors.

Not As Dovish As She Seemed?

One of the primary themes over the past week has been the idea that the Fed isn't really as dovish as Ms. Yellen's comments led many to believe after last week's FOMC press conference. In fact, there has been a fair amount of talk about the stock market rally in response to Yellen's dovish commentary being overdone.

If one listened to the latest flurry of Fedspeak that included Williams, Evans, Lockhart, Bullard, and Fischer last week, it was clear that nobody really changed their tune. As such, this seems to suggest that not much has not really changed in terms of the overall Fed narrative.

Earnings In Focus

Last week also saw a continued string negative earnings preannouncements for Q1 with worries about oil, the dollar, and the weather blamed as the major headwinds. According to FactSet, S&P 500 earnings expectations for Q1 have fallen by 8.2% since the beginning of the year, which represents the largest decline in the estimates since the first quarter of 2009.

FactSet also reported that as a result of the downward revisions, the Street is now looking for a -4.6% decline in Q1 S&P 500 earnings per share, which is down from expectations for +4.2% growth at the start of the quarter. And if you find yourself wondering why stocks would be able to rally in the face of falling earnings, you are not alone.

Not surprisingly, the energy sector has seen an outsized amount of revisions on the back of the sharp decline in oil prices. In addition, dollar strength has been the other big driver of earnings "resets." Finally, the crummy winter weather and protracted West Coast port strike were some of the other common themes coming from corporate America last week. As such, you can rest assured that traders will be listening to the each and every earnings report very carefully in the coming weeks.

Not a Bubble, But...

While all the recent talk of bubbles seems a bit humorous to anyone who was in this business in 1999, there is no denying that stocks are reaching overvalued levels when viewed through any traditional absolute valuation lens. In addition valuation concerns seem to be front and center at the present time in some of the mo-mo plays such as biotech and semiconductors.

For example, after finishing higher in each of the six previous weeks and gaining 16% during the run, the Nasdaq Biotech Index lost 5.3% last week. Granted one glance at a weekly chart of the IBB will quickly suggest that a pullback was overdue. However, one can't help but recall the "Mo-Mo Meltdown" that took place at this time last year and as such, there is some concern that traders may go back to the well on this trade.

Semis were also under pressure last week with the SOX down 5% on the week and falling 4.6% on Wednesday alone. The primary catalysts for the selling included negative preannouncements and talk of a slowdown in demand over the last four to five weeks due to FX pressures.

It's The Economy, Or Is It?

Finally, the recent trend of softer US economic data, particularly in the manufacturing sector, has been highlighted as another overhang for the markets recently. But, given the fact that most everybody on the planet knows that the weather and the port strike are the primary reasons for the weak data, traders have been giving the data a pass lately.

The key here will be to watch the data in the coming months. Should the reports remain on the punk side, you can rest assured that traders and their computers will notice as the topic of yet another "soft patch" could take center stage. Yet a great many analysts expect to see the data pick up going forward, a dynamic that would seem to confirm the "blame it on the weather" theme.

So there you have it. Although stocks are not really cratering and there isn't much fear in the air at this time, there is no denying that issues such as economic data and earnings might become a problem for this market if things don't perk up. But then again, this market may change directions 9 or 10 more times before any of these issues really present themselves.

Turning to This Morning...

The mood in the markets appears to be much improved in the early going on this fine Monday morning. Gone are the fears about the economy, valuations, earnings and what Ms. Yellen's merry band of central bankers are going to do next (and when). No, this morning, traders are celebrating the fact that China appears poised to do more to stimulate their fledgling economy. With reports over the weekend suggesting that Q1 GDP could come in well below the 7% target level, there is more talk of stimulative measures. In fact the PBoC kicked things off this morning by lowering down payment requirements for home buyers. Across the pond, bourses in Europe are up nicely as there are no new negatives to report. And here at home, the potential merger between Intel (INTC) and Altera (ALTR) announced Friday seems to have traders doing an about-face on the subject of valuations in the semiconductor space. U.S. stock futures are currently pointing to a strong 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: +0.65%
    Hong Kong: +1.51%
    Shanghai: +2.60%
    London: +0.15%
    Germany: +1.38%
    France: +0.97%
    Italy: +1.11%
    Spain: +0.81%

Crude Oil Futures: -$0.65 to $48.20

Gold: -$17.20 at $1182.60

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

10-Year Bond Yield: Currently trading at 1.960%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +9.80
    Dow Jones Industrial Average: +99
    NASDAQ Composite: +23.70

Thought For The Day:

"You've got to be very careful if you don't know where you are going because you might not get there." -- Yogi Berra

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 State of the U.S. Economy
      3. The State of the U.S. Dollar
      4. The State of the Earnings Season

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: Moderately 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: 2040
• Key Near-Term Resistance Zone(s): 2120

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: Neutral
• Volume Thrust Indicator: Neutral
• Breadth Thrust Indicator: Neutral
• Bull/Bear Volume Relationship: 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.

• S&P 500 Overbought/Oversold Conditions:
        - Short-Term: Oversold
        - Intermediate-Term: Neutral
  
• Market Sentiment: Our primary sentiment model is Neutral .

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 Positive

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

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

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 nor any Portfolio 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, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., a registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

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.