Even the staunchest bear will be forced to admit that the long-term trend of the U.S. stock market remains positive. To confirm this, all one need do is look at a weekly chart of the S&P 500 index. While things have been choppy for some time now and short-term pullbacks have been coming more regularity of late, the bottom line is the index continues to move from the lower left to the upper right on the chart. And as any market technician will confirm, this is a good thing.

Although traders have a long list of things to worry about on a daily basis, one key to the long-term chart of the S&P is the fact that the index has not made a meaningful "lower low" since last October. Thus, for the past 8 months, the market has managed to find a way to recover from each and every dip in prices and move on to new highs.

S&P 500 - Weekly

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However, the fact that the major indices continue to make new highs every once in a while doesn't mean that everything is hunky dory with this market. You see, from where I sit, there are several signs that the strength of this bull market is beginning to wane.

All Is Not Well...

For starters, and as we reported recently, our "Leading Indicators" model, which consists of indicators that historically have been early in their calls, went negative a few weeks back. This is important because the primary purpose of this model is to send up a flare when things start to get dicey. And while this indicator did give a false signal back in 2013, over the last 35 years, 72% of the trades this model would have made would have been profitable. And it is worth noting that the model also provided an early warning before the bear markets of 1990, 2000, and 2008.

Next up, and as I wrote about recently in my piece entitled "Desert Island Indicator Update," is the percentage of industry groups that are "technically healthy." The key here is that while the model is still on a "buy" signal, the level of the indicator fell to the lowest point of the year last week.

Although this is definitely NOT a cause for alarm, it is important to recognize that there is a clear divergence happening between the action of the market and the state of what we deem to be our most important long-term model of market health. In other words, when the market makes new highs, this indicator "should" be strong and telling us that the majority of industry groups are going along for the ride. But this is simply not the case at this time.

While it may sound odd with the Fed still technically in ZIRP (zero interest rate policy) mode, I'd also like to point out that both of our primary Monetary Models are also pulling back. The longer-term model, whose signals would have been correct 73% of the time since 1965, has now pulled back to its lowest level since 2013. And while the indicator is also still on a "Buy" signal, the current action of the model is noteworthy.

In addition, the intermediate-term Monetary Model, which itself is a model-of-models, has fallen into the neutral zone. And going back to 1981, the S&P 500 has gained ground at an annual rate of just 4.95% when the indicator is in the neutral mode. Compare this to the 24.2% annualized rate seen when the model is positive and you should get the picture.

Getting back to market internals, our long-term "volume demand" indicator, which measures the ratio of "demand volume" to "supply volume" has also been weakening rather significantly. In keeping with the theme here, this model too remains on a "buy" signal at this time. And since 89.5% of these signals would have been profitable back to 1981, the indicator suggests that it is probably a good idea to continue to give the bulls the benefit of the doubt here.

However, like the others, the current reading of this model is heading the wrong direction for a market that just recently hit all-time highs. In fact, the indicator is currently at the lowest level seen since last October. And if one removed the reading during that pullback, this indicator would be at its lowest point since mid-2013. So again, all is not well in terms of market internals.

Finally, as we've discussed at length recently, absolute valuations are a problem. Janet Yellen recently said as much as every measure of absolute valuation one can come up with (Price-to-Earnings, -Dividends, -Sales, -Book Value, and -Cash Flow) all suggest that stocks are expensive at this time relative to historical readings.

However, to be fair, when compared to the level of interest rates, stock valuations remain low. So, I guess the valuation subject remains in the eyes of the beholder.

The Takeaway

To be sure, this is NOT an exhaustive review of our indicator arsenal. However, the models mentioned here today all play important roles in our longer-term risk management approach. Therefore, the takeaway here is that the risks of a meaningful correction are indeed elevated at this time.

Then there is the fact that the market has now gone more than 925 days without a -10% correction and 1575 days without a -20% decline - both of which are multiples of the historical norms. And since there have only been three markets in history that went longer without a serious pullback, well, I'm just sayin' that this may not be the time to have the pedal to the metal in your portfolio.

The good news is that our indicators suggest that we are likely in the early stages of a secular bull market. As such, any meaningful dips should probably be considered long-term buying opportunities.

Publishing Note: I have a speaking engagement early on Friday morning and will not publish a report.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
Japan: +1.68%
Hong Kong: +0.83%
Shanghai: +0.31%
London: +0.33%
Germany: +0.93%
France: +0.79%
Italy: +0.86%
Spain: +0.69%

Crude Oil Futures: -$0.70 to $60.73

Gold: -$7.60 at $1179.00

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

10-Year Bond Yield: Currently trading at 2.451%

Stock Indices in U.S. (relative to fair value):
S&P 500: +4.35
Dow Jones Industrial Average: +46
NASDAQ Composite: +12.19

Thought For The Day:

Never get so busy making a living that you forget to make a life... unknown

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 Interest Rates
2. The State of Fed/ECB/PBoC Policy
3. The State of the U.S. Economy
4. The State of the U.S. Dollar

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 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: 2070
• Key Near-Term Resistance Zone(s): 2120-2135

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): Positive
• Price Thrust Indicator: Negative
• Volume Thrust Indicator: Negative
• Breadth Thrust Indicator: Neutral
• Intermediate-Term Bull/Bear Volume Relationship: Moderately 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: Moderately Oversold
  
• 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: Neutral

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.