Well that was harsh. Just when you thought that maybe, just maybe, the algo-induced intraday violence that had dominated the market action in 2015 might abate and that maybe, just maybe an actual trend lasting more than a month might begin, the 2016 opening bell rang. And before you could get the date right on your first piece of correspondence in the new year, the hysterics were back. Happy New Year.

This time, we were told, it was about China. Never mind that analysts have been fretting about the Chinese economy for many moons now. Apparently the Manufacturing PMI data had come in below expectations - again. This prompted a round of spirited selling on China's stock exchanges. Selling that was spirited enough to trigger circuit breakers when the indices fell 7%. And spirited enough to spook the rest of the global markets into, once again, worrying about global growth. It's the gift that just keeps on giving to the bear camp.

It's About China AND the Middle East...

However, upon further review, it appeared that the gyrations occurring on the first day of the first month of the new year were actually about more than just China. If you had read past the China headlines, you would have learned that the wave of red numbers in the global markets was about both China and the Middle East.

It turns out that Saudi Arabia decided to cut diplomatic ties with Iran in response to the storming of its embassy in Tehran. Which, of course was in response to somebody, somewhere being killed for something that didn't sit well with the other side. Yes fans, the Sunnis and the Shiites are back at it again, err, still. (Here's a link to a nice summary on the differences between the Sunnis and the Shiites.)

No, Wait. It's Really About China, the Middle East, AND...

No scratch that. About 30 minutes into what was being described throughout the day as the worst first session of a new calendar year since 1932, it became clear that the dance to the downside on Wall Street was really all about: China, the Middle East, AND the U.S. economy.

You see, the ISM Manufacturing index had just come in below expectations. And for those keeping score at home, the proxy for the manufacturing sector had fallen for a sixth consecutive month and had wound up in contraction mode for a second straight month. So much for the idea of the economy reaching escape velocity, right?

But then, just when you thought you had the game figured out for the day, it changed again. By the time lunch rolled around, you needed to add oil to that list of negative inputs.

Suddenly Texas Tea, which had been rallying early in the session on those fresh(ish) "geopolitical concerns," was now moving lower instead of higher. And if we've learned anything in the last year or so, it is that when oil moves down, stocks move down - apparently it's a growth thing to Wall Street traders and their fancy computers.

So there you have it. The 465 point dive on the Dow was in response to China, the Middle East, the U.S. Economy, and oil. Joy.

But, Taking a Step Back...

So, while we are likely to hear an awful lot about those so-called rules regarding "the first 5 days of January" and "as January goes, so goes the year," the important consideration as we begin the second trading day of 2016 is the question of whether or not anything has really changed.

The good news on this front is that stocks recovered nicely in the last half hour of the day. In fact the venerable Dow Jones Industrial Average vaulted 160 points in the last 30 minutes or so and finished the day almost 200 points off the bottom. As luck would have it, word got out that there was a billion dollars on the buy side at the close. So, armed with this knowledge and 30 minutes to rock 'n roll, the algos did what they do best and began chasing their tails into the close.

And if one steps back from the action and looks at things from an objective standpoint, you could make the argument that the nasty first session of 2016 didn't really change much at all and in turn, may not be meaningful. Take a look at the chart below and I think you'll see what I mean.

S&P 500 - Daily

View Larger Image

From a chart standpoint, there was no important support broken and in the end, it looks like Monday, January 4, 2016 was just more of the same. And in looking at a closing chart of the Dow for the last two months, the word that comes to mind is sideways.

Oh, and before you get all worked up about the U.S. economy heading into recession, I'd like to pass on an excellent bit of analysis from one of the few folks I listen to on a regular basis - Brian Wesbury, the chief economist over at First Trust.

On the topic of that ugly ISM Manufacturing print, Brian writes:

"Today's ISM report starts 2016 with a fizzle, not a bang, with the Manufacturing index hitting the lowest level since the end of the recession in 2009. While we would prefer the manufacturing sector show the same solid pace of recovery as the much larger services sector, we don't see the recent slowdown in manufacturing as a sign of looming doom. Today's data continues to highlight a stark contrast in two broad sectors of the economy: services, where the economy is expanding briskly and prices are rising, versus goods, where both growth and inflation are soft to non-existent.

There are two important things to remember with today's report. First, the manufacturing sector represents a much smaller portion of the economy than the service sector, which grew much more rapidly in 2015. Paired with solid gains in employment and wages, as well as positive trends in housing and consumer spending, the economic fundamentals suggest a recession is nowhere in sight... In other words, ignore headlines that suggest the sky is falling."

P.S. If you are at all interested in economics, I'd recommend adding Mr. Wesbury's work to your daily routine. It is both helpful and entertaining.

So, as we get ready to start the second session of the new year, I'm of the opinion that this market is still searching for direction. Sure, the bears are out in force and have lots to yammer on about. But since the indices have not (yet?) began to move lower in earnest, the word I believe may be most appropriate at this time - and on so many levels - is, "Onward!"

Publishing Plan For 2016: With my Chief Investment Officer gig at Sowell Management Services (a registered investment advisor responsible for north of $600 million in client assets) comes a myriad of tasks and responsibilities, as well as frequent writing assignments, speaking engagements, video recordings, advisor calls/meetings, and industry presentations. Because of this, the time available to pen a "daily" missive is becoming more elusive (and nearly impossible when I'm on the road). And since my primary duty is to keep our investing strategies up to snuff and on the right path (or "out of the ditch" as William Sowell likes to say), my plan for the upcoming year is to publish my oftentimes meandering morning market missive two to three times a week - or when market circumstances dictate. For most, this will likely be a more appropriate diet of "Daily State" reports! But since there are loyal readers that will check in to make sure everything is okay in my world if I miss a day, I thought it would be best to publish my intentions for the "State of the Market" reports in 2016. Finally, I'd like to say thank you to all those who make this report a part of their morning routine. It is my sincere hope that readers will continue to find these reports helpful in some small way.

Turning to This Morning

Yesterday afternoon's big rebound in the U.S. appears to have helped support global markets overnight. Speaking of support, the Chinese were seen pulling out all the stops after starting the new year down 7%. The PBoC injected liquidity and supported the yuan, the CSRC started talking about restricting sales and urged major shareholders not to sell stocks, and there was talk that state-controlled funds bought stocks. The result was a modest decline in Shanghai and a gain of +0.3% in the Shenzen index. In Europe, markets are mixed as Middle East tensions remain a focal point. And here in the U.S., Goldman is out with a note saying the worries over global manufacturing have been overdone. However, U.S. futures remain volatile and currently point to some additional weakness at the open on Wall Street.

Today's Pre-Game Indicators

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

Major Foreign Markets:
Japan: -0.42%
Hong Kong: -0.62%
Shanghai: -0.25%
London: +0.07%
Germany: -0.57%
France: -0.52%
Italy: +0.38%
Spain: +0.19%

Crude Oil Futures: +$0.16 to $36.60

Gold: +$5.20 at $1080.40

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.229%

Stock Indices in U.S. (relative to fair value):
S&P 500: -5.91
Dow Jones Industrial Average: -59
NASDAQ Composite: -10.61

Thought For The Day:

Success is getting what you want. Happiness is wanting what you get. - Dale Carnegie

Here's wishing you green screens and all the best for a great day,

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

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 Global Growth
2. The State of Corporate Earnings
3. The State of Global Central Bank Policy

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 6 months, and long-term as 6 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: Neutral
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Neutral
(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: 1990
• Key Near-Term Resistance Zone(s): 2040-50

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(NASDAQ): Negative
• Breadth Thrust Indicator (NASDAQ): Neutral
• Short-Term Volume Relationship: Negative
• 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: Neutral
  - Intermediate-Term: 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

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 is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is nit registered as a broker-dealer.

Employees and affiliates of Sowell 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.

Advisory services are offered through Sowell Management Services.