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The S&P 500 closed at the highest level of 2016 on Tuesday. Thus, one couldn't be blamed for thinking that oil had also enjoyed a good day. After all, the oil/stock correlation game has been the hallmark of the stock market for quite some time now. But, of course, that assumption would be wrong as stocks and oil actually diverged yesterday.

Instead of focusing on the action in the oil pits, it appears that stocks celebrated Janet Yellen being, well, Janet Yellen. And while the correlation trade has had a strong grip on the stock market this year, everybody knows that dovish Fedspeak trumps just about anything and everything.

And dovish is really the only word that would be appropriate to describe Ms. Yellen's speech to the Economic Club of New York on Tuesday. In short, Fed Chair Yellen said that caution in raising rates is "especially warranted" at this time. As such, traders immediately scratched the potential for an April rate hike from the board.

Yellen also talked about the importance of the Fed's data-dependent mantra. She told the audience that data surprises can be quickly reflected in market expectations about the future path of monetary policy. Ms. Yellen went on to discuss the Fed's ability to use conventional monetary policy to respond to economic disturbances as being "asymmetric" and stressed the potential for further stimulus.

Wait, what? Further stimulus? Isn't the Fed in a tightening mode at the present time? Isn't the number of rate hikes in 2016 the focus here?

Yep, that's right, Ms. Yellen continued to stress the idea of the FOMC being data dependent and mentioned the potential for further stimulative action should the data warrant such a move. In the speech, Yellen highlighted the risks to US economy from global developments and flagged concerns about tighter financial conditions, slower global growth and China's currency policy uncertainty.

And finally, the Fed chairwoman expressed concerns about falling inflation expectations and reiterated uncertainty about recent uptick in inflation.

So, despite crude falling 2.6% yesterday and Texas Tea threatening to break down through recent support, stocks enjoyed a strong session, bolstering the argument that the bulls are back and that the recent "mini bear" has indeed ended.

However, there are still at least a couple reasons to remain skeptical of the stock market's recent joyride to the upside. First and foremost is the correlation trade with oil. You see, one day does not a trend break. And the bottom line is that I'd like to see stocks continue to go their own way before fully embracing the idea of a new cyclical bull.

Then from a technical viewpoint, it is clear that the bulls have some work to do still before we can break into a chorus of "happy days are here again."

S&P 500 - Daily

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From a short-term perspective, the bottom line is stocks are overbought, there is heavy resistance overhead, investor sentiment is no longer a tailwind, valuations remain high, and oil could become a problem again at the drop of an algo. Cutting to the chase, it would appear that a pullback would seem to be in order right about now.

Yet it is important to remember that Ms. Market likes nothing more than to fool the masses when "obvious" moves are at hand - such as the expectation for a pullback in the near term. So, should the major indices continue to simply ignore the overbought condition and/or find a way to move higher in the face of a pullback in oil, I'd be inclined to side with the bulls and prepare to buy any/all dips in the coming weeks.

But if given a choice, I'd much rather see how stocks during a pullback, especially a pullback that was caused by falling oil prices, before jumping on the bull bandwagon. Then again, one has to play the hand that is dealt in this game and not the one they'd like. So, I'm thinking that the next couple weeks will likely be quite telling.

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Today's Pre-Game Indicators

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

Major Foreign Markets:
Japan: -1.31%
Hong Kong: +2.15%
Shanghai: +2.77%
London: +1.67%
Germany: +1.68%
France: +1.88%
Italy: +1.43%
Spain: +1.43%

Crude Oil Futures: +$0.61 to $38.89

Gold: +$0.10 at $1237.60

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

US 10-Year Bond Yield: Currently trading at 1.817%

German 10-Year Bund Yield: Currently trading at 0.147%

Stock Indices in U.S. (relative to fair value):
S&P 500: +9.75
Dow Jones Industrial Average: +97
NASDAQ Composite: +29.45

Thought For The Day:

The true measure of an individual is how he treats a person who can do him absolutely no good. - Ann Landers

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

David D. Moenning
Founder: Heritage Capital Research
Chief Investment Officer: Sowell Management Services

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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 Oil Crisis
2. The State of Global Central Bank Policy
3. The State of the Stock Market Valuations
4. The State of Global 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 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend (1 - 3 Weeks): Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend (1 - 6 Months): Moderately Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend (6 - 18 Months): 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: 2000(ish)
• Key Near-Term Resistance Zone(s): 2050-2135

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: Positive
• Volume Thrust Indicator(NASDAQ): Neutral
• Breadth Thrust Indicator (NASDAQ): Neutral
• Short-Term 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: Overbought
  - Intermediate-Term: Overbought
  
• 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

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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.

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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 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 not 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. Positions may change at any time.

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.