Paul Schatz is filling in for Dave M. this morning. Without further ado, here is Paul's take on the current "state of the markets."

2014 may be young, but so far, it’s exhibiting a very different character than 2013 with the rate of ascent completely flat lining and the high flying leaders hit very hard. In other words, the year has been digesting as I wrote about in the "2014 Fearless Forecast." Don’t get me wrong, just because I forecast this type of action doesn’t mean it has been an easy year to make money. It hasn’t. And I don’t think that changes just yet.

I am going to discuss the five major U.S. indices and see what we can glean from the action in 2014. Remember, the healthiest markets have all five indices in sync, meaning they should all make highs at the same time.

The Dow Jones Industrials are first and you can see highs in March and April with essentially equal lows during the same months. After today, the Dow is within striking distance of all time highs, a positive sign.

The S&P saw a higher high in April than March, but a lower low as well, making it stronger and weaker than the Dow.

The S&P 400 Mid Cap Index is below and while it shows similarities to the S&P 500, it is now exhibiting a series of lower lows as seen twice in March and once in April. As such, it is also farther away from all time highs than the other two indices.

The Russell 2000 is next and here you can see a very different pattern. From the last significant low in 2012, this index has led the market higher almost the entire time through early March 2014. Since that time, we see a series of lower highs and much lower lows. Not only is the Russell no longer the leading index, but it’s action is anything but positive and certainly warning of something on the horizon. For full disclosure, some of our programs took a position here at the lows last week since it was overly stretched to the downside and the odds a short-term snapback.

The technology laden NASDAQ 100 is the last major index to show and looks very similar to the Russell 2000 except it has already retraced the entire February to early March rally. Neither index is anywhere near all time highs and both need to be watched closely.

The S&P 500 is next and the chart looks very similar, to the Dow above. If I were doing a full "Canaries in the Coal Mine" piece, the above comments would be collectively labeled a dead canary and certainly disconcerting for the long-term health of the bull market. However, the canary can certainly be revived if all major indices get back in gear to the upside later this quarter or over the summer.

In the short-term, contrary to what may be reported, it will not be a positive sign to see yet another high in the Dow and/or S&P 500 without the other major indices confirming that celebration. Until proven otherwise, the higher beta (read weaker) indices are now best viewed as sales into rallies than anything else.

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Turning To This Morning...

Tensions in Russia/Ukraine continued over the weekend. However, given that the situation did not spiral out of control, those traders who removed exposure on Friday due to fear over weekend headline risk appear to be putting exposure back on and/or covering shorts. In addition, the mega-bid by Pfizer for AstraZeneca ($100 Billion) as well as other M&A activity seems to be keeping the mood buoyant in the early going. Overnight markets saw declines in Asia but green screens across Europe. U.S. futures are also 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: -0.98%
- Hong Kong: -0.41%
- Shanghai: -1.65%
- London: +0.42%
- Germany: +0.81%
- France: +0.51%
- Italy: +0.54%
- Spain: +0.43%

Crude Oil Futures: +$0.58 to $101.18

Gold: +$0.50 at $1301.30

Dollar: lower against the yen, euro and pound

10-Year Bond Yield: Currently trading higher at 2.689%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +9.75
- Dow Jones Industrial Average: +93
- NASDAQ Composite: +20.70

Thought For The Day...

"The more we allow expectations to drive us, the further we push our potential away." Yehuda Berg

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