Paul Schatz of Heritage Capital, LLC is filling in for Dave M. this morning. Here are Paul's latest thoughts on the "state of the markets."

When we last left off, the major stock market indices were all playing nicely together except for the small cap Russell 2000 which had seen a full fledged 10% correction, but was beginning to bounce. The performance of that one index was a key ingredient to the bears' negative stance on the market. At that time, here and on the blog, I dismissed the Russell's warning and went so far as to call for all time highs before long.

On the first day of the new month and quarter, the Russell 2000 joined the S&P 500, S&P 400, Nasdaq 100 and Dow to score fresh all time highs. At the same time, the New York Stock Exchange Advance/Decline Line, which is a barometer of health on the NYSE also saw a new all time high along with many other sectors and indicators. This continues to be intermediate and long-term positive for the bull market.

More shorter-term, the market can best be described as grinding or creeping higher day after day. When you are on the correct side, there is nothing better. This kind of market has been seen many times since 2009 but rarely before that. The most common ending is a sharp and fast decline that wipes out a lot of gains in short order but does not end the bull market. At some point that scenario will become more likely.

The Market People Love to Hate

Remember, as I have now said for two years, this bull market may be old and wrinkly, but certainly not unhealthy or about to die. It continues to be the most unloved and disavowed bull market of my lifetime. Instead of friends asking me for the latest or greatest "hot" tip which I would expect at Dow 17,000, I am frequently pushed to opine as to when this all ends or when the big correction is coming.

And it's not just individual investors. On a daily basis I speak with other advisors as well as the media. It really surprises me how many peers have been negative, are negative and will be negative. This is a market where people in my industry should be raising lots of money. Markets have been "easy", meaning there has not been any significant downside since June 2012.

I think it's very hard to run an investment management business being a perma-bear or holding on to the belief that although stocks have rallied, they remain in a secular (long-term) bear market that began in 2000 with the Dow at 11,750. That's crazy in my humble opinion.

On the media side, they may have finally realized that I have a better face for radio than TV, but it certainly feels like they are not as interested in my bullish stance anymore now that the market has rallied. I have lost several opportunities lately because my opinion wasn't bearish or I wouldn't forecast some kind of doom (my word) on the horizon.

You can accuse the Fed of manipulation or supporting the market or anything you want. But the reality is that this has been one of the most powerful bull markets of all time. From my seat, as long as investors ask questions about the downside, advisors are bearish, the media only wants to sell negativity and my Twitter feed is full of bears, the bull market will live on.

How It Usually Ends

Yes, the market is 33 months from its last 10% correction and some surveys show complacency, but bull markets do not usually end with a whimper. There are typically many warning signs long before the bear comes out of its cave. Today, we have almost none. Additionally, the market historically sees a 10% correction where the end of the bull market is claimed by the masses, only to see yet another rally to new highs take shape. We haven't even seen the correction yet. And before the 10% correction, there should be a modest 2-4% pullback.

Don't get me wrong. Investors need to remain vigilant and active and on top of their holdings. Throwing caution to the wind and taking a "get me in at any price" mentality will likely end in ruin. Eventually, stocks will pullback, probably sooner than later, and finally correct 10% or more. But as I have been saying for years, any and all weakness remains a buying opportunity until proven otherwise. These kinds of markets are rare and should be fun. It's too bad that so many can only see negativity.

Paul Schatz

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 Outlook for U.S. Economic Growth
      2. The State of Global Growth
      3. The State of Fed 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 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

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

Intermediate-Term Trend: 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 12 months)

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: 1965
• Key Near-Term Resistance Zone(s): NA

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: Positive
• Price Thrust Indicator: Positive
• Volume Thrust Indicator: Neutral
• Breadth Thrust Indicator: Neutral
• 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.

• Overbought/Oversold Condition: The S&P 500 is Overbought from a short-term perspective and is Overbought from an intermediate-term point of view.
• Market Sentiment: Our primary sentiment model is Negative .

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 because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets 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.

Weekly State of the Market Model Reading: Positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Turning To This Morning...

Weaker than expected Industrial Production numbers out of Germany and hints from IMF Chief Christine Lagarde that her group may need to downgrade global growth expectations for 2014 has markets on the defensive in the early going. Lagarde said that while global economic activity should strengthen in the second half of the year and accelerated through 2015, the current momentum may be weaker than anticipated. European bourses are lower and U.S. futures point to a weaker 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: -0.38%
- Hong Kong: -0.08%
- Shanghai: +0.03%
- London: -0.28%
- Germany: -0.21%
- France: -0.49%
- Italy: -0.44%
- Spain: -0.58%

Crude Oil Futures: -$0.10 to $103.96

Gold: -$6.00 at $1314.60

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

10-Year Bond Yield: Currently trading at 2.639%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -3.54
- Dow Jones Industrial Average: -32
- NASDAQ Composite: -5.75

Thought For The Day...

"To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment." --Ralph Waldo Emerson

Positions in stocks mentioned: none

Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them in the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision System Can Help

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com 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 and on our website is for informational purposes only. No part of the material presented in this report or on our websites 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. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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