After more than a week of very little in the way of news to work with, traders are being bombarded with inputs this morning.
In Europe, the all-important ZEW economic surveys showed that the outlook for the economies of Germany and the Eurozone continues to fade. In Germany, the index fell to 27.1 from 29.8 last month and the Eurozone reading was 61.8, which was below the consensus for 62.3. This coupled with the ongoing banking concerns have the major market indices moving down in afternoon trade across the pond.
Here at home, traders are focused on both the data and some very big name earnings reports. JPMorgan Chase and Goldman Sachs both blew away EPS and revenue estimates and the report from Johnson & Johnson also above analyst expectations.
In economic news, the Empire Manufacturing Index was strong. The survey of businesses in the New York region showed that business conditions improved significantly for a 3rd consecutive month as the index moved to its highest level in 4 years. Next, Retail Sales were disappointing again as the June headline came in at +0.2% versus expectations for +0.6%. However, May's level was revised to +0.5% from +0.3%.
Also note that Janet Yellen will provide her semi-annual testimony on Capitol Hill today and tomorrow.
U.S. stock futures are up fractionally and point to a mixed open on Wall Street.
The question of the day is if the upbeat state of the earnings season - which, so far at least seems to be going swimmingly - can overcome the concerns about Europe's economic slowdown, the issues with Portugal's Banco Espirito Santo, and the geopolitical problems seen in Ukraine, Iraq, and Gaza. The crosswinds in the market explain the fact that the major indices have not been able to break to new highs. However, both the Dow and S&P 500 remain only a whisker away from the Promised Land. Putting emotions aside, it is important to note that our market environment models are sagging at the present time, which is not something that usually happens in strong uptrends. But for now, the readings are moderately positive.
This continues to be a tale of two tapes as the blue chip indices (Dow and S&P 500) are currently on the verge of breaking out to fresh all-time highs while the charts of the smallcap and midcap indices appear to be in clear downtrends. In addition, if one looks at the weekly charts of the Russell 2000 index, it appears that a double top formation may be in play. And while the divergences such as we're seeing now can persist for some time and are not, in and of themselves, bull killers, strong markets do not usually display this type of action. We will continue to watch the important support zones in the midcap and smallcap indices. The bulls don't need the smallcaps to be at new highs in order to proceed. However, the overall market is unlikely to be able to advance if the "troops" are breaking down to fresh lows.
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Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +0.64%
- Hong Kong: +0.49%
- Shanghai: +0.16%
- London: -0.10%
- Germany: -0.16%
- France: -0.32%
- Italy: -0.67%
- Spain: -0.94%
Crude Oil Futures: -$0.66 to $100.25
Gold: +$4.10 at $1310.30
Dollar: lower against the yen, euro, and pound.
10-Year Bond Yield: Currently trading at 2.545%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +2.35
- Dow Jones Industrial Average: +26
- NASDAQ Composite: +5.14
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 the Earnings Season
3. The State of Fed/ECB Policy
4. The State of the Geopolitical 'Issues' in Ukraine, Iraq, and Gaza
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: High Neutral
(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:
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"...
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.
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 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.
Weekly State of the Market Model Reading: Moderately Positive
Learn to trust in an idea whose time has come...
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, StateoftheMarkets.com
President, Chief Investment Officer Heritage Capital
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