A colleague recently issued me a challenge. In short, my long-time friend teased that I needed to remove my rose-colored Revo's, if only for a moment or two, and try to look at the stock market environment from a member of the bear camp's perspective. Although I am indeed a card-carrying member of the glass-is-at-least-half-full club when it comes to the outlook for the U.S. economy and, in turn, the stock market, I am also a professional risk manager. And since removing emotional bias is part of the game, I welcomed the challenge.

What my colleague did not know is that I am nervous about the current state of the market and that I regularly spend some time on the dark side, looking at what could go wrong. As such, said challenge, wasn't really much of a challenge at all. It turns out that within 10 minutes, I had compiled a list of nearly 20 reasons that investors may want to take their foot off the gas a bit at this stage.

The plan then is to spend some time in the coming days plowing through this relatively lengthy laundry list of stock market worries. So, without further ado, let's get started. Finally, please note that the "worries" to be presented are in no particular order.

The Fed's Exit Plan

One of the oldest cliché's on Wall Street is "Don't Fight the Fed," to which, I have added "... Especially when they are on a mission."

The current market cycle is an absolutely perfect example of this trading rule. In short, the Fed has been on a mission to make double-darned sure that the U.S. economy does not enter a Japan-style deflationary environment. Therefore, the FOMC has come up with all kinds of new and creative ways to provide liquidity to the system.

And what has happened to all that money, they've been printing, you ask? It would appear that an awful lot of it has wound up in the stock market. The bottom line is that rising stock prices make people feel better. And when people feel better, they spend more time at the malls. In turn, the economy improves, etc., etc., so what's not to like, right?

The problem is that the actions taken from 2007 through 2013 by Mr. Bernanke and now Ms. Yellen in 2014 have been unprecendented. Therefore, no one really knows what will happen when they try to return interest rates to more "normal" levels (remember, current rates are at generational lows). However, we DO know that (a) the Fed WILL be starting to exit its easy money policy in the next year and (b) that a rising interest rate environment has not generally been kind to the stock market.

Inflation: Public Enemy #1 of Stock Market Bulls

To be sure, it has been a while since investors have had to worry about inflation. However, history shows that one of the biggest killers of bull markets is rising inflation.

Back in the day, the Fed focused primarily on keeping inflation in check. But of course, these days Ms. Yellen and company are actually trying to produce some inflation in the economy.

The problem is that once inflation takes hold it can prove very difficult to stop. Thus, one of the biggest worries is that the Fed's uber-easy monetary policy will once again prove to be the cause of the next stock market problem - namely, inflation.

Remember that the Fed's "target" for inflation is 2.0% per year. Last October, the annual CPI rate stood at 1% so there was no need to worry. However, in May the year-over-year CPI came in at 2.0%. In June it was 2.1%. The "Core Inflation" (excluding food and energy) rate was 1.9% and the "CPI Services" (less energy services) was reported at 2.7%. Note that all of these numbers are above the Fed's target.

Yes, I understand that Ms. Yellen is focused on Core PCE. However, it is important to recognize that the real inflation worry lies in wage inflation, which at this stage, remains under control. Everybody knows that consumer incomes have not been rising to any great degree, that plenty of folks are still out of work, and that there continues to be "slack" in the labor force.

Thus, the key is to watch the data for wage inflation. Should this begin to pick up, the stock market could have a problem on its hands.

This Bull Is Long In The Tooth

Some folks argue that the current bull market began on March 9, 2009 while others contend that 2011's rapid dance to the downside (which was tied to Greece and the U.S. debt downgrade) was technically a mini-bear and thus, the current bull started in November 2011. However, the key is that the average bull market lasts a little over two years. Therefore, regardless of where one begins counting, this bull is getting old.

Perhaps more important is the fact that it has now been more than 800 days since the stock market saw a correction of 10% or more. The problem is this. Over the last 50 years, the longer the time that the market spent going up between 10% corrections, the bigger the eventual decline has been.

For example, since 1965, the declines that began after the stock market had advanced without a 10% pullback for more than 500 days were: -14%, -19%, -34%, -22% and -19%. So... investors may want to implement a sell-first-and-ask-questions-later approach if the bears can finally get something going to the downside.

And since the recent declines have all been shallow, we will definitely sit up and take notice should a pullback exceed the -5% mark. In essence, this would be a sign that the bears might be in control.

Tomorrow, we will make some more check marks on our list of reasons to be cautious and look at the issues of liquidity, the nearest neighbor to the current advance, speculation and...

Turning To This Morning

Better than expected Industrial Production numbers out of China led to big gains in Asia overnight. However, across the pond, concerns about how Russia will react to new sanctions, the ongoing fighting in Ukraine, and the situation in Gaza/Israel are keeping a lid on stock prices. Here at home, traders are waiting on more data after the open, which is currently projected to be modestly lower.

Pre-Game Indicators

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

Major Foreign Markets:
    - Japan: +0.46%
    - Hong Kong: +0.88%
    - Shanghai: +2.42%
    - London: -0.01%
    - Germany: -0.25%
    - France: +0.13%
    - Italy: -0.31%
    - Spain: +0.38%

Crude Oil Futures: -$0.62 to $101.47

Gold: +$2.00 at $1305.30

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

10-Year Bond Yield: Currently trading at 2.481%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.64
- Dow Jones Industrial Average: -10
- NASDAQ Composite: -1.11

Thought For The Day:

A great fortune depends on luck, a small one on diligence. -Chinese Proverbs

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 Geopolitical 'Issues'
      2. The State of Fed/ECB Policy
      3. The State of the Earnings Season
      4. The Outlook for U.S. Economic 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 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: 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:

• Key Near-Term Support Zone(s) for S&P 500: 1955(ish)
• Key Near-Term Resistance Zone(s): 2000

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): Neutral
Indicator Explained

Price Thrust Indicator: Negative
Indicator Explained

Volume Thrust Indicator: Neutral
Indicator Explained

Breadth Thrust Indicator: Negative
Indicator Explained

Bull/Bear Volume Relationship: Moderately Positive
Indicator Explained

Technical Health of 100 Industry Groups: Neutral
Indicator Explained

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: Overbought
  
• 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.

Weekly State of the Market Model Reading: Moderately Positive
Indicator Explained

Looking For Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first 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 was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com
President, Heritage Capital Research
Check Out the NEW Website!

Positions in stocks mentioned: none

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

Free Research From StateoftheMarkets.com:

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

• State's Chart of the Day - Eeach day we highlight a top rated stock with a positive technical setup
• The Risk Manager Report - Stay in tune with the market's risk/reward environment
• The “10.0” Report - These are the REAL best-of-breed companies
• The Insiders Report - See what the people who know their company's best are buying
• ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.
• The SOTM 100 Portfolio - The top rated stocks in each market sector
• State's Market Models - Each week we quantify the "state of the market" with a series of models
• The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Our Mission Statement:

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

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 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 StateoftheMarkets.com 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.