Yesterday's stock market action once again reinforced the idea that the key driver of this market remains the outlook for monetary policy. With the S&P 500 looking it was down for the count and ready to break the all-important support at 1980, traders got word that the Chinese leader Xi Jinping was considering replacing the head of the PBoC. The immediate thinking was that such a move would liberalize monetary policy in the world's second most important economy and that more stimulus would likely ensue.

In addition, "Super Mario" (ECB President Mario Draghi) also lent the bulls a hand by saying that (a) monetary policy would remain accommodative for a very long time, (b) that the ECB was united in their view that inflation needs to return to the 2% annualized target range, and (c) that governments need to do more to boost growth.

Finally on the monetary front, there was more talk about the Fed needing to be patient in terms of its plan to tighten rates. For example, Chicago Fed's Evans said the Fed should be “exceptionally patient” and willing to allow modest overshooting of inflation target. NY Fed President Dudley also argued economy needs to run “a little hot” for a while. In addition, both referenced the Fed's premature tightening during the Great Depression. And then Minneapolis Fed President Kocherlakota said inflation likely to remain below 2% target for next four years.

On the economic front, New Home Sales surged in the month of August. This put a dent in the bear camp's worry that the housing market was slowing faster than anticipated and would soon become a drag on the economy. In addition, the new "Inversion Rules" from the Treasury department did not appear to be as harsh as had been feared and would not deter deals in the future.

Now toss in the fact that the market had been down for 3 consecutive days, which, for the past two years has been a buy signal for the fast money crowd, and boom - the rally was on.

Turning to this morning, things were fairly quiet overnight. European markets are mostly higher as traders continue to focus on Draghi's dovish stance. In Asia, the Nikkei went on a tear and finished at new seven-year highs. And here at home, U.S. futures point to a slightly lower open at the present time.

Current Market Outlook

By now it is quite clear that monetary stimulus remains the focal point of the market. In short, any mention of anything that could possibly delay rate hikes in the U.S. or add to stimulus measures in Europe/China is viewed as a positive by traders and their computers. However, it is important to keep in mind that this market is not hitting on all cylinders at the present time. As such a cautious stance remains warranted.

Looking At The Charts

The good news is that the S&P 500 stopped declining at the exact spot that it needed to yesterday. The fact that the 1980 level held during the opening round of selling caused traders to "go the other way" from a technical standpoint. However, the bad news is that stocks remains stuck in a trading range. And with stocks no longer oversold, it is anybody's ball game at this point. We will continue to focus on the key lines in the sand on the chart of the S&P 500, which by now are very well defined.

S&P 500 - Daily

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +1.28%
    Hong Kong: -0.24%
    Shanghai: +0.06%
    London: -0.08%
    Germany: +0.51%
    France: +0.35%
    Italy: +0.79%
    Spain: +0.77%

Crude Oil Futures: +$0.29 to $93.06

Gold: -$8.00 at $1211.30

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

10-Year Bond Yield: Currently trading at 2.549%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -2.85
    Dow Jones Industrial Average: -5
    NASDAQ Composite: -6.06

Thought For The Day:

Make sure your worst enemy doesn't live between your own two ears. -Laird Hamilton

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 Fed/ECB Policy
      2. The Level of Interest Rates
      3. The Level of the U.S. Dollar
      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: Moderately 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 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: 1980
• Key Near-Term Resistance Zone(s): 2005-20

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): Negative
• Price Thrust Indicator: Negative
• Volume Thrust Indicator: Negative
• Breadth Thrust Indicator: Negative
• Bull/Bear Volume Relationship: Moderately Positive
• Technical Health of 100 Industry Groups: Neutral

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: Moderately Oversold
  
• 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: Neutral

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

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research - A CONCERT Advisor
Be Sure To Check Out the NEW Website!

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.