Wait, what? On Wednesday, stocks blasted higher on the back of Super Mario singing a dovish song, word that China was about to sack the head of its central bank in favor of someone more modern, and not one, not two, but three Fed Governors suggesting that the Fed would likely take their time when it comes to raising rates.

Bam, just like that the worries about the effects of a rising dollar, where rates might go next, and all things geopolitical were put on the back burner. No, on Wednesday it was time to just BTFD! Stocks recovered all of Tuesday's losses as well as some of Monday's decline, and it looked like the bulls were back in business.

But a funny thing happened on the way to the rally recovery on Thursday. In short, traders forgot about all the good stuff from Wednesday and the market got blasted. Technical levels were broken. Good charts turned into bad charts. The league-leading NASDAQ suddenly looks sick. And the much-maligned Russell 2000 smallcap index continued diving, winding up near the low of the year.

For the record, the Russell is now down -5.5% on the month and -4.5% on the year. So anyone thinking that the S&P's "healthy" advance was representative of the overall market has another thing coming. Heck, the Dow is only up 2.2% in 2014.

Frankly, the charts below really tells the story of this market. First, as indicated on the chart of the S&P 500, it appears that yet another pullback - the 5th in the last 10 months - is underway.

S&P 500 - Daily

And then, as we've been discussing, the divergence on the chart of the Russell 2000 grows more glaring with each passing day. And frankly, these two charts don't even look like the same asset class.

Russell 2000 - Daily

As we've discussed, the issue here is that such divergences tend to be present during major tops in the stock market.

Another big data point to consider on the subjects of divergences and narrow leadership is the fact that, according to Bloomberg, 47% of the stocks on the NASDAQ are currently down 20% or more from their peaks in 2014. And again, narrow leadership is another classic indicator of a market top.

And while I am reticent to bring it up because it's a little on the ridiculous side, there has been an awful lot of jawing about the so-called "death cross" (which occurs when the 50-day moving average crosses below the 200-day moving average) seen on the Russell. However, there it should be pointed out that such an occurrence when the 200-day is rising has been a pretty good buy signal - but that doesn't stop the press from fawning all over the possibility of something REALLY bad happening (and given the recent ratings of CNBC, they could use a good crisis right about now!).

Why the Dive?

When the stock market makes a big move in either direction, there is usually a reason. However, yesterday's dance to the downside did not have any single catalyst. The selling seemed to be a culmination of a bunch of things, some of which include:

• Thursday was the last day a position could be sold in order to get it off a manager's "book" by the end of the quarter (i.e. window undressing)
• The U.S. dollar continued its joyride to the upside, hitting a 4-year high
• BoE's Carney said the economy is getting closer to where rates will need to start rising
• Russia basically said, "You sanction us, we will seize your stuff"
• ISIS warned of terrorist attacks on U.S. and France soil targeting subways, trains, buses
• The internal components of Durable Goods report suggests GDP might be hotter than expected, causing traders to worry again about the Fed raising rates sooner than anticipated
• S&P broke two important technical levels: (1) near-term support at 1980 and (2) its 50-day moving average
• Ditto for the NASDAQ
• There was talk of a "large institutional seller" exiting positions in 200 stocks
• Credit risk was in focus as high yield bonds broke down (see symbols JNK, HYG)
• The Yen was heading in the wrong direction again (the Yen-Carry trade remains a thing)
• There were rumors that a hedge fund was in trouble
• The action in commodities - although tied to the dollar's rise - continues to cause growth concerns
• Apple's iOS 8 debacle also created some negative sentiment

Taken alone, none of the above would normally warrant significant selling in stocks. However, these days, once a trend in the market gets started, the computers jump on board and ride the wave for all its worth. And in my humble opinion, this is why so many moves (January 24, April 10, July 31 and yesterday for example) become exaggerated on an intraday basis.

The Big Question

The question of the day, of course, is if the current selloff is "THE" correction that everyone under the sun has been looking for. In fact, a former Federal Reserve economist and fellow CONCERT Wealth Management Investment Committee member posed that very question to the committee via email after the close yesterday.

In my response, I pointed out that what's different this time compared to the other pullbacks we've seen this year, is the rise in the dollar, the classic divergences present, the narrow leadership, and the weakness in many underlying indicators. I said that this combination has, in the past, led to meaningful declines as well as bear markets.

Yet at the same time, I was forced to point out that a topping process can take a considerable length of time and that the above stated concerns are not, in and of themselves, catalysts.

Finally, I pointed out that we don't make predictions or "market calls" at my firm (I learned a long time ago that Ms. Market doesn't give a hoot about what I think might happen next in her game) and that our goal was to stay in line with what "IS" happening in the market as well as our market environment models, which have been neutral for some time now.

The conclusion was that while no one can be certain whether or not this is THE correction, the indicators DO suggest that this is a time to play the game less aggressively. So, the bottom line is that now is the time to let price be your guide. Unlike so many indicators, price, by definition, cannot deviate from itself and therefore, will tell us when THE correction is upon us.

Turning To This Morning

Although stocks were trashed on Wall Street yesterday, the global markets didn't really follow suit. Sure, Japan and Hong Kong were lower. However, European bourses are higher across the board on the back of talk that Thursday's move in the U.S. was overdone. Here at home traders will be focusing on the second revision of the nation's GDP, which is expected to come in at 4.6%. Of interest here is whether or not the report is "hotter" than expected.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.88%
    Hong Kong: -0.38%
    Shanghai: +0.12%
    London: +0.11%
    Germany: +0.18%
    France: +0.75%
    Italy: +0.78%
    Spain: +0.67%

Crude Oil Futures: +$0.45 to $92.98

Gold: -$2.40 at $1219.90

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

10-Year Bond Yield: Currently trading at 2.499%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +5.51
    Dow Jones Industrial Average: +66
    NASDAQ Composite: +14.48

Thought For The Day:

Things turn out best for the people who make the best of the way things turn out. -John Wooden

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 Level of Interest Rates
      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 Negative
(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: 1960(ish)
• Key Near-Term Resistance Zone(s): 1980

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
Indicator Explained

Price Thrust Indicator: Negative
Indicator Explained

Volume Thrust Indicator: Negative
Indicator Explained

Breadth Thrust Indicator: Neutral
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: Moderately Oversold
        - Intermediate-Term: Moderately Oversold
  
• Market Sentiment: Our primary sentiment model is Positive .

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
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.

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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
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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)

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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.