The big news this morning is the continued weak economic data out of Germany. As if yesterday's surprising dive in manufacturing orders (orders fell -5.7% in August) wasn't enough, today's report on Industrial Production was also much weaker than expectations and hit the lowest level in more than 5 years. However, an official from Germany's Economic Ministry says not to worry as the decline is being exacerbated by holiday effects.

The protests in Hong Kong and the Ebola outbreak also remain in the news this morning. In Hong Kong, student protesters and government officials continue to meet as another round of talks is set for today. However, at this stage, the talks are focused on how to approach the issues at hand as opposed to finding resolutions. The good news is that the number of protesters has declined over the weekend and there have been no further government crackdowns.

On the Eboloa front, a nurse in Spain has been diagnosed with the virus. This is the first confirmed case outside of Africa and the U.S. While health officials continue to downplay the situation, Wall Street remains interested in the potential economic impact if the outbreak grows.

Turning to the market action, after a disappointing day on Wall Street yesterday where the indices failed to build on Friday's big job-induced gains, Asian markets were mixed while European bourses are down hard. U.S. futures are off their worst levels of the morning but still point to a weaker open on Wall Street.

Current Market Environment

Let's review the facts. First, investors must recognize that until proven otherwise, this remains a bull market. Next, it is clear that the major indices are in a corrective mode at the present time. The damage inflicted on the indices since September varies widely with the blue chips suffering only a modest decline while the smallcaps continue to get hammered. It is also worth noting that market momentum remains a problem as most indicators of internal market health are currently no better than neutral. Finally, our market environment models also remain neutral. In sum, while the trend remains moderately bullish, there are reasons to exhibit some caution at this stage.

Looking At The Charts

The technical picture is a good news/bad news situation. The good news is (a) the S&P 500 has bounced off of its 150-day moving average, (b) the weekly uptrend that has been in place for more than two years remains intact, and (c) the #BTFD strategy continues to attract attention. As such, the bulls can claim that the recent "test" to the downside has been successful so far. But in the bad news column you've got the facts that (a) the S&P failed to recover its 50-day yesterday, (b) the major indices remain in a near-term downtrend, and (c) the technical divergence between the blue chips and smallcaps remains massive. The bottom line is that battle for the near-term trend is ongoing.

S&P 500 - Daily

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Russell 2000 - Weekly

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Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.67%
    Hong Kong: +0.46%
    Shanghai: closed
    London: -0.63%
    Germany: -0.86%
    France: -1.20%
    Italy: -1.18%
    Spain: -1.76%

Crude Oil Futures: -$0.16 to $90.18

Gold: -$1.50 at $1205.80

Dollar: higher against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.407%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -8.12
    Dow Jones Industrial Average: -58
    NASDAQ Composite: -15.47

Thought For The Day:

Go in the direction of your dreams. Live the life you've imagined. -Thoreau

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 Price Action in the Major Stock Market Indices
      3. The Level of the U.S. Dollar
      4. The Level of Interest Rates
      5. 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: Negative
(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: 1945
• Key Near-Term Resistance Zone(s): 1965-80

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
• 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: Neutral
  
• 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 Market Environment Model Reading: Moderately Positive

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.