Yesterday's trash-job in the stock market has bearish analysts telling anyone and everyone who will listen that this time it's different. This time, the bounce and the expected "V" bottom failed, we're told. This time, the technical damage is just too great. This time, there are huge divergences and narrow leadership. This time, global growth matters. And in sum, this time, the dip buyers aren't coming to save the day.

However, this appears to be an on-the-one-hand and yet, on-the-other-hand situation. Yes, it is true that yesterday's shellacking did not follow the script of the prior dips this year - where traders simply blindly bought after a handful of tough days. Yes, there was some serious technical damage done to the charts. And yet, it is important to recognize that from a longer-term perspective, things aren't remarkably different at this stage of the game.

It's the (Global) Economy...

Before turning to the charts, understand that the excuse du jour for yesterday's dance to the downside can be summed up in one word: growth. Or in this case, worries about a lack thereof.

Germany kicked things off with another miserable report from its manufacturing sector. After the report on Manufacturing Orders dove 5.7% on Monday, Tuesday's disaster of the day was Industrial Production, which as you might suspect by now, came in well below expectations. These two numbers were akin to an exclamation point to the thesis that Europe's economy in general and Germany's specifically, are in trouble.

Then came the IMF. Generally a master of restating the obvious, the IMF once again didn't disappoint as the group downgraded their forecasts for global economic growth. Sure, the forecast for the U.S. was actually taken up, however, it was the outlook for both Europe and China that got people's attention.

Next up came the Fed-heads. Minnesota's Narayana Kocherlakota said in a speech that it would be inappropriate for the FOMC to raise rates in the next two years. Never mind the fact that Kocherlakota is an uber-dove and that his call to keep rates low indefinitely is NOT new. No, what traders heard was concern about the state of the U.S. economy.

New York Fed President William Dudley also chimed in with similar sentiments, saying it is "premature" to raise interest rates. Ditto on the trading takeaway here.

Next, there was the report on Consumer Credit, which rarely if ever warrants any attention. However, with total credit coming in at $13.5 billion versus expectations for $21.0 billion, well, you get the idea.

And finally, there is the U.S. dollar. Word is that the spike in the greenback is going to threaten earnings, consumer spending, keep inflation from growing, yada, yada, yada. However, as the chart will show, it may be premature to panic over the dollar here.

Turning to the Charts

Ok, now that the reasons for the big dive are out of the way, let's turn our attention to the message from the charts.

First, there is the daily chart of the S&P 500. And while the area circled in red may not look like much, there is a lot going on here.

S&P 500 - Daily

View Larger Image

First, there is the break of the uptrend line that has been intact for many months. The bears tell us this is bad, very bad.

Next, there is the upside test of the 50-day moving average (orange), which also failed recently. Again, we are told this is not a positive.

Then there is the fact that the S&P 500 took out last week's closing low. Something that likely led to a fair amount of "technical" selling yesterday and, to hear the bears tell it, is a harbinger of bad things to come.

However, before you decide to double up on your short bets, let's consider that (a) the S&P is still above the all-important 150-day moving average, (b) the intraday low from last week has not been violated, and (c) the bulls contend that yesterday's hysterics merely represented a "retest" of the lows - something that is fairly typical during corrective phases.

For more, let's take a longer-term view.

S&P 500 - Daily

View Larger Image

The chart above shows the S&P 500 on a daily basis over the last 18 months or so. The red circles represent the 7, count them, 7 prior dips - as well as the current decline. The takeaway here is that, at least from a longer-term perspective, yesterday's thrashing doesn't appear to change the overall picture much. For example, while stocks are still in a short-term correction, the S&P has not violated its 150-day. As such, things do not appear to be dramatically different at this point.

The same short-term versus longer-term analysis can be applied to the freakout that is taking place in the dollar.

PowerShares US Dollar (UUP) - Daily

As the chart above clearly illustrates, the greenback has been surging since July and has put in an impressive run. However, when one steps back a bit and looks at the action in the dollar over a longer time horizon, the message changes.

PowerShares US Dollar (UUP) - Weekly

Viewed on a weekly basis over a multi-year time frame, one can argue that "King Dollar" has really just challenged the high end of the trading range that has been in place for more than three years. Thus, at a minimum, we would need to see a decisive break of this range in order to be able to argue that a new secular move in the dollar has begun.

Is It Really Different This Time?

So, those that argue that this time is different and stocks are due for a 2000/08-style beating, they may be right. However, it is important to remain objective in this type of situation and to realize that if the game is to change dramatically, there will need to be big changes on the longer-term charts as well. And so far at least, this is just not the case.

However, as we have been saying for quite some time, the risk of a meaningful decline in the stock market is indeed elevated and some caution is clearly warranted at this time.

Turning To This Morning

Although China's HSBC Services PMI for September came in at 53.5 versus 54.1 in August and European bourses remain weak this morning, things are looking up here at home. Perhaps it is the font-page editorial in the China Securities Journal calling for the PBoC to cut rates that has traders in a better mood. Or maybe it is the fact that the minutes from the latest Fed meeting are likely to be bullish. But in any event, U.S. stock futures are movin' on up and point to a rebound attempt at the open. It is also worth noting that oil is diving again this morning, which is a positive for U.S. consumers.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -1.19%
    Hong Kong: -0.68%
    Shanghai: +0.81%
    London: -0.50%
    Germany: -0.76%
    France: -0.72%
    Italy: +0.40%
    Spain: -0.08%

Crude Oil Futures: -$0.84 to $88.01

Gold: +$5.20 at $1217.80

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

10-Year Bond Yield: Currently trading at 2.356%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +3.60
    Dow Jones Industrial Average: +32
    NASDAQ Composite: +10.76

Thought For The Day:

When men speak of the future, the Gods laugh. -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 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?

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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.