The question of the day remains largely the same at this point in time: Have we seen the lows of this move or are the bears about to retake control of the market again?

To be sure, there are lots of reasons to remain negative on the outlook for stocks here. There is the situation with valuations, the fact that earnings are set to decline for a second consecutive quarter, the situation in China, slowing economic growth just about everywhere you turn, and the simple argument that a host of longer-term indicators have issued warning flags.

This has led many to argue that this time will be different. This time there won't be a quick, V-bottom recovery from the decline. This time the fundamentals are a problem. This time there are a host of big name billionaire investors who are voicing concerns about the state of the stock market (Bill Gross being the latest). And this time, we're told, the Fed is out of bullets.

Heck, even my "desert island indicator" says there is enough internal weakness in the stock market that one needs to be cautious at this point in time.

But Then Again...

But as you might suspect, the view from the other sideline is not nearly as negative. In fact, the bulls have a handful of arguments suggesting that now (as in right now) is the time to "go the other way" from the prevailing sentiment.

So, while it is very easy to recite the bearish point of view, I thought it might be worthwhile to look at the arguments from those seeing the glass as at least half full at the present time.

First up in the bull case is the price action of the stock market itself. As my friend and colleague Paul Schatz and I have been yammering on about now for a couple months, the "Crash Playbook" appears to remain in play here. And our heroes in horns contend that we've seen the waterfall decline, the bounce, and the retest. Therefore, the next thing to look for is a breakout to the upside above 2000 that is also accompanied by a surge in momentum.

S&P 500 - Daily

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Next, there is the fact that sentiment has become extremely negative. Remember, in the stock market game bottoms tend to occur just about the time everyone on the planet is able to lay out the bear case. And given the levels of our sentiment indicators, it might be a good idea to recognize that "the crowd" has become one sided in their view here.

Then there is the seasonality argument. Lest we forget, history shows that the period from November through April is where most of the upside action in the stock market tends to occur. And if you dig a little deeper into the seasonality statistics, you will find that the best time to buy the stock market is at the October lows. So, while the retest of the August low technically occurred in late September, this might be "close enough" from a seasonal perspective.

And finally, there are some encouraging signs on the charts of markets other than stocks. Take high yield bonds for example. Don't look now fans, but junk is ripping at the moment.

iShares IBOXX High Yield Corp (HYG) - Daily

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One of the bear arguments is that there is trouble in the credit space and that spreads are widening. The bulls counter that this is due to the debacle in the oil patch and that while there could indeed be trouble in the energy sector, the rest of the market is doing just fine, thank you.

And as the chart of the HYG indicates, this argument may be gaining some traction.

Speaking of the oil patch... take a peek at the action in the XLE below.

Energy Select SPDR Fund (XLE) - Daily

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While calling a bottom in the oil market is akin to trying to catch a falling knife, the stocks in the energy sector are clearly starting to perk up. Exhibit A in this argument is the fact that the XLE has recently broken above the downtrend line that had been in place for nearly 6 months. And while the bottoming process could still take some time to play out, the key is that we may be seeing the value players starting to get in the game here.

Finally, since the oil patch has been a drag on just about everything for an inordinate length of time, I thought it would be a good idea to take a look at the action in oil itself this morning.

U.S. Oil Fund (USO) - Daily

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The message from the price action here looks to be pretty simple as the USO (an ETF proxy for the price of oil) appears to be basing at this time. And if the price of the USO can continue to move up in the near-term, one could even argue that an uptrend is forming.

But before you boo me off the stage with my optimistic view, I think we can agree that oil, at the very least, is no longer moving down. And as far as the stock market is concerned, an end to the decline in oil would cause a lot of the deflationary arguments to be removed from the table.

The Bottom Line...

The key takeaway this morning is that while it is easy to be bearish at this time, things may not be as dour as our furry friends have made them seem. You see, the bulls contend that many of the negative arguments may already be priced into stocks here. Time will tell on this score, of course, but I've found it usually pays to look on the bright side when dealing with Ms. Market's game.

Publishing Note: I have an early meeting Friday morning and will not publish a morning missive.

The Pre-Game Indicators

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

Major Foreign Markets:
Japan: -0.99%
Hong Kong: -0.71%
Shanghai: +2.96%
London: +0.33%
Germany: +0.16%
France: -0.11%
Italy: +0.44%
Spain: -0.39%

Crude Oil Futures: +$0.42 to $48.23

Gold: -$10.00 at $1138.70

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

10-Year Bond Yield: Currently trading at 2.057%

Stock Indices in U.S. (relative to fair value):
S&P 500: -6.90
Dow Jones Industrial Average: -54
NASDAQ Composite: -15.40

Thought For The Day:

The truth will set you free. But first, it will piss you off. -Gloria Steinem

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 China's/Global Economy
2. The State of Stock Market Correction
3. The State of Fed/Global Central Bank Policy
4. The State of the U.S. Economy

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 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Positive
(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: Low Neutral
(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: 1867
• 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): Positive
• Price Thrust Indicator: Negative
• Volume Thrust Indicator(NASDAQ): Negative
• Breadth Thrust Indicator (NASDAQ): Negative
• Intermediate-Term Bull/Bear Volume Relationship: Negative
• Technical Health of 100+ Industry Groups: Negative

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: Overbought
  - Intermediate-Term: 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 Market Environment Model Reading: Negative

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

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research

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.

Disclosures

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 is for informational purposes only. No part of the material presented in this report 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.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is the owner of Heritage Capital Management (HCM) a registered investment adviser. Advisory services are offered through Heritage Capital Management, Inc. For a complete description of investment risks, fees and services review the HCM firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting HeritageHCM also serves as a sub-advisor to other investment advisory firms. Neither HCM or Heritage is registered as a broker-dealer.

Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.