Posted Jul 8, 2015 in Blog, David Moenning

The good news is that the situation in Greece appears to be moving toward a conclusion. Just this morning Tsipras & Co. have submitted a request to the ESM for a fresh, 3-year bailout along with promises to implement tax and pension reform measures at the beginning of next week. In addition, there seems to be movement on both sides to create a short-term bridge loan so that the country can avoid defaulting on more than €3 billion due to the ECB this month while the new deal is hashed out. The bottom line is that Sunday is the new deadline for the structure of a deal to be agreed to.

As a result, European stock markets are following suit with Wall Street’s rousing rebound seen yesterday and European bourses sport gains of 1% or more across the board in the early going Wednesday.

The bad news is that China’s stock markets are now crashing and getting the attention of U.S. traders.

China May Be the Next Big Problem

After soaring more than 150% since opening its markets to all kinds of new investors last year, the Shanghai index has now declined more than 33% in the last 3 weeks, losing nearly 6% alone overnight in very volatile trading.

Chinese officials appear to be panicking in response, implementing all kinds of stop-gap measures including bans on certain types of short sales, trading halts, and strong-arming companies to stop selling stock.

That’s right fans, while the situation in Greece looks to be improving, China may be the next big problem Wall Street traders have to worry about.

Here’s the latest…

Continued weakness in China’s mainland shares overnight sparked a regional selloff in Asia, with Hong Kong-listed stocks seeing outsized losses. The Shanghai Comp closed down 5.9%, which was actually an improvement from the decline of 8% seen intraday.

As a result, Chinese officials are doing whatever they can think of to try and halt the slide. Currently estimates indicate that more than 50% of mainland shares have been halted for trading (with some estimates as high as 70%). Bloomberg estimated today that the 1,301 companies locked up $2.6 trillion in shares, or approximately 40% of the index’s market cap.

Next, China’s Financial Futures Exchange has raised margin requirement for short-sale orders on CSI 500 Futures Index to 20% from 10% (apparently this excludes so-called hedging positions). The exchange says that margin requirements will be raised again to 30% on Thursday.

In addition, a Ministry of Finance announcement indicated Wednesday that the government has ordered state-owned financial firms not to sell shares in their companies. The Ministry also pledged not to sell its own holdings of listed stocks.

And then there is the jaw boning… China’s regulatory agency (the CSRC) issued an announcement encouraging founders and directors of companies to buy shares in their own companies in order to stabilize prices. The regulator said that insider share purchase restrictions would be eased to make the purchases easier to implement. And this just in… Bloomberg is reporting that the CSRC has banned major shareholders, corporate executives, and directors from selling any of their positions for six months.

As is usually the case with this type of market panic, the concern is the risk of contagion – I.E. the decline spreading around the globe. And with Chinese investors notorious for being trend-followers, the fear is that the rout in stock prices is just getting started. Using the play book from past market crises, we should note that when prices fall to this degree (more than -30% in 3 weeks), the margin calls start to begin. These then tend to followed by forced selling, fund blow-ups, selling in other markets around the world (remember the old adage that applies here is “sell what you can, not what you have to”) and what amounts to a “whoosh” lower. And the bottom line is this tends to cause anyone and everyone wanting to sell to do so.

Why is all this important? Lest we forget, China is the second-largest economy in the world. And given that concerns about the health of the Chinese economy have been growing for some time now, a stock market crash would likely cause those worries to become reality. And in short, such an event would likely negatively impact the global economy (commodities are already tanking in response) and equity markets.

Here in the U.S., the action is starting to get wild and woolly after the volatile ride seen over the past couple of weeks. To many observers, including yours truly and the rest of my team, the trading is reminiscent of the extreme volatility seen during 2011. As such, it might be time to buckle up and focus on the big-picture trends in the market and to exhibit some caution.

S&P 500 Index – Daily

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This Morning’s Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -3.13%
    Hong Kong: -5.84%
    Shanghai: -5.91%
    London: +1.05%
    Germany: +0.93%
    France: +1.18%
    Italy: +2.07%
    Spain: +1.01%

Crude Oil Futures: -$0.15 to $52.18

Gold: +$1.30 at $1152.90

Dollar: higher against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.231%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -13.59
    Dow Jones Industrial Average: -127
    NASDAQ Composite: -31.80

Thought For The Day:

You can easily judge the character of a man by how he treats those who can do nothing for him. -James D. Miles

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 Greek Crisis
      2. The State of China’s Stock Market
      3. The State of Fed/ECB/PBoC 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 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Negative
(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: Moderately 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: 2040
  • Key Near-Term Resistance Zone(s): 2100

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
  • Intermediate-Term Bull/Bear Volume Relationship: Moderately Negative
  • Technical Health of 100+ Industry Groups: Moderately Positive

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: Oversold
          – 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: Neutral

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, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., a registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT 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.

Numetrix Portfolio Solutions are Offered by Hg Capital Advisors LLC, an independently owned Texas limited liability company, registered as a Registered Investment Advisory firm under the Investment Advisors Act of 1940.

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