The word of the day appears to be weakness. Asian stock markets are down across the board this morning in response to weaker-than expected FDI (foreign direct investment) data in China, which showed inflows hitting the lowest level in at least two and one-half years. In addition, the ZEW Investor Confidence data in both the Eurozone and Germany continued to be surprisingly weak (Germany’s ZEW index came in at the lowest level since December 2012). As a result, European bourses are also a sea of red this morning. Finally, geopolitics are back in the news today as the U.S. initiated its first official airstrikes against ISIS in Iraq and the fragile ceasefire in Ukraine is being tested by some military activity. Here at home, traders continue to fret about the Fed and futures point to a slightly lower open on Wall Street.
Current Market Outlook
While there does not appear to be any panic in the market at the present time, the action this month has been sloppy, to say the least. This is likely due – at least in part – to the uncertainty relating to the Fed’s monetary policy. Everybody knows that QE is ending and that the Fed will begin to raise rates at some point next year. The questions at this stage are when and by how much? This uncertainty is likely causing buyers to either do less or stand aside completely at this time. Now toss in another round of selling in some of the high-flying “mo-mo” names such as Tesla and the social media darlings and you’re left with a market that appears to be weakening. As such, the traders who have been looking/waiting for a meaningful correction are once again on high alert. Finally, our market models have slipped to neutral. And while this is not a death knell for the market, it does indicate that some degree of caution may be warranted until the bulls can regain their mojo.
Looking At The Charts
It is said that technical analysis of chart patterns is more art than science and the current situation would appear to confirm this view. For example, the bears are arguing that the near-term support levels on the major indices have been violated and that the direction of the trend is down. On the opposite sideline, our heroes in horns suggest that support in the market is not a specific point or level, but rather a zone. Therefore, as long as stocks don’t make a meaningful break below 1980, the bulls say everything is fine. From an objective point of view however, one has to admit that the line in the sand is getting a little thin. We continue to contend that 1980 holds the key to the next move. Yet at the same time, the Fed is on tap tomorrow – so the action before Janet Yellen’s press conference may take on less importance. In short, the outlook is more than a little cloudy right now.
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David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.