After a third consecutive losing session for the stock market, it appears that the mood may be improved today – at least in the early going, anyway. We will note that buying after 3 down days has been a profitable strategy for the last couple years. Thus, it will be interesting to see if traders continue to play the BTFD game (“buy the freaking dip!”) or will continue to focus on the negative seasonality and the weak economic data from across the pond.
Speaking of weak economic data, the IFO Business Climate in Germany fell for a fifth straight month in September. The current reading is the lowest level since April 2013 and underscores the recent weakening in conditions. “Super Mario” (aka ECB President Draghi) told Europe 1 radio this morning that monetary policy will remain accommodative for a long time. Draghi also noted that rates will remain low and reiterated the bank’s unanimous commitment to use available instruments to bring inflation back toward 2%.
Sticking with the monetary stimulus theme, there are signs that the recent pushback out of Chinese officials toward the concept of additional stimulus seems to be an easing. Official China Securities Journal said in a front-page editorial that lowering interest rates and adjusting the exchange rate may be the right policy combination for China.
Finally, in the overnight markets, Chinese indices extended their recent rally overnight, European bourses are sporting green screens, and U.S. stock futures point to a modest bounce attempt at the open on Wall Street.
Current Market Outlook
As the saying goes, “risk happens fast” in the stock market these days. Last week’s new highs have been greeted with nothing short of a smack-down as talk of the “death cross” in the Russell 2000 and a potential “Alibaba top” have dominated the discussion on trading desks. This market continues to be a tale of two tapes with the blue chip indices appearing to be in a consolidation phase while the small and midcap indexes are trending lower. In short, this is the very definition of a neutral market environment. The concern however, is that we are seeing a topping process as technical divergences and narrow leadership are usually present when bull markets end. And while an oversold bounce would be logical at some point in the next day or two, we continue to believe the environment warrants caution at this time.
Looking At The Charts
The key question from a chart perspective is if the current pullback will be another in a long string of dip-buying opportunities or morph into something far more sinister. The contrasting action seen on the charts of the S&P 500 and Midcap 400 really tell the whole story. While the S&P 500 remains in a sideways consolidation range at this point, the Midcaps appear to be tracing out an intermediate-term double-top. Therefore, we will argue that the near-term price action takes on added importance. Stocks are oversold from both a short- and intermediate-term time frame. But the all-important line in the sand currently stands at 1980 on the S&P 500.
S&P 500 – Daily
Midcap SPDR Trust (MDY) – Daily
See more at: StateoftheMarkets.com
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.