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State of the Markets: It's a good news/bad news situation

The big news this morning is the continued weak economic data out of Germany. As if yesterday’s surprising dive in manufacturing orders (orders fell -5.7% in August) wasn’t enough, today’s report on Industrial Production was also much weaker than expectations and hit the lowest level in more than 5 years. However, an official from Germany’s Economic Ministry says not to worry as the decline is being exacerbated by holiday effects.

The protests in Hong Kong and the Ebola outbreak also remain in the news this morning. In Hong Kong, student protesters and government officials continue to meet as another round of talks is set for today. However, at this stage, the talks are focused on how to approach the issues at hand as opposed to finding resolutions. The good news is that the number of protesters has declined over the weekend and there have been no further government crackdowns.

On the Eboloa front, a nurse in Spain has been diagnosed with the virus. This is the first confirmed case outside of Africa and the U.S. While health officials continue to downplay the situation, Wall Street remains interested in the potential economic impact if the outbreak grows.

Turning to the market action, after a disappointing day on Wall Street yesterday where the indices failed to build on Friday’s big job-induced gains, Asian markets were mixed while European bourses are down hard. U.S. futures are off their worst levels of the morning but still point to a weaker open on Wall Street.

Current Market Environment

Let’s review the facts. First, investors must recognize that until proven otherwise, this remains a bull market. Next, it is clear that the major indices are in a corrective mode at the present time. The damage inflicted on the indices since September varies widely with the blue chips suffering only a modest decline while the smallcaps continue to get hammered. It is also worth noting that market momentum remains a problem as most indicators of internal market health are currently no better than neutral. Finally, our market environment models also remain neutral. In sum, while the trend remains moderately bullish, there are reasons to exhibit some caution at this stage.

Looking At The Charts

The technical picture is a good news/bad news situation. The good news is (a) the S&P 500 has bounced off of its 150-day moving average, (b) the weekly uptrend that has been in place for more than two years remains intact, and (c) the #BTFD strategy continues to attract attention. As such, the bulls can claim that the recent “test” to the downside has been successful so far. But in the bad news column you’ve got the facts that (a) the S&P failed to recover its 50-day yesterday, (b) the major indices remain in a near-term downtrend, and (c) the technical divergence between the blue chips and smallcaps remains massive. The bottom line is that battle for the near-term trend is ongoing.

S&P 500 – Daily

Russell 2000 – Weekly

– 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.

Dave Moenning

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.