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State of the Markets: An awful lot to consider

Anyone expecting a quiet Columbus Day Holiday in the markets (where stock markets are open but banks and bond markets are closed) will likely to be disappointed as the news flow over the weekend and the early action in the futures market suggests that last week’s volatility could continue.

In the wee hours, U.S. stock futures were down 15 points and suggested that it might be a scary open on Wall Street. Traders were apparently concerned about all the Fed-speak coming out of an IMF/World Bank conference. Vice Chair Stanley Fischer said that rate hikes in the U.S. could be delayed by a global slowdown and Daniel Tarullo stated that he was worried about the state of global growth.

In case it isn’t obvious, the key driver to the markets right now is global growth, or, perhaps more appropriately, a lack thereof. The bottom line is that there is once again talk of recession in places like Japan, Germany and the Eurozone as well as a serious growth slowdown in China.

On the latter subject, there were reports out of China that the government is targeting an annual growth rate of 7% in 2015. Recall that the economic growth for the world’s second biggest economy has been downgraded almost constantly in 2014 and the current estimate for 2014 is in the 7.3% zone.

Speaking of the slowdown in China, semiconductor maker Microchip (NASDAQ: MCHP) missed earnings badly and blamed conditions in China for the shortfall. As expected, the company’s stock got slammed for a loss of -12.3%. However, the concerns about China’s impact on earnings quickly spread to the rest of the semiconductor sector as the SOX index (NASDAQ: SOXX) fell -6.9%.

Shifting the focus across the Atlantic, let’s not forget that the banking crisis that threatened the unity of the Eurozone from mid-2009 through much of 2012 was never really fixed. And in case you missed it, Finland’s debt rating was downgraded on Friday. And then later in the afternoon (recall that S&P just love to make announcements on sovereign debt ratings on Friday afternoon’s) Standard & Poor’s downgraded their outlook on France from neutral to negative. In short, this means that France’s debt rating will see a downgrade in the coming months. If your first reaction to all of this is, “here we go again,” join the club.

While growth is the subject du jour, remember that the Fed is also still part of the game. For example, Goldman Sachs was out with a report over the weekend suggesting that the end to QE could produce a shock in the markets that will expose liquidity risk.

However, the good news is that things have improved rather dramatically in the last couple of hours. The improved mood appears to be tied to the announcement that Russian President Putin announced orders to pull back 17,600 troops from the Ukrainian border. As a result, European bourses now sport a decent shade of green and U.S. futures now point to a flat open on Wall Street.

Current Market Environment

The key question of the day is how low can the market go during this corrective phase? For the last 3+ years, all declines were contained within the -3% to -6% range. So, with the S&P 500 now down -5.23% from its September high, the bulls argue that the difficult days ought to be ending any day now. However, we remain concerned that (a) the reasons for the current decline are fundamental, (b) the divergences seen in the market are typically present during major tops, and (c) this time we are starting to see some important indicators issue sell signals. So, while our market environment models remain neutral on balance at the present time, we continue to view risk levels as elevated.

Looking At The Charts

Last week’s reversal of the prior reversals created a large degree of technical damage on the charts. First, the near-term support was broken. Next, the 150-day moving average, which had been support, snapped and now represents overhead resistance. And finally, the S&P put in a “lower low” on a closing basis. Granted, you have to squint to see it, but Friday’s close was below the August low. The good news is that the S&P 500 remains above its upwardly sloping 200-day moving average and stocks are now oversold on both a short- and intermediate-term basis. Therefore, a countertrend, reflex bounce is likely in the near-term. But the key line in the sand remains the 200-dma, which currently resides at 19005. Should this level be violated, we can probably expect a strong “whoosh” lower thereafter.

S&P 500 – 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.

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.