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State of the Market: Can you say neutral?

Welcome to the consolidation phase – are we having fun yet?

From a longer-term perspective, all we hear from the market analysts these days is that the volatility of the market has dried up this year. There have been no corrections, we're told. The trading range environment is both extremely tight and very rare, they say. And if one looks at a closing chart of the S&P 500 on a weekly basis over the past couple of years, it is hard to argue with these assessments.

Yet from a shorter-term perspective, I will posit that just the opposite is occurring. The action seen since the middle of June is a perfect example of my point as stocks have moved wildly in one direction and then the other. Back and forth. Up and down. With each trend (and I use that term loosely!) lasting a handful of days before the powers that be decide to simply go the other way – with reckless abandon.

Hence my handful of recent tweets terming the current action “idiotic.” In fact, I'm still shaking my head over Wednesday's insanity. But the reality is, in this business, you've got to play the hand you've been dealt and not the one you'd like, right?

So, putting all emotions aside and looking objectively at both the charts and our host of market models, the word that best describes the current stock market is, neutral.

The daily chart of the S&P 500 makes this pretty clear. Take a peek at the graph below and see for yourself…

S&P 500 – Daily

 

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First, note the top and bottom of the trading range that is nearly six months old. Next, note the line drawn through the middle of the range. Then, take notice of the red lines, which represent both short-term up- and down-trend lines (the technical analysis textbooks would call this some sort of a wedge formation). And finally, check out where the S&P closed yesterday… Yep, that's right – smack dab in the middle of everything. Can you say, neutral?

The song remains the same when you look at the market from a longer-term perspective. Below is a weekly chart of the S&P. Note that the uptrend that was in place since the middle of 2012 has now given way to a pattern that fits quite nicely into the red rectangle drawn on the chart.

S&P 500 – Weekly

 

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While it may be hard to see, it is also worth noting that the blue and orange lines (the 10- and 30-week weighted moving averages) are now moving sideways and that price is currently resting right in the middle of the range and almost on top of the moving averages. Neutral indeed.

Do The Indicators Provide a Clue?

Then there are the indicators. While there are a growing number of our indicators that are beginning to flash warning signs, the weight of the evidence of the group suggests that things are, that's right… neutral. This is highlighted by our Market Environment Models (there are short-, intermediate-, and long-term models), which, in keeping with the theme of this morning's meandering market missive, are all yellow at the present time.

The questions of the day then are (a) where do we go from here? And (b) when does this maddening, neutral environment end?

As for the latter query, there is obviously no way of knowing. And since the “breakout fakeout” has become quite prevalent lately, we would suggest investors wait for some confirmation if/when one of our teams appears to gain control of the ball again. This can take the form of a percentage break above/below the range (if memory services, Martin Pring preaches a 3% confirmation when stocks break a meaningful trading range) or an indicator confirmation. In other words, we would want to see our models – especially those in the momentum category – turn a bright shade of green before jumping onboard the breakout train.

As for the first question, it is probably best to give the bulls the benefit of the doubt here. Remember, as I've mentioned a time or twenty, stocks tend to exit a consolidation phase heading in the same direction they were when the consolidation began. And in this case, this would suggest the current malaise is likely to be resolved to the upside. However, this does not mean that the bears won't scare the bajeebers out of everyone a couple times first!

So, on this fine Friday morning, the word of the day is neutral. And for now, it is probably best to play the game accordingly.

Read More – 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.