Does The Stock Market Have Serious Issues?

Given that (a) stocks have fallen for four consecutive days and (b) there haven't been any clear-cut, obvious catalysts to the pullback, it is probably safe to say that there are "issues" at work behind the scenes.

Granted, the decline over the past four days hasn't been severe (the S&P is down just 1.63 percent from its September 18 high). And as such, the bulls will contend that there isn't anything to worry about at this stage.

However, given that in the stock market "things don't matter until they do - and then they matter a lot," it is probably a good idea to have at least a cursory understanding of the "issues" at hand - if for no other reason than to protect oneself against something big sneaking up and causing a really serious problem at the corner of Broad and Wall.

Based on the news-flow of late, there are three "issues" that traders and their computers appear to care about at the present time including: Iran, the debt debate and the taper.

So, let's spend a few minutes this morning breaking down these "issues" and getting to the heart of each matter. Frankly, this may sound like a boring exercise. However, it is important to remember that the markets don't like surprises - so neither should you.

Is Iran Really an Issue?

If your first thought was to skip this section because nobody expects any serious trouble out of the blustering leaders of Iran, you may want to think again. While this issue has been largely off of traders' radar for some time now, there were reports that the algo-induced blast up off of the morning lows Tuesday was sponsored by comments President Obama made on Iran in front of the United Nations.

According to reports, Obama said that he had directed Secretary of State John Kerry to pursue talks with the Iranian government regarding all things nuclear. The President's comments, which sparked a ten point move up in the S&P in less than thirty minutes and moved the index from red to green, seemed to be interpreted as being rather dovish.

Connecting the geopolitical dots, it should be noted that Obama's words followed remarks from new Iranian President Hassan Rouhani, who is seen as having a mandate to negotiate a deal that would allow the country to produce nuclear energy for peaceful use - and not for military purposes.

The bottom line here appears to be that if the algorithms care about comments on this topic, perhaps traders should as well.

The Fed's "Issues"

Traders can't be blamed for doing a little head scratching on the subjects of Fed policy, the taper, and/or the new Fed Chairman. All three issues have moved the markets of late - in both directions - so doing a deeper dive into these "issues" would seem to be appropriate.

On the topics of Fed policy and "the taper," StreetAccount said it best Tuesday. Here's an excerpt: "As the post-FOMC rally lost momentum late last week, there was some focus on worries that policy dynamics have entered into a vicious circle where the Fed cannot even get comfortable about dialing back some of its policy accommodation without wreaking havoc on the market and choking off the recovery, let alone begin the normalization process. There were also concerns about the credibility of the Fed's thresholds following the downward revisions to both the unemployment rate and fed funds forecasts."

One of the real problems right now is the idea that there may be leadership vacuums developing due to the uncertainty surrounding whom will head up the FOMC come January. The fact that Fed officials have not been able to provide more color on how the decision to taper will be made has been cited as an "issue" in some trading circles.

The bottom line on the issues relating to the Fed is that until the uncertainty is removed, traders may be more interested in taking profits and avoiding headline risk.

Fun and Games in D.C.

Speaking of headline risk, politicians in Washington are known to consistently be a source of algo-inducing comments, rumors and innuendo. In fact, being able to spin a catch phrase intended to incite their opponents may be in the job description. Therefore, whenever Washington is in the spotlight, traders had best be on their toes.

In case you've been living in a cave, the key issue in and around the beltway these days is the idea that the government is slated run out of money in six or seven days. Point number one on this issue is that like the "sequester" deadline, the October 1 date may not exactly be set in stone.

If you haven't been paying much attention to this issue, first of all, no one can blame you as just about everyone in America has had it with the games played by our elected officials. But the latest is that after the House passed a bill this week that has not a chance in heck of becoming law, the Senate is now messing around with their own bill.

Without boring everyone to tears as to what could happen when and where, the bottom line on this "issue" is that just about everyone on the planet expects something to get done - at the last possible second, of course. In short, the political stakes of being seen as the bad guy are too large. Oh, and this is just the way that Washington plays the game.

So, while there isn't a lot of selling being done based on the fears of what might or might not happen in Washington, one could also conclude that there isn't a lot of buying going on right now either. And this is something that could easily continue until these "issues" are resolved.

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Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

     

T-1) The State of Fed Policy

T-1) Fun and Games in Washington (I.E. the Debt Ceiling)

3)   The Outlook for the U.S./Global Economy

The State of the Trend

We believe it is important to analyze the market using multiple time frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Positive

(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Near-Term Support Zone(s) for S&P 500: 1680
• Near-Term Resistance Zone(s): 1700

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator: Neutral
• Price Thrust Indicator: Moderately Positive
• Volume Thrust Indicator: Positive
• Breadth Thrust Indicator: Positive
• Bull/Bear Volume Relationship: Moderately Positive
• Technical Health of 100 Industry Groups: Moderately Positive

About Author: Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Strategist at Heritage Capital Management. He focuses on stock market risk management, stock analysis, stock trading, market news and research. Click here to claim a freecopy of Dave's Special Report on changes in the current market.