Good morning and welcome back. Since it's Monday, let's get right to our weekly review of the state of the market and our major market indicators/models.

As usual, the first stop is a review of the price/trend of the market. Here's my current take on the state of the technical picture...

• Summer doldrums clearly in effect here
• Since 7/20, the trend has been clear: Stocks move sideways in tight range until a catalyst causes a move in either direction
• This would appear to qualify as a slow drift higher
• Bulls did a good job of holding the line at the 2175 level last week
• Bears will argue rally has stalled
• Unfortunately, the seasonal/cyclical tailwinds turn into headwinds soon

S&P 500 - Daily

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From a longer-term perspective (e.g. looking at a weekly chart of the S&P 500)...

• The trend is clearly up
• There is clear support at 2125 on weekly chart - gives the bulls some room to work
• A further break of 2050 would be problematic from intermediate-term perspective

S&P 500 - Weekly

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Next, let's look at the "state of the trend" from our indicator panel. These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

• Basically same 'ol, same 'ol
• Although there is a lot of green on the board, the momentum indicators (see below) are starting to weaken
• With the market finally back in a "trending mode" some of our trend-following indicators switch gears and give the bulls a little more room to work
• The cycle composite projects a flat to slightly down week
• After this week, the cycle composite projects a stair step move lower into early October
• This board suggests that the bulls be given benefit of any doubt and the dips should be bought

Now we turn to the momentum indicators...

• The Short-Term Trend & Breadth Confirm Model has been waffling back and forth between barely positive and neutral for several weeks now
• The Industry Health Model has been unable to move up into the "purely positive" mode - this remains something to watch
• The "thrust indicators" have pulled back, which is normal after issuing "thrust buy signals" - Remember these signals tend to be quite positive 3-, 6-, 9-, and 12-months out but often come when a market has become overbought
• It is normal for momentum to wane after a strong advance
• The question is if the pause in momentum signals that the bulls are getting tired or represents "a pause that refreshes"

Next up is the "early warning" board, which is designed to indicate when traders may start to "go the other way" for a trade.

• Suddenly there is a lot of red on this board - This tells us that the bears will likely have an opening soon
• Stocks are overbought from both short- and intermediate-term perspective
• The VIX Indicator remains on a sell signal
• All three sentiment models are now negative
• However, sentiment will likely need to reach extreme levels to become a threat to the rally
• Bottom line: This is no time to be complacent

Now let's move on to the market's "external factors" - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.

• This board remains one of the main reasons to side with the bulls here
• Monetary conditions are positive
• The Economic Model remains in good shape as far as stocks are concerned
• Inflation expectations are moving up, but are not a threat to stocks
• And the valuation argument can go either way depending on whether you look at absolute valuations (traditional indicators such as Price-to-Earnings) or relative indicators, which compare valuations to the level of interest rates

Finally, let's turn to our favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.

• These indicators argue that we've got an ongoing bull market on our hands
• 90% of the indicators in the Leading Indicators model are currently positive
• I would prefer to see both the State of the Taps and the External Factors Model in a "purely positive" mode
• But the historical return average is (a) well above average and (b) typical of bull market results

The Takeaway...

To sum things up, stocks are in an uptrend but the momentum has stalled. The major indices are overbought and sentiment is now overly optimistic (a negative). The cycle composite becomes a headwind for the next eight weeks. Thus, the bears would seem to have the table set up for them in the near-term. However, from the longer term perspective, this is a new cyclical bull that is occurring within the context of a secular bull phase that began in March 2009. So, investors should give the bulls the benefit of the doubt and put cash to work during any/all dips in prices.

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).

1. The State of Global Central Bank Policies
2. The State of U.S. Economic Growth
3. The State of Oil Prices

Thought For The Day:

"Success is simple. Do what's right, the right way, at the right time." - Arnold Glasow

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Follow @Sowell_MS

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Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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