By Dave & Donald Moenning, StartoftheMarkets.com

Based on the early action, it appears that traders have moved into a schizophrenic mode as Tuesday’s gains could be reversed quickly at the open.

At issue is the simple fact that no one really knows what to expect in terms of the duration of the government shutdown. And, the bottom line is markets hate uncertainty.

Optimism Fading Fast

At least part of Tuesday’s advance was based on the idea that the government shutdowns since 1980 have not produced large sell-offs in the stock market  While the algorithms have been trained to react at the speed of light to any and all headlines coming out of Washington D.C., reports made the rounds yesterday that historically, stocks have managed to advance the vast majority of the time (ten out of eleven occurrences) in the two weeks following a government shutdown.

In addition, there was the Bloomberg report, which stated that since 1976, the S&P has risen 11 percent on average in the ensuing twelve months following a shutdown. Given that such a return is actually higher than the average twelve-month period returns seen in the stock market, some traders may have decided to take a more upbeat stance – especially with the S&P having been down seven of the past eight sessions and having become oversold in the process.

Back To Reality – And the Debt

However, traders appear to be back to reality on this fine Wednesday morning. The fear is that with the political brinkmanship showing absolutely no signs of abating, the drama could easily continue for a while and eventually spill over into the debt-ceiling deadline.

Frankly, the worry has always been about the debt ceiling. Treasury Secretary Lew said Tuesday that his department is taking extraordinary measures in its efforts to avoid running out of money the middle of this month, but that his options are running short. Since most traders likely remember that the credit rating of the U.S. government was stripped of its ‘AAA’ status the last time Congress failed to act on the debt ceiling in a timely manner and that stocks suffered mightily in response, traders appear to be heading to the exits at the present time.

Time To Review The Cycle Projections

Although the news of the day is likely to dominate trading in the coming days and weeks, investors should remember that the month of October has a bad reputation for generating large losses. So, with the market looking uncertain, it is time to review what the historical cycles have to say about the month October.

Since this is the tenth review of the cycle composite this year, there is probably little need to go over all the disclosures/disclaimers again. The bottom line is that analysis of cycles should not be used in a vacuum or as a stand-alone indicator. However, the data continues to be an important input into our daily and weekly Market Environment models.

For anyone new to this analysis, the cycle composite is a combination of the one-year seasonal, the four-year Presidential, and the 10-year decennial cycles – all going back to 1928.

October Has a Bad Reputation

Most investors likely live in fear of the month of October as the month’s bad reputation has been earned on the back of numerous market crashes over the years. However, it is important to note that when the market isn’t involved with a horrific decline, October isn’t half bad. But given the market’s propensity to dive hard during the month, there are certainly some traders who enter October with a cautious stance.

Is The Market In Sync With The Cycle Projections?

The first step in the analysis of the cycles is to get a feel for whether or not the cycle projections are “on” or not at the present time. Looking at how the market acted relative to the cycle composite in September, it should be noted that the stock market went opposite the cycle composite’s projection in the first half of the month and then got back in sync in the second half.

But from a longer-term point of view, the market (as defined by the S&P 500) continues to generally act in accordance with how the composite projection says it should in 2013. And in looking at the market versus the projections since 2009, it is clear that the S&P is fairly close to where it is projected to be.

What Does October Look Like?

The next step is to take a look at what the cycle projections are calling for during the coming month:

One-Year Cycle: The picture painted by the one-year seasonal cycle is not terribly positive. After a period of sideways consolidation in the first part of the month, volatility returns. And after an intense move in both directions two-thirds of the way through the month, a downtrend materializes that lasts until the beginning of November.

Four-Year Cycle: The four-year Presidential cycle projection is similar to the one-year, although the moves are more clear and pronounced. In short, the month opens with a rally and then the meaningful correction that began in August resumes into the end of the month.

10-Year Cycle: The good news is the 10-year cycle looks very different from the one- and four-year cycles. The 10-year suggests the month will be more of a sideways affair and end on a positive note (and with a plus-sign).

The Cycle Composite: The overall cycle composite suggests that October will be volatile with an early rally giving way to a stout pullback and then a modest rally into the end of the month.

So there you have it. It would appear that the cycles are suggesting that the current stalemate in D.C. will (a) continue and (b) produce some damage to investors’ portfolios. Here’s hoping that the projections are wrong and that the politicians come down off of their high horses sooner rather than later.

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. Claim a copy of Dave’s Special Report covering changes in the current market.

By Tim Melvin, The Deep Value Letter

A deep value asset-based investor at this time last year could have defined their universe as just the S&P 500 (NYSE: SPY) and still done very well for themselves.

About 10 percent of the index was still trading below tangible book value, and there were plenty of stocks to choose from in assembling a portfolio. 

The Picks

There were large banks on the list like Bank of America and Citigroup as well as technology related stocks like Corning and Gamestop (GME). The refiners had just started to make a move and stock like Hess (NYSE: HES) and Tesoro (NYSE: TSO) still traded below book value. Although it was not as fertile a shopping ground as 2009 when more than 20 percent of S&P 500 stocks traded cheaply when compared to asset value, it was still a fertile area to farm.

It was a fertile hunting ground as well. An investor who split their cash up among the 50 or so companies has earned a return through Friday’s close of a little more than 35 percent. Only a small handful of stocks are lower with Newfield Exploration (NYSE: NFX) the biggest loser at down 13 percent. Gamestop (NYSE: GME) and Genworth Financial (NYSE:GNW) both better than doubled in the past 52 weeks. An investor could have focused just on very large companies that were cheap and beaten the market rather solidly as the S&P 500 index itself is up a little less than 20 percent over the same time frame.

But that was yesterday, and yesterday’s gone…

Unfortunately, pickings are not as bountiful this year after the stock markets continued rise. Only 12 stocks currently trade below tangible book value right now and are components of the widely traded index. Combined with very high readings in things like the 10-year average Price to Earnings ratio and the Tobin Q ratio, the markets would seem to be entering a somewhat dangerous level. An increase in cash levels in a deep-value portfolio in the face of a lack of new opportunities would probably be a prudent action at this point in time.

It is an interesting mixes of stocks that actually still trade below book value. After the debacle of the at few weeks shares of JC Penney (NYSE: JCP) trade at book value but that probably not going to last once they do an equity raise of almost $1 billion. Even if they do, the company appears to be broken and there are very real questions about its ability to survive. The stock may be cheap but it does not appear to have a margin of safety adequate to justify purchase. 

First Solar (NASDAQ: FSLR) is still just barely on the list at a small discount to tangible book value, but the stock has doubled off the lows of last year. Buying the stock at this level would depend entirely on your outlook for the solar industry for the next few years.

The Big Players

Insurance companies make up a healthy percentage of the list. Hartford Financial (NYSE: HIG) and AIG (NYSE: AIG) have both been solid performers over the past year but are still cheap enough on a book value basis to merit consideration. AIG is currently trading at 74 percent of tangible book and Hartford is at 76 percent so they are cheap enough to buy at this level. Genworth has more than doubled but was so cheap last year that the stock is still at just 50 percent of book value. Health insurer Unum Group (NYSE: UNM) rounds out the list and is trading at a little over 95 percent of book value.

Banks dominated last year’s list and were among the top performers over the past 52 weeks. However continuing credit improvements have caused most of them to rally and just two banks in the index still trade below book value. Zions Bancorp (NASDAQ: ZION) is probably not profitable without continual loan reserve releases and the Federal Reserve has objected to parts of the banks capital plans.

That has kept a lid on the stock’s price and the stock trades at a little less than 90 percent of tangible book value. Shares of Citigroup (NYSE: C) have risen sharply this year, but the stock is still at a little less than tangible book value right now.

If the company is extracting stuff from the ground, the stock is probably cheap. That holds true with the S&P 500 bargain issues as well. Oil and gas related firms Nabors (NYSE: NBR), Rowan (NYSE: RDC) and WPX Energy (NYSE: WPX) are all trading below tangible book value right now. So is iron ore and coal miner Cliffs Natural Resources (NYSE: CLF) as global weakness and excess inventories have plagued the company.

The S&P 500 stocks trading below book value are probably excellent long-term values at the current price. However the very limited opportunity set should serve as something of a red flag for most investors.

When bargains are scarce the markets are usually becoming at least somewhat frothy and over valued.

Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.Com as well as several print publication including Active Trader and the Wall Street Digest. Watch Tim Melvin’s FREE webinar and learn how to break through volatility using his proprietary value stock strategy.

Guest Post: By Dave & Donald Moenning of StateOfTheMarkets.com

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. 

Click Here For More “Daily State of the Markets” Commentary

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 Dave Moenning: 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 free copy of Dave’s Special Report on changes in the current market.