Dave Moenning

Bulls Starting To Feel The Love

One of the primary arguments coming out of the bear camp these days is the stock market game is just too easy right now. Our furry friends suggest that when things become too one-sided for an extended length of time (such as this being the longest period in history without a 3% correction), the tide can quickly turn.

The focal point to this argument has to do with investor sentiment. And based on the indicators I review on a regular basis, sentiment has indeed reached bullish extremes. For example, the reading of one crowd sentiment model I follow currently stands at 73.5. Although the model reading has been near this level twice already this year, it is important to note that (a) this week’s reading is the highest of the year and (b) in the last fifteen years, there have only been two readings that were higher.

Another example that this market is beginning to be “loved” instead of “hated” is the level of margin debt investors hold. According to the Wall Street Journal, investors held $559.6 billion in margin debt at the end of September. This level is a record high (the 7th such record set this year) and is up 14% from the end of 2016. As the Journal points out, higher levels of margin debt can be seen as a measure of confidence in the current market.

There are lots of other indicators to confirm the view that sentiment toward stocks has bee moving up strongly.  For example, in the latest survey of consumer sentiment done by the University of Michigan, the reading for the “outlook for the stock market one year from now,” hit an all-time.

Next up is the confidence level of newsletter writers. While I can certainly argue that the newsletter game has experienced a meaningful decline over that last decade, analyzing the spread between bullish and bearish writers still has value in the sentiment department. As of last Wednesday, Investors Intelligence reports that 64% of newsletter writers were currently bullish while just 14% were bearish.

The folks at Investors Intelligence tell us that sentiment risk become “elevated” when the spread between the number of bullish and bearish newsletter writers exceeds 40%. Point number one here is that this spread has now exceeded 40% for six straight weeks. Point number two is that last week’s spread between bulls and bears was the highest in more than 30 years.

Then there is the subject of stock market volatility – as in the lack thereof. On that score, according to The Wall Street Journal’s Market Data Group, it has been 45 days since the S&P 500 last had so much as a 0.5% decline, which is the longest such streak since 1968.

As we’ve noted previously, the current low volatility environment, while not unprecedented, is fairly unusual. If memory serves, volatility has only been this low in the late-1990’s and the mid-1960’s.

Consumer sentiment towards the economy has also been improving steadily this year. The reason I bring this up is that consumer sentiment tends to be correlated to the movement in the stock market. In short, when stocks go up, consumers become more comfortable with their financial positions and vice versa.

So, it is interesting to note that the University of Michigan’s gauge of consumer sentiment climbed to its highest level since 2004 last month and a Conference Board indicator was at its highest reading since 2000 in October.

I could go on, but the big point this morning is that investors appear to be in their happy places right now when it comes to the stock market.

Over the years, I’ve learned that when investor sentiment reaches extreme levels, it means they are usually pretty well invested. You see, the public doesn’t invest when things are scary (and prices are low). No, they tend to wait until things “feel good” before putting their money to work. So, by the time extreme readings show up in the sentiment models, most of the money has already been invested.

The key is that if investors are happy (they are) and mutual fund cash is low (it is), then a great deal of buying power has already been used up. This means that the market can experience a vacuum of demand if things turn south. As such, I can argue that risk becomes elevated alongside extremely positive sentiment readings.

As the saying goes, the public tends to be wrong at both ends of a move but right during the middle of the trend. So, with folks feeling pretty good right about now, it might be a good idea to recognize that an uptick in volatility could begin at any time and for just about any reason.

But, with the fundamental models still in good shape, the game plan remains the same for now – buy the dips. Assuming there are any dips to buy, that is.

Thought For The Day:

Judge a man by his questions rather than by his answers. -Voltaire

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 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 Tax Reform

      2. The State of the Earnings Season

      3. The State of Fed Policy/Leadership

      4. The State of the Economy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

What A “Blow-Off” Looks/Feels Like

The title of yesterday’s missive was “The Blow-Off Stage?”. The suggestion was given that the dominant color on my favorite models/indicator boards relating to the stock market’s trend and momentum is green, it could be possible that we are seeing what is termed a “blow-off” phase.

However, it occurred to me that not everyone reading my oftentimes meandering morning market missive might be familiar with the term. So, this morning, I thought we’d review what a “blow-off” phase looks and feels like. And then I’ll throw in a few stats, just to keep it interesting.

In general, a “blow-off” phase tends to mark the end of a cyclical bull phase. To review, the database at Ned Davis Research tells us that the cyclical bull moves in the stock market (defined as an increase in the DJIA of at least 30% after 50 calendar days – or a gain of 13% over a period of at least 155 days) since 1900 have produced an average gain of 85.5% over 768 days.

However, as logic would dictate, cyclical uptrends that occur when the stock market is in the midst of a secular bull run (note that several cyclical moves tend to occur within secular moves, which tend to last many years) tend to be longer and stronger. For example, the average gain for cyclical bull markets that occur within secular bulls since 1900 has been 106.7% over 1027 days.

To be sure, identifying a blow-off stage is best done with a healthy dose of hindsight. As such, anyone trying to suggest that such a move is occurring in real time is likely “making a call.” And to clarify, I am not suggesting that what we are seeing IS, in fact, a blow-off phase. No, I am merely trying to alert everyone to the idea that we COULD be seeing such a move here. (Or not!)

I’ve witnessed a grand total of 10 blow-offs during my career, which began in 1980. There were 3 in the 1980’s, 3 in the 1990’s, 4 in the 2000’s (well, to be fair, the blow-off that ended in January 2000 should probably be placed in the 1990’s category as it was a doozie!), and 1 so far in the decade that began in 2010.

The first thing to recognize here is that we haven’t seen a blow-off phase since April 2011. So, it’s been awhile.

Next, blow-offs tend to be characterized by an overly bullish mood (if not euphoric) from a sentiment standpoint. By the time stocks make their final run during what amounts to a fairly long bull cycle, just about everybody in the game understands and can recite the bull case. I.E. everybody “knows” the reasons that stocks are going to continue to go up. The term “no brainer” tend to get used a lot during the blow-off phase.

Earnings are growing. The economy is humming along. And something is happening to cause investors to think that risk in the stock market is an antiquated concept. (In this case, I’ll argue that the “something that is happening” is a combination of QE and tax reform.)

And finally, there is a little something called capitulation. This is where fund managers who may have been concerned about risk factors in the market (valuations come to mind on this front here) simply give up. Performance anxiety sets in as year-end bonuses are on the line. So, managers simply throw up their hands and jump on the bull band wagon.

The Average Blow-Off…

As for what to expect from a statistical standpoint, Ned Davis himself published a report this week that shed some light on what the blow-off phase has looked like.

However, the first point the venerable Mr. Davis makes is that his table of “blow-offs” is “too subjective for my taste.” Ned says that (a) there have been many instances where a big rally doesn’t actually wind up being the final rally of the cyclical trend and (b) the starting dates of the final moves can vary depending on who is making the call and the criteria they are using.

With these caveats out of the way, I find it interesting to note that since 1960, NDR has identified 13 blow-off phase rallies that marked the end of cyclical bull moves. The average gain on the DJIA during these moves has been 12.7%. And the average duration of the rally has been 58 trading days.

Ned also points out that IF we are seeing a blow-off at the present time, the move likely began on August 18th with the Dow closing at 21,674.51. The high of this move occurred a week ago at 23,441.76, putting the gain for the current move at 8.15% on the Dow (which has been the strongest index of late).

So, based on history, if the DJIA winds up putting in an average blow-off move (trust me, it won’t), the Dow could add another 4.55% – putting the high at 24,509.

For anyone thinking that the next bear market is going to look a lot like 2008 (I doubt it), you are probably thinking that it might be best to exit stage left now. Why not skip that last little leg and save yourself the pain of the ensuing bear, right?

The problems with this thinking include (a) we don’t know if this is indeed a blow-off stage, (b) the stock market has a strong upward bias over time, (c) the final moves in bull markets vary greatly, and (d) in my experience, the final move tends to last longer than anyone can possibly imagine.

It is for this reason that I prefer to avoid “making a call” and suggesting that I know what is going to happen next. No, I prefer to deal with what “IS” happening in the market and adapt when necessary. And the bottom line right now is the bulls are in control of the game. So until some of our market models start to wave red flags, its a bull market until proven otherwise and the dips should continue to be bought.

Thought For The Day:

Well-timed silence hath more eloquence than speech. -Martin Farquhar Tupper

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 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 Tax Reform

      2. The State of the Earnings Season

      3. The State of Fed Policy/Leadership

      4. The State of the Economy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

The Blow-Off Stage?

I experienced some “technical difficulties” when attempting to get this report published yesterday morning. Between a new location for files, a new laptop, and the fact I was attempting to publish in the wee hours from a hotel room, well, I’m sorry to say that things just didn’t work out. But, time and some technical assistance cured my ills and so we will file this under the category of better late than never. To review, the primary goal of this exercise is to try and remove any subjective notions about what “should” be happening in the market in an attempt to stay in line with what “is” happening in the markets. So, let’s get started.

The State of the Trend

We start our review each week with a look at the “state of the trend.” These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.


View Trend Indicator Board Online

Executive Summary:

  • With the S&P 500 closing at yet another all-time high on Friday, it is not surprising to see all of our Trend Models positive this morning. 
  • Ditto of the Channel Breakout Systems. P.S. a breakout to new highs represents a renewed buy signal from this trend-oriented system.
  • After being completely out of sync with the trend over the past month and a half, the Cycle Composite is positive this week – but remains choppy for much of the month. 
  • The Trading Mode models confirm that the major indices are in a “trending” mode at this time. Feel free to put this one in the “duh” category.

The State of Internal Momentum

Next up are the momentum indicators, which are designed to tell us whether there is any “oomph” behind the current trend.


View Momentum Indicator Board Online

Executive Summary:

  • Both the short- and intermediate-term Trend and Breadth Confirm Models remain positive. 
  • Despite the market closing at new highs, the Industry Health Model slipped to Neutral. However, I will note that the change was more technical in nature and not driven by a big decline in the model reading. As such, I would not take any action on this change. 
  • The short-term Volume Relationship remains positive. But I will note that the up-volume line has rolled over, which suggests that internal momentum may be waning. 
  • We’re seeing the same type of action in the intermediate-term Volume Relationship model – although demand volume remains well above supply volume, the trend of demand vol is starting to roll over and is close to entering a downtrend. Something to watch for signs of a top. 
  • The Price Thrust Indicator remains positive, but only slightly as the recent blast has weakened considerably over the past few weeks. 
  • The Volume Thrust Indicator went negative last week, which is another warning sign that internal momentum is not as strong as the action in the major indices. Again, this is a warning sign. 
  • The Breadth Thrust Indicator is stuck in neutral. However, note that the historical return for stocks remains strong in this mode.

The State of the “Trade”

We also focus each week on the “early warning” board, which is designed to indicate when traders might start to “go the other way” — for a trade.


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks remain overbought. 
  • From an intermediate-term view, stocks are also overbought. 
  • The lack of meaningful volatility has kept the Mean Reversion Model largely on the sidelines this year. 
  • The short-term VIX indicator flashed a buy signal last week – albeit by a slim margin. As such, this signal should be viewed as a short-term trade. 
  • Our longer-term VIX Indicator remains on its August buy-signal. 
  • From a short-term perspective, the market sentiment model is flip-flopping between negative and neutral, but is technically negative to start the week. 
  • The intermediate-term Sentiment Model remains negative. 
  • Longer-term Sentiment readings are also flip-flopping but our main model is negative this morning.

The State of the Macro Picture

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.


View External Factors Indicator Board Online

Executive Summary:

  • Monetary conditions remain neutral. 
  • Our Economic Model suggests that economic growth will remains strong. 
  • The Inflation Model continues to slip lower in the neutral zone. And while everyone on the planet is “looking” for inflation to perk up at some point, so far there is no evidence to support this idea. 
  • The Absolute Valuation Model remains negative. 
  • Our Relative Valuation Model remains neutral, but is heading the wrong direction – this is in reaction to the recent backup in rates

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, remains positive. However, it is worth noting that the model reading has slipped a bit recently. 
  • We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model is strong. 
  • The Risk/Reward model remains modestly positive at this stage. 
  • The new, expanded External Factors model includes a total of 10 indicators ranging from earnings, yields, sentiment, monetary, economic, and volatility. The current model reading is high neutral.

My Takeaway…

With the stock market starting the week at new all-time highs, it is easy to argue that “the trend is your friend” and that it’s okay to “party on Wayne.” However, given the length of the current bull move and the readings of some of my favorite big-picture models, I think there is a decent chance that we are seeing the beginning of a “blow-off phase” where performance-chasing and capitulation are the primary drivers. In short, the combination of the recent GDP numbers and earnings reports from big-name tech suggest that there is really no reason not to be long stocks here. And with the calendar about to flip again, pressure on underperforming managers to get cash off the books increases. The bottom line here is this is a bull market until proven otherwise. However, with valuations as elevated as they are, this is also no time to “set it and forget it.”

Sample Risk Exposure System

Below is an EXAMPLE of how some of above indicators might be used in order to determine exposure to market risk. The approach used here is a “Model of Models” comprised of 10 independent Models. Each model included gives separate buy and sell signals, which affects a percentage of the model’s overall exposure to the market.

Trend models control a total 40% of our exposure. The 3 Momentum Models and 3 Environment Models each control 10% of the portfolio’s exposure to market risk. The model’s “Exposure to Market Risk” reading (at the bottom of the Model) acts as an EXAMPLE of a longer-term guide to exposure to market risk.

In looking at the “bottom line” of this model, my take is that readings over 75% are “positive,” readings between 50% and 75% are “moderately positive,” and readings below 50% should be viewed as a warning that all is not right with the indicator world.


View Sample Exposure Model Online

The model above is for illustrative and informational purposes only and does not in any way represent any investment recommendation. The model is merely a sample of how indicators can be grouped to create a guide to market exposure based on the inputs from multiple indicators/models.

Thought For The Day:

The kindest word in all the world is the unkind word, unsaid. -Unknown

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 Tax Reform

      2. The State of the Earnings Season

      3. The State of Fed Policy/Leadership

      4. The State of the Economy

Indicators Explained

Short-Term Trend-and-Breadth Signal Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates NDR’s All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.

Channel Breakout System Explained: The short-term and intermediate-term Channel Breakout Systems are modified versions of the Donchian Channel indicator. According to Wikipedia, “The Donchian channel is an indicator used in market trading developed by Richard Donchian. It is formed by taking the highest high and the lowest low of the last n periods. The area between the high and the low is the channel for the period chosen.”

Intermediate-Term Trend-and-Breadth Signal Explained: This indicator incorporates NDR’s All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 45-day smoothing and the All-Cap Equal Weighted Equity Series is above its 45-day smoothing, the equity index has gained at a rate of +17.6% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +6.5% per year. And when both are below, the equity index has lost -1.3% per year.

Industry Health Model Explained: Designed to provide a reading on the technical health of the overall market, Big Mo Tape takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as “positive,” the S&P has averaged returns in excess of 23% per year. When the model carries a “neutral” reading, the S&P has returned over 11% per year. But when the model is rated “negative,” stocks fall by more than -13% a year on average.

Cycle Composite Projections: The cycle composite combines the 1-year Seasonal, 4-year Presidential, and 10-year Decennial cycles. The indicator reading shown uses the cycle projection for the upcoming week.

Trading Mode Indicator: This indicator attempts to identify whether the current trading environment is “trending” or “mean reverting.” The indicator takes the composite reading of the Efficiency Ratio, the Average Correlation Coefficient, and Trend Strength models.

Volume Relationship Models: These models review the relationship between “supply” and “demand” volume over the short- and intermediate-term time frames.

Price Thrust Model Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line’s 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a “thrust” occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.

Volume Thrust Model Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.

Breadth Thrust Model Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.

Short-Term Overbought/sold Indicator: This indicator is the current reading of the 14,1,3 stochastic oscillator. When the oscillator is above 80 and the %K is above the %D, the indicator gives an overbought reading. Conversely, when the oscillator is below 20 and %K is below its %D, the indicator is oversold.

Intermediate-Term Overbought/sold Indicator: This indicator is a 40-day RSI reading. When above 57.5, the indicator is considered overbought and wnen below 45 it is oversold.

Mean Reversion Model: This is a diffusion model consisting of five indicators that can produce buy and sell signals based on overbought/sold conditions.

VIX Indicator: This indicators looks at the current reading of the VIX relative to standard deviation bands. When the indicator reaches an extreme reading in either direction, it is an indication that a market trend could reverse in the near-term.

Short-Term Sentiment Indicator: This is a model-of-models composed of 18 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a short-term perspective. Historical analysis indicates that the stock market’s best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.

Intermediate-Term Sentiment Indicator: This is a model-of-models composed of 7 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a intrmediate-term perspective. Historical analysis indicates that the stock market’s best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.

Long-Term Sentiment Indicator: This is a model-of-models composed of 6 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a long-term perspective. Historical analysis indicates that the stock market’s best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.

Absolute Monetary Model Explained: The popular cliche, “Don’t fight the Fed” is really a testament to the profound impact that interest rates and Fed policy have on the market. It is a proven fact that monetary conditions are one of the most powerful influences on the direction of stock prices. The Absolute Monetary Model looks at the current level of interest rates relative to historical levels and Fed policy.

Relative Monetary Model Explained: The “relative” monetary model looks at monetary indicators relative to recent levels as well as rates of change and Fed Policy.

Economic Model Explained: During the middle of bull and bear markets, understanding the overall health of the economy and how it impacts the stock market is one of the few truly logical aspects of the stock market. When our Economic model sports a “positive” reading, history (beginning in 1965) shows that stocks enjoy returns in excess of 21% per year. Yet, when the model’s reading falls into the “negative” zone, the S&P has lost nearly -25% per year. However, it is vital to understand that there are times when good economic news is actually bad for stocks and vice versa. Thus, the Economic model can help investors stay in tune with where we are in the overall economic cycle.

Inflation Model Explained: They say that “the tape tells all.” However, one of the best “big picture” indicators of what the market is expected to do next is inflation. Simply put, since 1962, when the model indicates that inflationary pressures are strong, stocks have lost ground. Yet, when inflationary pressures are low, the S&P 500 has gained ground at a rate in excess of 13%. The bottom line is inflation is one of the primary drivers of stock market returns.

Valuation Model Explained: If you want to get analysts really riled up, you need only to begin a discussion of market valuation. While the question of whether stocks are overvalued or undervalued appears to be a simple one, the subject is actually extremely complex. To simplify the subject dramatically, investors must first determine if they should focus on relative valuation (which include the current level of interest rates) or absolute valuation measures (the more traditional readings of Price/Earnings, Price/Dividend, and Price/Book Value). We believe that it is important to recognize that environments change. And as such, the market’s focus and corresponding view of valuations are likely to change as well. Thus, we depend on our Valuation Models to help us keep our eye on the ball.

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

It Can’t Continue, Can It?

Yesterday, we talked about the fact that the stock market has now enjoyed the longest stretch ever without experiencing a correction of 3% or more. We noted that the CBOE Volatility Index (aka the VIX) recently hit an all-time low and that volatility in general is the lowest in decades. It is also worth noting that the S&P 500 index is up nearly 15% on the year and that the venerable blue-chip index isn’t even the best performing index so far in 2017.

And yet, nearly every single financial advisor I talk to is worried about the stock market. They are worried about valuations, investor sentiment, a replay of 1987, what the Fed is going to do next, the state of tax reform, a meltdown in ETF-land, etc. In short, advisors fret that another bear market will turn their clients’ 401K’s into 201K’s again and appear to collectively be singing the refrain from The Who’s big hit, “Won’t get fooled again.”

To these folks, it is almost inconceivable that stocks could move higher from here. And yet, the DJIA closed at yet another all-time high yesterday. So what gives?

The answer, in my opinion, is that we’ve seen this movie before – several times. Stocks climb a wall of worry and continue to march higher for longer than almost anyone can imagine. Yep, that’s how bull markets tend to work.

In my experience, bull markets don’t end when everyone on the planet is expecting a bear to begin at any moment. The market doesn’t suddenly decline 30% or so just because valuations are high. No, as I’ve opined a time or two recently, bear markets tend to be “caused” by something. And right now, with the market on solid footing, there doesn’t appear to be a bearish catalyst on the horizon.

On the contrary, it’s actually the bulls who have the wind at their backs right now. And while I do worry that the following laundry list of positives for the bull camp might be a little too popular right now (meaning that a garden-variety pullback of 3% – 5% could occur at any time, for almost any reason) the bulls do seem to have a lot going for them these days.

Below is a sampling of some of the positives that would seem to suggest the bulls may be able to just keep on keepin’ on down the road…

Earnings: One of the simplest bullish arguments is that if earnings are at record highs, then stock prices should follow suit. So, with another decent reporting season underway…

The Economy: The bottom line here is that global economic growth has been surprising to the upside this year. As a result, stock prices continue to “adjusted” to reflect the state of economic growth. This isn’t rocket science.

Inflation: The lack of inflation is a mystery to many – including the current Fed Chair, Janet Yellen. However, given that too much inflation has tended to be a bad thing for stocks historically, the current state of inflation – or lack thereof – continues to support our heroes in horns.

QE: While the US has embarked on QT (quantitative tightening), both the ECB and the BOJ are continuing to print money on a monthly basis. And since money tends to go where it is treated best, fresh capital may continue to find its way to the U.S. markets.

Seasonality: Don’t look now fans, but the seasonal headwinds that have been blowing since August are about to turn into tailwinds as the November – April period tends to be the best time of year to be invested in the stock market.

Passive Flows: Remember, managers of passive mutual funds and ETFs don’t really do much selling when money is flowing in. And with investors continuing to pump money into the passive arena each month, well…

Performance Anxiety: Fund managers that have kept some powder dry or played the game conservatively in 2017 are likely behind their bogeys at this point. And with performance bonuses on the line, this is the time of year when capitulation can come into play.

Performance Chasing: This is a close cousin to the performance anxiety issue as investors of all shapes and sizes like to chase the leaders into year-end.

BTFD: Another potential reason that volatility has been so low this year is that everyone on the planet is now a dip buyer. And given that cash on the sidelines may need to get invested, any/all dips continue to be met with buying.

The Tax Trade: What list of bullish tailwinds would be complete without a discussion of the Trump Trade, right? Or in this case, the expectations for some form of tax reform. The argument is simple – lower taxes mean higher earnings. ‘Nuf said.

To be sure, this is not an exhaustive list of the bull camp arguments. However, running through this list does give you a reason or two to at least consider the idea that stocks could continue to be bought in the coming months.

Sure, a correction could begin at any time. And gun to the head, I’d argue that any headline suggesting that tax reform could be delayed or derailed might be the trigger our furry friends are looking for. But so far at least, it looks to be more of the same. Party on Wayne!

Thought For The Day:

By swallowing evil words unsaid, no one has ever harmed his stomach. -Winston Churchill

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 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 Tax Reform

      2. The State of the Earnings Season

      3. The State of Fed Policy/Leadership

      4. The State of the Economy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

Fear Has Left The Building

Although the S&P 500 finished the session with the biggest decline in nearly two months, the fact that the venerable index didn’t fall 3% yesterday meant a new record for the longest period of time without a 3% correction in the stock market. According to Ryan Detrick, Monday marked the 242nd trading day without a decline of 3% or more, which eclipsed the old record of 241 days set back in 1995.

And for those keeping score at home, this is not one of those records that is measured over the last 5 or 10 years. No, this data goes back to 1928. Impressive, eh?


View Large Image Online

In his research post dated 10/22, Mr. Detrick goes on to point out that (a) the S&P has now gone 33 sessions (34 after Monday) without so much as a decline of -0.5%, which is the longest such streak since 1995, (b) the index’s average daily change on an absolute basis in 2017 has been just 0.3%, which would be the smallest for a calendar year since 1965, and (c) the S&P has experienced daily losses of 1% or more only 4 times this year, which is the fewest during a calendar year since 1964.

The point on this fine Tuesday morning is that fear appears to have left the building as everyone on the planet is now a dip-buyer. The bottom line is there doesn’t appear to be any good reasons to sell stocks for more than a day or two. (Oops, I meant an hour or two.)

I started this morning’s meandering market missive by highlighting the new record for the period of time without an itty-bitty correction and some other fun facts to know and tell in the hope it becomes clear that the current market environment just isn’t normal. As such, we probably shouldn’t be surprised if stocks suddenly and without much of a reason, start to decline for more than a few hours.

I know what you’re thinking. Something along the lines of, “Yea, right; like that’s gonna happen!” Am I right?

In behavioral finance, there is a little something called “recency bias.” This theory suggests folks tend to believe that whatever has been happening recently is likely to continue. And while most traders are ready for a pullback, nobody is really expecting one.

This mentality is on display via some of the fancy indices and options games that traders play. For example, below is a chart of the CBOE Volatility Index (aka the VIX, or “fear index”) which just hit another all-time record low on October 5th.


View Image Online

For the record, the WSJ’s Daily Shot dated October 6 tells us that the prior record low for the VIX was set on September 31, 1993, which was more than 24 years ago.

Next up is a similar analysis that shows the implied (or estimated) at-the-money volatility for the S&P 500. And yep, that’s a new low.


View Image Online

What is interesting (well, at least to me) is that although we are seeing record lows for this and the longest period of time for that, the fast-money types continue to bet against market volatility. And yes fans, this too smacks of that “recency bias” thing.

Take a look at the next chart – which shows the price action of the Velocityshares Daily Inverse VIX ETN (NYSE: XIV).


View Image Online

Granted, this highly levered way to play the stock market (from a slightly different angle, of course) has only been around since 2011 (where the initial price was $10). But since the prior all-time high was set in the summer of 2015 at around $50, it will suffice to say that traders continue to bet against the VIX in a big way.

And in case you think that this game is only being played by the “dumb money,” think again. The final chart this morning is a ratio of the VVIX (the volatility of volatility) to the VIX, which is at the highest level in years. In short, this means that despite the record lows, there is still plenty of demand for call options on the VIX.


View Image Online

Yes, it is true that today’s stock market game is MUCH more sophisticated than it was even 10 years ago – and that today’s portfolio managers do indeed use these types of securities in ways other than to make a directional bet on the market. In addition, using options and other fancy trades has become a very cheap/popular method for fund managers to hedge long positions quickly and easily. As such, IMO, the VIX may reflect something of a new world order for volatility – and this may wind up being another example of “lower for longer” playing out in today’s market.

However, the final point this morning is while things can always be “esplained” away in this business, the preponderance of data points coming in at new records should tell us to, at the very least, “look alive” here. Because if there’s one thing to know about “recency bias,” it is that the current trend in the stock market isn’t likely to last forever. So, I for one, will be on the lookout for anything that might crawl out of the woodwork upset the apple cart here.

And no, this does NOT mean that I’m wearing my bear costume this morning. I’m simply suggesting that, in my experience, periods of low volatility tend to be followed by periods of high volatility and that we need to be prepared for this shift. Unless, of course, it’s different this time!

Thought For The Day:

Life, like photography, is developed from the negatives. -Unknown

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 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 Tax Reform

      2. The State of the Earnings Season

      3. The State of Fed Policy/Leadership

      4. The State of the Economy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

Good Enough, But…

Good morning. We’ve got a new week on tap so let’s get started with a review of my key market models/indicators and see where we stand. To review, the primary goal of this exercise is to try and remove any subjective notions about what “should” be happening in the market in an attempt to stay in line with what “is” happening in the markets. So, let’s get started.

The State of the Trend

We start our review each week with a look at the “state of the trend.” These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.


View Trend Indicator Board Online

Executive Summary:

  • The short-term Trend Model remains positive, however the march higher is showing signs of fatigue. 
  • Both the short- and intermediate-term Channel Breakout Systems remain on their 8/22 buy signals. 
  • The intermediate-term Trend Model is in good shape – albeit a bit extended. 
  • The long-term Trend Model remains positive. 
  • The Cycle Composite remains negative AND out of sync with the trend of the market at this time. Note that the composite calls for one more significant move to the downside over the next two weeks before a bottoming process. 
  • The Trading Mode models finally all agree that stocks are trending. But, the levels of the indicators aren’t exactly robust.
  • The bottom line as far as price is concerned is the trend is up, but is looking a little tired.

The State of Internal Momentum

Next up are the momentum indicators, which are designed to tell us whether there is any “oomph” behind the current trend…


View Momentum Indicator Board Online

Executive Summary:

  • Both the short- and intermediate-term Trend and Breadth Confirm Models are positive, which suggests the march higher is “in gear.” 
  • The Industry Health Model remains moderately positive and near the highest levels of the year. However, my only complaint is that this model is not outright positive. 
  • The short-term Volume Relationship model is positive. However, the up-volume indicator looks to be rolling over a bit here – something to watch. 
  • Ditto for the intermediate-term Volume Relationship model. The model itself is positive and on a buy signal that dates back to the spring of 2016. However, the demand-volume indicator leaves something to be desired here. 
  • The Price Thrust Indicator remains positive but is starting to wane. 
  • The Volume Thrust Indicator slipped to neutral this week. 
  • The Breadth Thrust Indicator also slipped back into the neutral zone.
  • While in good shape overall, the momentum board slipped a notch this week. This suggests that momentum may be waning.

The State of the “Trade”

We also focus each week on the “early warning” board, which is designed to indicate when traders may start to “go the other way” — for a trade.


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks remain overbought. However, at this stage, we view the condition as a sign of strength as stock have been unable to become oversold since mid-August. 
  • From an intermediate-term view, stocks are VERY overbought as my favorite intermediate-term indicator is now at the most overbought condition seen since the beginning of 2015. 
  • After a failed sell signal, the Mean Reversion Model is back to neutral. 
  • The near-term VIX indicator flashed a sell signal on 10/6, which remains in play. 
  • Our longer-term VIX Indicator remains positive as volatility has been unable to pick up any steam for some time since early summer. 
  • From a short-term perspective, the market sentiment model remains negative. 
  • There is no change to our intermediate-term Sentiment Model – still a negative input. 
  • Longer-term Sentiment readings are back to the weakest levels of the year – a warning sign. 
  • The bottom line is the table is set if the bears can find a reason to sell for more than a couple hours.

The State of the Macro Picture

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.


View External Factors Indicator Board Online

Executive Summary:

  • Absolute Monetary conditions remain neutral as the backup in rates took a break last week. 
  • The Relative Monetary Model continues in the neutral zone this week. 
  • After a quick trip to the sell side, our Economic Model (designed to call the stock market) is back on a buy signal this week. 
  • The Inflation Model continues to move modestly lower within the neutral zone and is currently at the lowest reading of the year. This model tells us that inflation pressures are minimal here. 
  • The Absolute Valuation Model remains solidly in the red, but it has been trending lower for much of the year on the back of improving earnings. 
  • Our Relative Valuation Model suggest that stocks are approaching an undervalued condition relative to the level of yields.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, remains on a buy signal and is in good shape. 
  • The overall message from “the tape” is that things are “good enough” for the bulls to continue to run with the ball. 
  • The Risk/Reward model managed to peek its head into the positive zone – albeit by the skinniest of margins. 
  • The External Factors model remains positive and on a buy signal.

My Takeaway…

Running through the indicator boards, I conclude that things are clearly “good enough” for the bulls to continue to control the ball. For example, the trend is up. Momentum is pretty good. Seasonality will become a tailwind soon. Valuations, while still clearly negative, are actually improving a bit as the year goes on. And year-end window dressing should be assumed this year. Thus, I think we need to continue to give the bulls the benefit of any/all doubt and to buy the dips. However, it is also worth noting that both the near-term trend and the momentum indicators are starting to look a little tired. So, in sum, I would not be surprised to see some earnings-related difficulity in the near-term (as in a “sell the news” trade on good, but not great earnings) and would expect to see additional gains before this cyclical bull – a bull that will turn 2 years old in February – runs its course.

Sample Risk Exposure System

Below is an EXAMPLE of how some of above indicators might be used in order to determine exposure to market risk. The approach used here is a “Model of Models” comprised of 10 independent Models. Each model included gives separate buy and sell signals, which affects a percentage of the model’s overall exposure to the market.

Trend models control a total 40% of our exposure. The 3 Momentum Models and 3 Environment Models each control 10% of the portfolio’s exposure to market risk. The model’s “Exposure to Market Risk” reading (at the bottom of the Model) acts as an EXAMPLE of a longer-term guide to exposure to market risk.

In looking at the “bottom line” of this model, my take is that readings over 75% are “positive,” readings between 50% and 75% are “moderately positive,” and readings below 50% should be viewed as a warning that all is not right with the indicator world.


View Sample Exposure Model Online

The model above is for illustrative and informational purposes only and does not in any way represent any investment recommendation. The model is merely a sample of how indicators can be grouped to create a guide to market exposure based on the inputs from multiple indicators/models.

Thought For The Day:

The richest man is not he who has the most, but he who needs the least. – Unknown

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 the Earnings Season

      2. The State of Tax Reform

      3. The State of the Economy

      4. The State of Fed Policy

Indicators Explained

Short-Term Trend-and-Breadth Signal Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates NDR’s All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.

Channel Breakout System Explained: The short-term and intermediate-term Channel Breakout Systems are modified versions of the Donchian Channel indicator. According to Wikipedia, “The Donchian channel is an indicator used in market trading developed by Richard Donchian. It is formed by taking the highest high and the lowest low of the last n periods. The area between the high and the low is the channel for the period chosen.”

Intermediate-Term Trend-and-Breadth Signal Explained: This indicator incorporates NDR’s All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 45-day smoothing and the All-Cap Equal Weighted Equity Series is above its 45-day smoothing, the equity index has gained at a rate of +17.6% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +6.5% per year. And when both are below, the equity index has lost -1.3% per year.

Industry Health Model Explained: Designed to provide a reading on the technical health of the overall market, Big Mo Tape takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as “positive,” the S&P has averaged returns in excess of 23% per year. When the model carries a “neutral” reading, the S&P has returned over 11% per year. But when the model is rated “negative,” stocks fall by more than -13% a year on average.

Cycle Composite Projections: The cycle composite combines the 1-year Seasonal, 4-year Presidential, and 10-year Decennial cycles. The indicator reading shown uses the cycle projection for the upcoming week.

Trading Mode Indicator: This indicator attempts to identify whether the current trading environment is “trending” or “mean reverting.” The indicator takes the composite reading of the Efficiency Ratio, the Average Correlation Coefficient, and Trend Strength models.

Volume Relationship Models: These models review the relationship between “supply” and “demand” volume over the short- and intermediate-term time frames.

Price Thrust Model Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line’s 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a “thrust” occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.

Volume Thrust Model Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.

Breadth Thrust Model Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.

Short-Term Overbought/sold Indicator: This indicator is the current reading of the 14,1,3 stochastic oscillator. When the oscillator is above 80 and the %K is above the %D, the indicator gives an overbought reading. Conversely, when the oscillator is below 20 and %K is below its %D, the indicator is oversold.

Intermediate-Term Overbought/sold Indicator: This indicator is a 40-day RSI reading. When above 57.5, the indicator is considered overbought and wnen below 45 it is oversold.

Mean Reversion Model: This is a diffusion model consisting of five indicators that can produce buy and sell signals based on overbought/sold conditions.

VIX Indicator: This indicators looks at the current reading of the VIX relative to standard deviation bands. When the indicator reaches an extreme reading in either direction, it is an indication that a market trend could reverse in the near-term.

Short-Term Sentiment Indicator: This is a model-of-models composed of 18 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a short-term perspective. Historical analysis indicates that the stock market’s best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.

Intermediate-Term Sentiment Indicator: This is a model-of-models composed of 7 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a intrmediate-term perspective. Historical analysis indicates that the stock market’s best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.

Long-Term Sentiment Indicator: This is a model-of-models composed of 6 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a long-term perspective. Historical analysis indicates that the stock market’s best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.

Absolute Monetary Model Explained: The popular cliche, “Don’t fight the Fed” is really a testament to the profound impact that interest rates and Fed policy have on the market. It is a proven fact that monetary conditions are one of the most powerful influences on the direction of stock prices. The Absolute Monetary Model looks at the current level of interest rates relative to historical levels and Fed policy.

Relative Monetary Model Explained: The “relative” monetary model looks at monetary indicators relative to recent levels as well as rates of change and Fed Policy.

Economic Model Explained: During the middle of bull and bear markets, understanding the overall health of the economy and how it impacts the stock market is one of the few truly logical aspects of the stock market. When our Economic model sports a “positive” reading, history (beginning in 1965) shows that stocks enjoy returns in excess of 21% per year. Yet, when the model’s reading falls into the “negative” zone, the S&P has lost nearly -25% per year. However, it is vital to understand that there are times when good economic news is actually bad for stocks and vice versa. Thus, the Economic model can help investors stay in tune with where we are in the overall economic cycle.

Inflation Model Explained: They say that “the tape tells all.” However, one of the best “big picture” indicators of what the market is expected to do next is inflation. Simply put, since 1962, when the model indicates that inflationary pressures are strong, stocks have lost ground. Yet, when inflationary pressures are low, the S&P 500 has gained ground at a rate in excess of 13%. The bottom line is inflation is one of the primary drivers of stock market returns.

Valuation Model Explained: If you want to get analysts really riled up, you need only to begin a discussion of market valuation. While the question of whether stocks are overvalued or undervalued appears to be a simple one, the subject is actually extremely complex. To simplify the subject dramatically, investors must first determine if they should focus on relative valuation (which include the current level of interest rates) or absolute valuation measures (the more traditional readings of Price/Earnings, Price/Dividend, and Price/Book Value). We believe that it is important to recognize that environments change. And as such, the market’s focus and corresponding view of valuations are likely to change as well. Thus, we depend on our Valuation Models to help us keep our eye on the ball.

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

My Back-of-the-Napkin Take

In yesterday’s missive, I began a back-of-the-napkin review of market conditions. For me, the question at hand is whether the bulls will be able to break out of the trading range that has been in place for the past two and one-half months. I stated that in situations like these, I like to look at the macro backdrop, the historical tendencies, and my market models for clues.

We began with a big-picture review of the macro situation, concluding that stocks remain in a secular bull market and that unless accompanied by a recession, any meaningful decline in the stock market is likely to be shorter and shallower than normal – and that the dips should continue to be bought. We then explored the history of the “Sell in May and Go Away” rule and decided that although the May – October periods haven’t exactly been gangbusters in this cycle, there didn’t seem to be any big reason for investors to head to the sidelines.

This morning, we will review what the cycle composite is projecting here and take a look at the message from my major market models.

What Do the Historical Cycles Say?

Before we begin, let me say that I do not believe in managing money based on “market calls,” predictions, or “gut feelings.” No, I prefer to utilize a disciplined approach that is guided by a “weight of the indicators” methodology. In short, I prefer to stay in tune with what the market “is doing” and avoid getting caught up in what I think stocks “should be” doing.”

As such, the use of a cycle composite would seem to be counter-intuitive. To review, the cycle composite is a combination of all the 1-year seasonal cycles, the 4-year Presidential cycles, and the 10-year decennial cycles going back to the early 1900’s.

I have been watching the cycle composite’s projections for years. And the bottom line is that, for the most part, stocks tend to follow the general trend indicated by the projection. Not on a day-to-day, or even week-to-week basis. But, again, generally speaking, over longer periods of time, the projection tends to be scary good. And it is for this reason, that I employ the cycle composite’s projection as one of the 10 inputs in my weekly market model.

But to be clear, we need to remember that Ms. Market has a mind of her own and will, at times, diverge completely from the historical trends.

Looking at the composite projection for 2017, stocks largely followed the historical script until early February, when the market shot higher instead of moving lower into early March, as the projection had called for. But since the beginning of March, the market appears to be back “in sync” with the historical cycles.

Looking ahead, the composite suggests a dip into mid- to late-May, to be followed by a strong rally through mid-July.

Unfortunately, this is where the good news ends. After a topping phase projected for mid-July through early August, the cycles suggest a meaningful decline to ensue for several months. A decline that would wind up wiping out the years’ gains and doesn’t finally bottom out until mid-October/November.

So, if the cycle composite holds up this year, investors would be wise to use the projected rally to prepare for an ensuing pullback. Put another way, investors with a longer-term time frame should be ready to buy the dip.

Will the market follow the script through the rest of the year in 2017? Who knows. However, I find it useful to have an inkling of what “could” happen in the months ahead.

What Do My Market Models Say?

Since I do a detailed review of my favorite market indicators and models every Monday morning, I’m going to skip the minutiae and cut to the chase here.

In short, I have four market models that I call my “primary cycle” indicators. These are four very different models designed to provide me with the “state of market.” I have been following these models for many years (two since 1993) and I can say that while nothing is perfect in this business, these models tend to get the big picture mostly right, most of the time.

Below is a summary of the current readings of the models from Monday’s report.


View Online

I like to say that you can get a very good feel for the health of the overall market by simply glancing at the colors of boxes that contain the indicator ratings. So, in reviewing the table above, the key is I don’t exactly get a warm and fuzzy feeling.

With the market making new all-time highs (microscopic as they may be), one would expect this indicator scoreboard to be sporting a bright shade of green. However, there are no green boxes to be found as the indicators are all neutral – or worse – at the present time.

In fact, two of the four models have issued sell signals in the past few months.

The bottom line message here is simple – risk is elevated and this is no time to have your foot to the floor.

Summing Up

Let’s summarize. First, we should recognize that stocks remain in a secular bull market trend. As such, all dips should be bought and bears tend to be shorter and shallower than average. Next, the “Sell in May” rule is in effect. However, as recent history shows, this is not exactly a reason to bury one’s head in the sand. Then there is the cycle composite projection, which is calling for a strong rally to begin momentarily and to take the market to new heights. But then later in the summer, the cycles project a nasty pullback that could even qualify as a mini bear. And finally, my favorite, big-picture market models are telling me that all is not right with the market and that some caution is warranted.

If I add these inputs together, it appears that we have an aging bull on our hands where leadership is narrowing and the key internals are weakening. As such, I will conclude that this is not a low-risk environment.

Looking ahead, my guess is that we could see a classic “blowoff” phase commence in the coming months – a type of overexuberant phase that tends to precede meaningful corrections. However, given that there is no reason to believe the secular bull trend that began in 2009 is ending, a buy-the-dips strategy still seems to make sense.

It is for this these reasons that our primary tactical allocation programs are currently in their “lower risk profile” mode. We haven’t moved to cash. But we are trying to stay in tune with the state of the indicators by taking our exposure to risk down a notch.

Thought For The Day:

Win or lose you will never regret working hard, making sacrifices, being disciplined or focusing too much. -John Smith

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 Trump Administration Policies

      2. The State of the U.S. Economy

      3. The State of Earning Season

      4. The State of World Politics

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

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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.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.