Dave Moenning

Indicator Review: The Table Appears To Be Set For…

Good Monday morning and welcome back to the land of blinking screens. North Korea’s obsession with missiles, the issues of Tax Reform and the Debt Ceiling, and what I call “Fed Expectations” are in focus this week. On the latter, note that, according to Bloomberg, the futures-implied odds of another rate hike in 2017 currently stand at just 40% as many folks contend that the FOMC is more interested in beginning a “balance sheet normalization” plan than hiking rates again soon. However, with both PIMCO and BlackRock publicly talking about inflation hitting the Fed’s 2% target in the near-term after Friday’s better-than expected jobs report, we should probably be on the lookout for the “reflation trade” to make a comeback. Thus, traders will be paying particular attention to every word uttered as Fed officials return to the speaking circuit this week.

But since it’s the start of a new week, let’s focus on our objective review the key market models and indicators and see where things stand. To review, the primary goal of this weekly exercise is to remove any subjective notions one might have in an effort to stay in line with what “is” happening in the markets. So, let’s get started.

The State of the Trend

We start 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 SPX moving sideways for the past three weeks, it isn’t surprisng to see some weakness creep into the short-term Trend Model 
  • Both the short- and intermediate-term Channel Breakout Systems remain on buy signal. The short-term system would flash a sell signal below 2459 and the intermediate-term system below 2405 
  • The intermediate-term Trend Model remains positive. 
  • The long-term Trend Model is also solidly positive. 
  • The Cycle Composite has turned negative and will stay there for some time. 
  • The Trading Mode models continue to suggest the market is in a trending environment.

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:

  • The short-term Trend and Breadth Confirm Model slipped to negative last week – albeit by a slim margin. 
  • Our intermediate-term Trend and Breadth Confirm Model remains positive. 
  • After poking its head up into the positive zone for a brief period, the Industry Health Model is back to neutral this week. 
  • The short-term Volume Relationship is technically positive, but the up-volume line continues to trend down. 
  • The intermediate-term Volume Relationship model remains positive. However, the demand volume line is flirting with the low end of a trading range and very close to the lowest point of the year. Any further weakness could cause the line to enter a downtrend. 
  • The Price Thrust Indicator fell back to neutral as the recent momentum was not sustained. 
  • The Volume Thrust Indicator is no negative. 
  • The Breadth Thrust Indicator is also negative.
  • In sum, short-term momentum has faltered.

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. 
  • Stocks remain overbought also from an intermediate-term view. 
  • The Mean Reversion Model is stuck in neutral. 
  • The VIX Indicators remain on sell signals. 
  • From a short-term perspective, market sentiment is now at the low end of neutral. 
  • The intermediate-term Sentiment Model remains very negative. 
  • Longer-term Sentiment readings haven’t budged and the model suggests extreme complacency in the market.

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:

  • The Absolute Monetary model remains at the low end of the positive range. 
  • On a relative basis, our Monetary Model suggests conditions have improved to moderately positive 
  • Our Economic Model (designed to call the stock market) hasn’t moved and is currently moderately positive. 
  • The Inflation Model continues to fall in the neutral zone. This suggests inflation pressures are trending down. 
  • Our Relative Valuation Model is neutral but edging back toward undervalued (note the correlation of this to the improvement in the monetary models) 
  • The Absolute Valuation Model remains VERY negative.

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 briefly neutral a while back, is now solidly positive. 
  • The Tape continues to struggle and is back to neutral. The fact that the indices are near all-time highs and this model is neutral really says it all – leadership is narrow. 
  • After briefly turning positive, the Risk/Reward model slipped back to neutral last week. 
  • The External Factors model remains ever-so slightly positive.

The Takeaway…

Let’s see… the trend and momentum models have weakened, the market remains overbought, sentiment is overly positive, and the historical cycles suggest a meaningful decline could begin any day now. However, the bigger-picture/external factors models remain constructive and suggest above-average gains. As such, one could argue that stocks are “set up” for a corrective phase. Thus, if the bears can find a negative “trigger” they could be in business for a while. But given the macro backdrop, buying the dips still makes sense here.

Publishing Note: My wife and I are closing on and moving into our new home this week. As such, I will publish reports only if time and energy level permits.

Thought For The Day:

The four most dangerous words in investing are: This time it’s different. -Sir John Templeton

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 U.S. Economic Growth (Fast enough to justify valuations?)

      2. The State of Earnings Growth

      3. The State of Trump Administration Policies

      4. The State of the Fed

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 Next Big Worry? Well, Never Mind…

A couple weeks back, I opined that the next big problem for the stock market might revolve around global central bankers changing their monetary policy tune on a coordinated basis. The idea was simple. Stocks have enjoyed the benefits of capital creation via global QE programs since the crisis ended in early 2009. The key has been that when banks print money, the cash must go somewhere. And the bottom line is that a fair amount of the freshly minted QE capital consistently found its way into the U.S. stock and bond market.

The worry is that the majority of the world’s central bankers (save Japan, of course) looked to be ready to reverse course. Instead of creating capital, the plan now is for banks to begin to “normalize” their balance sheets. In English, this means the banks plan on selling trillions of dollars of the bonds and funky securities they accumulated to help keep the global banking system afloat over the last eight years.

The thinking is that although no central banker in their right mind would intentionally overwhelm or surprise the markets, a globally coordinated plan to sell bonds would become a massive headwind for the bond market. And the end result is that rates would be expected to rise – maybe a lot. Especially if the inflation that the central bankers have been striving for begins to materialize – or perhaps starts to run hot. Or if all those macro hedgies decide to front-run the Fed by doing some selling of their own.

While this outcome may sound a lot like the plan the bankers have been hatching for some time now, the problem is that the global economy was assumed to be strong when the bankers began to sell. And the big fear has been that the US Fed, the BoE, the ECB, etc., would “miss” on this element and wind up inducing economic weakness – maybe even a recession – in the process.

Recall that last month, investors had begun to worry that central banks around the world were actually turning hawkish. If one connected the dots, it appeared that this might even be a coordinated effort. For example, a string of Fed officials publicly stated they they would be in favor of hiking rates at a faster pace than currently projected by the “dot plot.” In addition, Bank of England officials openly called for an increase in interest rates. And then Super Mario (aka ECB President Mario Draghi) suggested that his bank might need to scale back its monthly bond-buying program. Oh, and the Bank of Canada joined the fray by hiking rates for the first time in seven years.

The bond market definitely noticed as the yield on the U.S. 10-year climbed about a quarter of a percentage point in short order. On a chart basis, it appeared that the 10-year yield was about to break out, a move that technicians said was important. As such, it appeared that rates were on the precipice of something big.

But a funny thing happened on the way to the debacle in the bond market. Since that pivotal moment back on July 7, the worries that central bankers were suddenly turning hawkish in a coordinated fashion have fallen – in a fairly large way.

In fact, the yield on the 10-year has retraced more than half of the late-June move, having fallen from 2.4% to 2.25% over the last nine trading days. From my seat, the sudden change in the market mood is tied to the fact that the inflation data that the Fed, BoE, and ECB were banking on has been moving in the wrong direction. Instead of inflation moving above the 2% target, the data has been coming in weaker than expected. In other words, the premise for central bankers moving faster than anticipated just isn’t there.

And while Yellen’s bunch appeared to want to ignore the data and stick to their plan by calling the downtick in inflation “transitory,” they have since come to their senses. Earlier this month, the Fed Chair acknowledged the inflation trend and said the Fed could adjust its rate policy if inflation doesn’t pick up.

Then last week, the ECB also backed off what had been perceived to be a more hawkish stance by delaying any discussion of winding down its bond buying program until the fall.

So, with the central bankers apparently putting aside talk of moving rates faster than anticipated, yields have come down and the fear of the next big problem appears to have receded. And until/unless inflation starts to perk up in a meaningful way, the bears will have to back away from the panic button. Well, for now, anyway.

Thought For The Day:

If you are determined enough and willing to pay the price, you can get it done. -Mike Ditka

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 the U.S. Economic Growth (Fast enough to justify valuations?)

      2. The State of Earnings Growth

      3. The State of Trump Administration Policies

      4. The State of Fed Policy

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

Yellen Sounding More Like Yellen Again

When it comes to the markets, the slightest change in the narrative can make all the difference at times. And based on the market action yesterday, this might be one of those times.

I wrote on Wednesday that rising bond yields (if the move were to continue, that is) could become the next problem for the stock market. I suggested that rates have been movin’ on up recently due to the idea that the era of global central bank support was coming to an end. At least part of this assessment stemmed from the belief that the U.S. Fed was on a mission to (a) return rates back to more “normalized” levels and (b) begin reducing the massive portfolio of securities they accumulated since the crisis – regardless of the recent data.

From my seat, traders believed that Yellen & Co. could be guilty of ignoring some key inflation data and that the Fed was planning to simply power ahead. After years of transparency and the Fed being “data dependent,” this approach appeared to be a departure from the usual course. Thus, Yellen’s apparent stubbornness coupled with the ECB “talking taper” and the BOE sounding more hawkish by the day, seemed to give bond traders pause.

A key component to the worry in the bond market was the Fed’s apparent insistence that the recent reversal in the trend of the inflation data was “transitory” and due to things like changes in cell phone plans and price declines in prescription drugs. So, with inflation data declining and the Fed planning to move forward with rate hikes and bond sales, traders voted with their feet – and bond yields spiked around the globe.

A Sigh of Relief

But yesterday, some of those fears were allayed. Instead of insisting that the Fed was on the right path and that there was no reason to alter the course, Yellen sounded more like the uber dovish Fed Chair that traders had grown to know and love.

Instead of insisting that the recent decline in inflation was transitory, Yellen backpedaled. The Fed Chairwoman testified Wednesday that the historical pattern of tighter labor markets creating pressure on wages and inflation has been slow to materialize. “The relationship between those two things has become more attenuated than we’ve been accustomed to historically,” Yellen said. “There is uncertainty about when — and how much — inflation will respond to tightening resource utilization,” she added.

The key is Yellen told lawmakers yesterday that the Fed is monitoring inflation carefully. “Temporary factors appear to be at work. It’s premature to reach the judgment that we’re not on the path to 2 percent inflation over the next couple of years.” Yellen said.

Then the Fed Chair told traders what they wanted to hear – that monetary policy is not on a preset course. “We’re watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot appears consistent.”

It was the last part that the markets really liked. I.E. the idea that the Fed remains flexible and could back off at any time if the economy (oops, I mean, inflation) falters.

What is “Neutral” Anyway?

Another part of yesterday’s celebration in the markets was the implication that rates may not have to rise much more in order to reach levels the Fed would consider “neutral.”

Some analysts believe that Yellen’s written testimony released Wednesday morning suggested that rates may not be that far from a neutral rate. For example, economists at Goldman Sachs saw this particular comment as dovish, pointing out that Yellen confirmed she expects the neutral rate to remain below historic levels.

While some will argue that the comments relating to where the “neutral” rate should be are not particularly new, it is worth noting that Fed Governor Lael Brainard discussed the same issue on Tuesday. So, with Yellen singing a similar tune on Wednesday, the thinking in the market is that this may be one of the Fed’s new public talking points.

The bottom line is: (a) Yellen sounded more like Yellen yesterday, (b) the Fed publicly recognized that inflation is now moving in the wrong direction, (c) Yellen reminded us that the path of monetary policy is not set in stone, and (d) rates may not need to rise as much as traders had assumed in order for Fed policy to return to “neutral” or normal levels.

In response, traders made some adjustments to their thinking. Rates fell and stocks rose. However, with both markets still trading in a range, the question is if yesterday’s improved mood will continue. Stay tuned, as Ms. Yellen will testify again today – and every word she utters is sure to be closely scrutinized.

Thought For The Day:

The oldest, shortest words – ‘yes’ and ‘no’ – are those which require the most thought. -Pythagoras

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 U.S. Economic Growth (Strong enough to justify valuations?)

      2. The State of Earnings Growth (Ditto)

      3. The State of Trump Administration Policies

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 Next Problem Could Be…

Don’t look now fans, but bonds may be back on the list of things to worry about in the stock market. Jeff Gundlach, who has apparently been anointed the new king of the bond market, has suggested that bonds are on the precipice of a bear market and that Ten-year Treasury yields are on course to move “toward 3 percent” this year.

Just over two weeks ago, the yield on the U.S. Gov’t 10-Year closed at the low of the year at 2.137%. The thinking at the time was that inflation indicators were wobbling, the economic outlook was mixed, and the chances of Trump getting anything done in 2017 were falling fast. So, despite all the Fedspeak to the contrary, the markets doubted the Fed’s ability to stay the course. Rates looked to be moving in the opposite direction of the general consensus.

Lest we forget, the yield on the 10-year began 2017 at 2.446% and just about everyone on the planet expected that yield to rise steadily throughout the year. So, when yields dropped to a fresh calendar-year low on June 26, it appeared that the prognosticators of doom and gloom in the bond market had once again failed – in rather spectacular fashion.

However, eight days later, the yield on the 10-year had spiked to 2.396% and looked ready to take out important resistance zones. The move was impressive – and global in scope. And those who don’t spend their days watching the action in markets, were left scratching their heads.

Yield of U.S. Gov’t 10-Year – Daily

View Image Online

So, what gives? Why did bond yields reverse course in violent fashion? Why did the sentiment flip completely in such a short period of time?

No, Janet Yellen didn’t change her tune. No, the Fed didn’t surprise the markets at their June meeting. And no, the inflation data hadn’t suddenly reversed.

The answer actually has nothing to do with the United States economic data, nor inflation, oil, or even the Fed. Nope, this situation started across the pond – and not where you might think.

It turns out that a weaker than expected bond auction in France caused traders in Europe to sit up and take notice (and do some serious selling). Next, Super Mario started “talking taper” (or so traders thought). And then, the Bank of England chimed in with some unexpectedly hawkish comments.

The Lightbulb Goes Off

This coupled with the fact that Yellen & Co. appear to be bent on raising rates and unwinding their $4 trillion balance sheet (yes, despite growth and inflation expectations being downgraded almost daily) caused traders to realize that the “QE Era” was coming to an end.

After nearly of decade of unprecedented global central bank intervention, it appears that the most of the globe’s central banks (save Japan of course, which apparently plans to print money until the end of time) have decided that it is time to step aside.

Yep, that’s right; almost in unison, central bankers have started talking about pulling back on their stimulative efforts. As in ending QE. As in selling some of the mountain of paper the banks have acquired while trying to keep the global economy afloat. And as in “normalizing rates” and monetary policy.

So, what do traders do when they realize that the biggest buyers of bonds are going to (a) stop buying in bulk and (b) move toward becoming net sellers of bonds? They sell, of course.

Whether the current spike in rates will continue or not is anybody’s guess. Whether or not Mr. Gundlach and all the other prognosticators calling for the start of the big, bad bond bear will be right anytime soon is also in question.

However, for me, the takeaway is that when investors decide to do the same thing at the same time, things can get ugly – in a hurry. So, as I’ve been lamenting for some time now, I do not believe we are seeing the type of low risk environment that the volatility metrics might imply.

No, the bottom line is I think risk is elevated and one should play the game accordingly.

Thought For The Day:

If you have everything under control, you’re not moving fast enough. -Mario Andretti

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 U.S. Economic Growth (Strong enough to justify valuations?)

      2. The State of Earnings Growth (Ditto)

      3. The State of Trump Administration Policies

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 Fed’s On A Mission – Will It Be Different This Time?

To be sure, there are those that remain concerned about the state of the U.S. economy. The glass-is-at-least-half-empty crowd used last week’s weaker-than expected Non-farm Payrolls report as Exhibit A in their argument. And while the more upbeat economic crowd cites the timing of data collection and various other “technical issues” with the jobs report, yesterday’s JOLTS report presented a very strong rebuttal.

You see, the Labor Department reported Tuesday that Job Openings in the United States came in well above consensus expectations and hit a new high in the process.


Source: Wall Street Journal

And with the nation’s Unemployment Rate moving to a new low for the cycle and below the level deemed as “full employment,” Janet Yellen’s merry band of central bankers agree that the economy – as measured by the jobs market – is in pretty darn good shape right now.

Given that the Fed only has two official tasks (full employment and stable inflation), this means that the odds of Yellen & Co raising rates at the conclusion of next week’s FOMC meeting currently stand at about 100%. And no, this is not news.

Don’t Fight the Fed?

From a macro perspective, it is important to note that the Fed has clearly embarked on a tightening cycle. And since these cycles have historically resulted in recessions, this is a primary reason why many of my big-picture stock market models are waving yellow flags here.

One of the oldest clichés on the street is, “Don’t fight the Fed.” The reason this sentiment has become revered over the years is simple. The Fed usually gets what it wants and it controls the money.

In fact, of the sixteen tightening cycles seen in the last 103 years, thirteen have resulted in recessions. ‘Nuf said.

Different This Time?

The question, of course, is will this time be different?

The bullish argument is that yes, this time is indeed different. This time, the Fed isn’t trying to slow the economy or fight inflation. No, this time around, Yellen’s bunch is simply trying to return rates to more normalized levels after a protracted period of extreme accommodation.

Both Ben Bernanke and Janet Yellen have gone out of their way to communicate their “normalization plan” to the markets. They have tried to make it clear (as in “crystal”) that the Fed is NOT embarking on a traditional tightening campaign, rather the Fed is merely trying to get things back to normal.

From a stock market perspective, traders seem to be onboard with the plan. The thinking is that this time around, the rate hike campaign is actually a good thing because it means the economy no longer needs the monetary life support that has been provided by the Fed for the past nine years.

What Could Go Wrong?

Unfortunately though, the bottom line is the Fed has a history of “overshooting” with their rate campaigns. Remember, 81% of the time, the Fed’s rate hikes have produced recessions. And with the current economic rebound being the weakest on record in the post-war era, the fear is it wouldn’t take much to squash the economy’s current upward momentum.

So, despite the improving economy and good earnings, this is one of the reasons that my trusted, big-picture market models are not in their “happy places” at this time.

Could it be different here? You bet. The monetary warnings can certainly be “esplained” away this time around. As such, my model warnings may look silly in hindsight.

But one thing I have learned in my 30+ years of managing other people’s money is that ignoring risk factors such as monetary conditions and valuations is a great way to be “surprised” when bull markets morph into bears. While, my current cautious stance may turn out to be unwarranted, I prefer to stay in tune with the overall environment. And at this point in time, this means it is time to turn off the turbo chargers in your portfolios and to take your foot off the gas a bit – just in case there is an unexpected curve in the road ahead.

Thought For The Day:

Remember, no one plans to fail…

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 U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

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.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


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

Friday Quick Take: Jobs, France, Buffett and Oil

There are several items in focus this morning including Warren Buffett’s big meeting (as well as his take on both IBM and Apple), the election in France on Sunday (Macron continues to hold a 20-point lead – but strange things have been happening at voting booths around the world lately), the latest move in oil (don’t look now, but oil was trading below $44 this morning based on supply concerns – and remains something to watch), and of course, the Big Kahuna of economic data – the Jobs Report.

The latter is attracting most of the attention at the moment as job creation in April rebounded from the surprisingly weak March reading. According to the Labor Department, the U.S. economy created 211,000 jobs last month, which was above the consensus expectation for 185,000.

Next, the nation’s official Unemployment Rate fell to 4.4%, which was down from March’s reading of 4.5% and two-tenths below analysts expectations of 4.6%. It is worth noting that the current level is the lowest seen since May 2007.

However, there are numerous ways to look at the rate of the unemployed. For example, there is the now-popular U-6 rate, which includes those not actively looking for jobs and folks looking for part-time work. The U-6 dropped to 8.6% in April, which is down from the 8.9% level in March, and the best reading since November 2007.

Another way to view unemployment is to take the number of employed people relative to the population. This ratio rose to 60.2% in April, which is the highest level seen since February 2009.

As usual, there were revisions to the prior two months’ job creation totals. March was revised down to 79K from 98K while February’s numbers went up to 232K from 219K.

On the income front, Average Hourly Earnings rose by 0.3% in April to $26.19 per hour and hourly wages grew by 2.5% on a year-over-year basis.

The Takeaway

What jumps out at me in this report is the “best reading since” numbers. For example, the Unemployment Rate is the best since May 2007. The U-6 is the best since November 2007. And the ratio of employed-to-population is the highest since February 2009.

Thus, it is fairly easy to argue that the jobs market has returned to levels seen before the Great Recession. And as such, the Fed is justified in returning rates to more normalized levels.

In addition, it would appear that the Fed’s view that the weakness seen in Q1 may indeed have been “transitory” as hiring clearly perked up again after March’s hiccup. And from a big-picture standpoint, I believe the idea of the economy rebounding from the usual late-winter swoon is critical to the current market levels and trader narrative. Therefore, we need to continue to watch the incoming data in May/June for signs of confirmation.

Thought For The Day:

Remember that it pays to be open minded (in more ways than one)…

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.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


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 Take: Fed Will Stay The Course

Although nobody in the game expected Janet Yellen to make any moves regarding rates yesterday and the changes to the Fed’s post-announcement statement required a microscope to identify, this week’s meeting of the FOMC was important nonetheless.

After spending nine years pulling rabbits out their hats in order to keep the economy out of the deflationary ditch, you can bet your bottom dollar that Yellen’s merry band of central bankers would like to return interest rates back to more normal levels. And in case you’ve been living in a cave for the last couple years, you know that the Fed has begun the process known as “policy normalization.”

The problem is that in each of the last two years, Yellen & Co. have been forced to put the brakes on their plans due to what the WSJ called “economic shocks, especially from abroad.” As such, the Yellen has only managed to push out two rate hikes of 0.25% each so far.

While Fed members appear to be bent on raising rates at least three times in 2017, the markets are less than convinced at this stage. For example, according to Ned Davis Research, the Fed Funds Futures are projecting just 1.5 additional rate hikes in 2017. The issue at hand appears to be the lack of strength in the “hard” economic data. And Exhibit A in the argument is that the Fed may have to once again shelve their normalization plans, was the underwhelming Q1 GDP report (which sported a rather anemic annualized growth rate of just 0.7%).

Showing Some Resolve

However, at least at this stage of the game, Yellen’s gang appears undeterred as yesterday’s postmeeting statement remained surprisingly upbeat. In fact, the FOMC statement suggested that the weakness seen in the January-to-March period was “likely to be transitory.”

Perhaps this is due to the plethora of strong “soft” economic reports seen so far this year. Perhaps Yellen is standing behind the inflation data, which has reached the Fed’s target zone. Or perhaps the Fed is looking to boost its reputation by sticking to its guns here. But the bottom line is that yesterday’s statement signaled that Janet Yellen is assuming a “steady as she goes” stance with regard to the path of monetary policy.

Reasons To Stay the Course

First up on our list of reasons why Janet Yellen is likely to stay the course for three rates hikes in 2017 AND the start of a campaign to reduce the size of the Fed’s balance sheet by the end of the year is the fact that wage pressures are building.

Most folks think that commodities such as oil and grains are the primary drivers of inflation. But in reality, my work shows that wages are the key driver of CPI. And don’t look now fans, but wage pressures are starting to increase.

For example, the Atlanta Fed’s Wage Growth Tracker moved up smartly in 2016. And then after a drop into the election (likely due to uncertainty over the outcome of the vote) the wage growth tracker is now moving higher again. This has helped push the Employment Cost Index up 2.4% on a year-over-year comparison basis, which is near the upper end of the recent range, as well as the trends of other compensation surveys.

Next up is inflation. The bottom line here is the PCE (the Fed’s preferred inflation measure), which looks to have stabalized around the FOMC’s annualized target of 2%.

Then there is the fact that the stock market is near all-time highs. The first point here is the Fed has publicly voiced its concern about valuations in the stock market. So, if the market were to freak out over higher rates, Yellen has cover to say, “I told you so.” In addition, although the FOMC has been talking about raising rates AND starting to reduce their over $4 Trillion holdings, the stock market is none the worse for wear. Thus, the Fed appears to have a green light to proceed from the stock market.

Finally, and while I will admit this is pretty geeky stuff, the “real Fed Funds rate” (which adjusts for inflation), is currently LOWER than it was when the Fed started raising rates. Therefore, one can argue that the Fed is currently “more accommodative” that it was when the Fed Funds rates was back at 0%.

The Takeaway

So, while the “hard” economic data has been soft and Yellen’s bunch has backed off plans to raise rates due to economic softness in each of the last two years, for now at least, it appears that the Fed has backing to stay the course in terms of normalizing monetary policy. And from my perch, this is a good thing from a big-picture perspective.

Thought For The Day:

Learn to trust in an idea whose time has come…

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.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


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.