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

No Surprises

As expected, the FOMC said little that was new in the release of yesterday’s post-meeting policy statement. Yes, there were the obligatory tweaks to the first paragraph regarding current economic conditions and some very modest adjustments to the committee’s view on inflation. And yes, there was a discussion about starting to wind down the Fed’s $4.5 Trillion balance sheet. But all in all, the statement was a non-event from a market perspective.

On the inflation front, the statement said inflation measures “have declined” and are “running below 2%.” Analysts quickly compared/contrasted this to last month’s assessment, when it said inflation had “recently declined” and was “somewhat below” 2%. Such is life as a Fed-watcher!

Although the changes were subtle, some analysts opined that this month’s characterization of inflation suggests the Fed views inflation as more entrenched and less transitory than it did in June.

The main event in the release, which wasn’t really new, was the statement that the FOMC expects to implement its balance sheet normalization program (i.e. the selling of bonds the Fed holds) “relatively soon.” The general consensus among the Fed-watchers I follow is that the “normalization” will begin at the conclusion of the next FOMC meeting on September 20. The expectation is the Fed will announce that starting in October, it will gradually decrease its reinvestment of principal payments from its securities holdings, in accordance with its previously released Policy Normalization Principles and Plans. And if all goes according to plan (insert hearty chuckle here), the Fed’s “balance sheet” would be back to “normal” in four or five years.

Based on the aforementioned “principles and plans” offered up so far by Yellen’s crew, Ned Davis Research took a look at what the wind down of the Fed’s balance sheet might look like. Although the Fed has not given anyone an exact end target for their plan, NDR expects the Fed “will shrink its balance sheet until the total securities held is the equivalent of 10% to 12% of GDP, or by roughly $2 trillion.”  This means the Fed’s balance sheet wouldn’t “normalize before 2021 or after 2022, assuming no recession, of course.

The market’s reaction to the news – or lack thereof – was a yawn. The dollar fell a bit, bond prices rose on the idea that the Fed isn’t in a position to hike rates faster than expected, and the stock market had little to no reaction.

At this stage of the game, the markets seem to believe that the Fed may not even raise rates again in 2017. According to the action in the futures markets, the implied “odds” of another rate hike in 2017 are no better than 50-50. Note that this runs counter to the Fed’s “dot plot,” which suggests there will be an additional increase in the Fed Funds rate before year-end.

For me, the key takeaway is that Ms. Yellen and her compadres have done a pretty good job in terms of communicating their intentions to the markets. And as anyone who has been in this business awhile knows, Ms. Market is not fond of surprises. As such, Yellen & Co. are to be commended for their efforts.

Thought For The Day:

“I’m not telling you it’s going to be easy, I’m telling you it’s going to be worth it.” Art Williams

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

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.

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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.