Dave Moenning

The Most Bullish Thing A Market Can Do Is…

Good Monday morning and welcome back. It’s a new week, so let’s start things off with an objective 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.

NEW THIS WEEK:

Over time, we have received numerous requests for suggestions on how readers might utilize the indicators/models shown in this report, this week we introduce a “model of models” approach to determining longer-term exposure to market risk. Please note that this is merely an example of how these indicators can be used and is not a recommendation or the positioning of any specific investing strategy. The idea is to illustrate how a disciplined approach may help one stay in tune with the “message” of the models/indicators.

In addition, we’ve included a brief summary of the indicators/models used in the report.

It is our sincere hope that you find the upgrades to our weekly summary of interest.

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:

  • Last week’s rally and fresh all-time highs has turned the short-term Trend Model positive. 
  • Both the short- and intermediate-term Channel Breakout System remain on their 8/22 Buy Signals. 
  • The new all-time closing high keeps the intermediate-term Trend Model positive. 
  • The long-term Trend Model continues positive as well… 
  • The market action continues to run counter to the Cycle Composite projection, which remains negative next week. 
  • The Trading Mode models remain unimpressed by the new highs so far and call this a mean-reverting environment.
  • The bottom line is the most bullish thing a marke can do is make new highs, so…

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 flipped back to positive last week. 
  • Our intermediate-term Trend and Breadth Confirm Model is also positive – a good thing. 
  • The Industry Health Model moved up to the moderately positive zone. And with the global version positive, the bulls hold the edge here. 
  • The negative reading of the short-term Volume Relationship remains a warning sign. But, in and of itself, is not a reason to be negative. This is simply a yellow flag. 
  • The intermediate-term Volume Relationship is improving but is not yet outright positive. 
  • The Price Thrust Indicator moved back to positive last week – another plus for the bulls. 
  • The Volume Thrust Indicator remains neutral. However, note that stock market returns have been above trend when in this mode. 
  • The Breadth Thrust Indicator is also positive.
  • The bottom line is momentum, while not wildly robust here, is positive and moving in the right direction.

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 are now very overbought. This alone is not a reason to sell, but it is a warning flag. 
  • From an intermediate-term view, stocks are not yet overbought, but are getting close. 
  • After a timely buy signal, the Mean Reversion Model has moved back to neutral and is actually close to a short-term sell/short signal. 
  • The VIX Indicator also gave a timely buy signal recently is now very close to a sell signal. 
  • After a timely buy signal, the short-term market sentiment has moved to neutral. 
  • The intermediate-term Sentiment Model slipped back into the negative zone. 
  • Longer-term Sentiment readings are also negative. 
  • The key takeaway here is the “mean reversion/trading winds” are no longer at the bulls’ back.

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 continue to dip and our 14-indicator model is now falling in the neutral zone. 
  • The Relative Monetary Model remains in good shape. 
  • Our Economic Model (designed to call the stock market) continues to falter and is now at the low end of neutral – something to watch. 
  • The Inflation Model remains solidly neutral. Our inflation models continue to suggest the Fed’s inflation target is unlikely to be sustained. 
  • The Absolute Valuation Model is still the same – very negative. 
  • With rates near 2017 lows, our Relative Valuation Model continues to improve and is very close to turning positive.

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, 
  • The Tape is in decent shape – just not strong. 
  • The Risk/Reward model is back to neutral. 
  • The External Factors model continues to improve (likely thanks to the move in rates), which is a good thing from a longer-term perspective.

My Takeaway…

The readings from the primary cycle board really tell the story here. From a big-picture standpoint, things are in “pretty good” shape, which tells us to continue to give the bulls the benefit of any doubt. However, the facts that (a) the early warning board is waving its flag, (b) momentum is anything but robust, and (c) valuations remain extreme, tells us that risk factors are NOT low at this stage of the game. My take on this is that if the bears were to find a raison d’etre, the ensuing decline could be sharper/more severe than normal. Yet at the same time, stocks have been able to handle just about anything thrown at them this year and so far at least there has been no reason for traders to hit the sell button. So, until/unless there is a reason to worry, the dips are likely to be bought and volatility is likely to remain low.

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.


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:

Beware the barrenness of a busy life – Socrates

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 Geopolitics

      2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)

      3. The State of the Trump Administration

      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

Looking To The Weight Of The Evidence

Stocks pulled back a bit yesterday in response to Donald Trump’s threat to shut down the government if he didn’t get his border wall. On this topic, it is important to note that (a) the government is slated to run out of money on October 1 and (b) the House has already approved $1.6 billion for the wall – but the issue appears to be problematic in the Senate.

From a technical perspective, the S&P 500 is basically searching for direction. From a short-term view, stocks are in a downtrend. From an intermediate- and longer-term perspective, the trend of the stock market is in pretty good shape. The key here is that a break below Monday’s low would threaten the health of the intermediate-term trend and embolden the bears.

And with speeches from both Janet Yellen and Mario Draghi on tap in Jackson Hole tomorrow, it is a decent bet that traders may not want to make any big moves today. Unless, of course, Yellen’s speech gets leaked and contains market-moving info, that is.

So, since stocks remain in a seasonally weak period, valuations are in rarified air, and we appear to have some time on our hands this morning, I thought I’d continue our discussion of the various ways investors can manage the risk of severe market declines in their portfolios.

Going Back To The Beginning

When I first entered the business in mid-1980, something called “market timing” was gaining popularity. The idea was to invest 100% of your account either in the money market or the stock market, depending of the reading of various indicators – usually moving averages. Such a concept would have helped the proponents of such strategies to avoid the difficult markets of the 1970’s, which saw the DJIA go mostly sideways for years.

I didn’t realize it at the time, but a couple things made this strategy successful. First, very few people were doing it as the mutual fund industry was in its infancy and calculating a moving average wasn’t easy, requiring a legal pad, a pencil, and a calculator. Remember, charts weren’t available on your phone back then. Heck, cell phones didn’t exist back then.

In addition, an investor could earn a VERY strong rate of return when in the “defensive” money market position. Thus, “market timing” was pretty easy when you were earning 10% annualized sitting in cash.

But as time went on, such strategies lost favor. In my opinion, this was largely due to the secular bull market that began in 1982. The mutual fund industry launched a massive campaign encouraging investors to put their money into a fund family and leave it there – forever. “Time, not timing” was the battle cry. “Be a long-term investor” was also a big theme promoted at the time. Since there wasn’t much in way of risk for nearly a decade after the Crash of ’87, the concept of risk management became laughable and “market timing” was a dirty word by the middle of the 1990’s.

So, with the public being told that no one could “time the market” (never mind the boatload of research that proved otherwise) and that such efforts were a waste of time (stocks just went up every year, so why bother?), the “buy and hold” approach became all the rage. (P.S. If this sounds similar to today’s emphasis on passive investing, give yourself a gold star!)

Thus, risk managers were scoffed at during the mid-1990’s. Risk? What risk?

However, the ensuing bear markets triggered by the bursting of the technology bubble and then the credit crisis have changed people’s point of view on the subject – in a big way. Thus, risk management is now an important part of many investors’ portfolios.

The trick is the figure out a way to reduce one’s exposure to market risk when the bears are in town and to “make hay while the sun shines” the rest of the time. Simple enough, right?

So far in this series, we’ve talked about BlackRock’s approach, which entails the use of low volatility vehicles, as well as the idea of diversifying your portfolio by employing multiple risk management strategies. Today, let’s keep moving and talk about one of my favorite strategies to risk management.

The Exposure Method

The goal of what I call the “exposure method” is to keep one’s exposure to market risk in sync with the “state of the market.” When the market is healthy, you want to be onboard the bull train and enjoy the ride. Then as conditions weaken over time, as they often do during long bull market runs, you reduce your exposure to risk accordingly.

The challenge, of course, is finding a way to accomplish this goal. The bottom line is there are many approaches to this strategy. My take on the subject is to employ a diversified approach by using multiple indicators and/or models, with each controlling a set portion of the exposure.

For example, if I have 10 market indicators, I can assign each indicator a 10% weighting. When all 10 are positive, I’m 100% long. But as indicators flip to red, the exposure gets reduced. For example, if 3 indicators are negative, I’d be 70% long and 30% in cash, etc.

Of course, the real key to this method is the indicator selection and weighting. To be sure, there are a myriad of ways to do this – and trust me, I’ve played with a great many over the years!

What I’ve found is that a combination of trend, momentum, sentiment, and “external” factors can be a pretty good guide to the health of the market. In fact, I publish the readings of these indicators every Monday in my weekly indicator review. Here’s a link to this week’s edition.

To illustrate the concept further, below is an example of an exposure model I developed and publish weekly for the NAAIM (National Association of Active Investment Managers) organization each week.

The idea is pretty straightforward. I allocate 60% of the model to trend and momentum indicators/models and 40% to sentiment and external factors. My goal is to blend both technical and fundamental indicators because, if I’ve learned one thing since 1980, it is that all strategies/indicators/models WILL go into a funk at times and/or stop working. Thus, I’ve learned that it is critical to avoid using a singular indicator to drive your exposure. As the saying goes, all indicators work great, right up until they don’t!

Therefore, I prefer to employ a “model of models” approach to build what I hope will provide me with a “weight of the evidence” for the overall health of the stock market.


View Model Online

To review, the game plan is to be invested more heavily in stocks when the “weight of the evidence” is positive and less so when the model reading suggests some caution.

Is the system perfect? Heck no. No matter how hard you try, Ms. Market will always find a way to trip you up at times. But to me, this approach makes sense as my goal is to get it “mostly right, most of the time.”

Currently, the market’s internal momentum had clearly stalled and the table was “set” for a pullback. The model sensed that all was not right in the indicator world and recommended that chips be taken off the table. From my seat, this is what “risk management” is all about.

A friend of mine uses this model with live money. He takes the model reading as his long equity exposure and puts the remainder in bonds on a weekly basis. As such, this week he’d have 40% in stocks and 60% in bonds. And for the record, the model’s exposure to equities was 75% at the end of July, 65% the week of August 6, and first went below 50% on August 13.

And I am pleased to report that since my NAAIM friend went live with this approach, it has outperformed a traditional 60/40 portfolio by a pretty sizable amount.

Thought For The Day:

When men speak of the future, the Gods laugh. -Chinese Proverbs

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 Trump Administration/Policies

      2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)

      3. The State of Geopolitics

      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

Improving Conditions, But…

Good Monday morning and welcome back to the land of blinking screens. Russia, Trump’s Tweets as well as his latest hiring/firing, a big M&A deal, and North Korea’s latest missile tests are in focus to start the 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.

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:

  • After a week of sideways price action, the Short-Term Trend Model has lost a bit of its luster – but remains modestly positive going into the new week 
  • Both the short- and intermediate-term Channel Breakout Systems remain on buy signals. A close below 2450 would put the short-term system at risk. 
  • The intermediate-term Trend Model remains solidly positive 
  • The long-term Trend Model is also in good shape and solidly bullish 
  • The Cycle Composite suggests this week will be the bulls last gasp before a meaningful decline begins. 
  • All 3 Trading Mode models confirm that we are now in a “trending” environment. However, none of the model readings are strong at this time.

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 neutral last week. Note that the momentum indicators have not been robust in quite some time. 
  • Our intermediate-term Trend and Breadth Confirm Model remains positive. 
  • The Industry Health Model moved up into the positive zone (albeit by the skinniest of margins) where returns have historically been very strong. 
  • The short-term Volume Relationship is technically positive. However, the trend of the model is not heading in the right direction. 
  • The intermediate-term Volume Relationship continues to be solid. 
  • The Price Thrust Indicator is positive 
  • The Volume Thrust Indicator remains stuck in neutral. This suggests the sloppy action could continue. 
  • The Breadth Thrust Indicator is also in the neutral zone. In short, the bulls need these “thrust” indicators to turn green to have any hope of moving much higher.

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 are overbought. This is a clear warning sign. 
  • From an intermediate-term view, stocks are also overbought. Remember that the biggest moves in the stock market come when the “stars are aligned” in this arena. 
  • The Mean Reversion Model stays neutral. 
  • The VIX Indicators are waving warning flags. However, bulls suggest we are in a new era in terms of the VIX readings. 
  • Since 2006, there has only been one lower sentiment model reading. Can you say “complacency?” 
  • The intermediate-term Sentiment Model is negative. 
  • Longer-term Sentiment readings are extremely negative.

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 moved back up into the moderately positive zone this week. 
  • On a relative Monetary Model remains at the high end of neutral. Note that the monetary models have shown consistent improvement over the last few months – a positive. 
  • Our Economic Model (designed to call the stock market) remains moderately positive and on a buy signal. 
  • The Inflation Model continues to move lower within the neutral zone. It is worth noting that our longer-term inflation model is now neutral, suggesting the Fed may not have the cover it needs to raise rates much higher. 
  • Our Relative Valuation Model is stuck in neutral – something the bulls continue to hang their hats on. 
  • The Absolute Valuation Model has improved a wee bit – but continues to suggest stocks are VERY overvalued by traditional metrics.

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, has moved back to a solid reading of 80%. 
  • The Tape has improved to positive – by the slimmest of margins. 
  • The Risk/Reward model moved back into the positive zone last week. But, again, by only by a smidge. 
  • The External Factors model also moved back up into the positive zone – but… well… you get the idea.

The Takeaway…

It is important to note that several of my favorite models moved up into positive territory this week. In fact, the models designed to call the “Primary Cycle” of the stock market are now universally green, which can only be interpreted as a bullish sign. However, it is also important to recognize that the models are only slightly above the lines of demarcation between neutral and positive. Thus, I would keep the champagne on ice for the time being and wait for some confirmation before getting too excited. Especially with the cycle composites only a week or so away from turning down hard for several months. The bottom line is that conditions have improved but this is no time to let your guard down.

Thought For The Day:

Better three hours too soon than a minute too late. – William Shakespeare

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

Indicator Review: Not Much To Complain About

Good Monday morning and welcome back. It’s the start of a new week so let’s get right to 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 I might have in an effort to stay in line with what “is” happening in the markets.

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 Dow and S&P 500 closing at new all-time highs on Friday, it is not surprising to see the short-term Trend Model positive. 
  • Both the short- and intermediate-term Channel Breakout Systems remains positive 
  • The intermediate-term Trend Model looks good. 
  • The long-term Trend Model is also a bright shade of green at this time 
  • The Cycle Composite points down this week before turning up for the next two. 
  • The Trading Mode models continue to point to a mean-reverting 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 remains positive 
  • Our intermediate-term Trend and Breadth Confirm Model has been a good guide lately and is still green 
  • The Industry Health Model continues to muddle along in moderately positive territory 
  • The short-term Volume Relationship is positive, but not by much 
  • After flirting with a breakdown, the intermediate-term Volume Relationship model improved last week and remains positive 
  • The Price Thrust Indicator moved back to positive last week. 
  • The Volume Thrust Indicator moved up from negative to neutral. Note that the historical gains in the neutral zone have been above the long-term mean of the market. 
  • The Breadth Thrust Indicator remains neutral. But like the Volume Thrust indicator, the historical gains in the neutral mode are strong

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 are now in overbought territory. 
  • From an intermediate-term view, stocks are also in the overbought zone 
  • The Mean Reversion Model produced a buy signal last week. 
  • The VIX Indicators are struggling with low readings and remain on sell signals 
  • From a short-term perspective, market sentiment is neutral 
  • The intermediate-term Sentiment Model is negative 
  • Longer-term Sentiment readings are also negative

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 recent uptick in rates caused our Absolute Monetary model to slip back to neutral 
  • On a relative basis, our Monetary Model continues to climb within the neutral zone 
  • Our Economic Model (designed to call the stock market) remains in good shape 
  • The Inflation Model – which has done a great job of calling the trend of inflation for the past year – continues to fall within the neutral zone 
  • Our Relative Valuation Model has improved modestly but remains neutral 
  • The Absolute Valuation Model continues to sport a bright shade of red

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, continues on a buy signal. However, the overall model reading is well below recent levels. 
  • The Tape remains moderately positive 
  • The last signal of the Risk/Reward model was a sell. However, the model is currently in the neutral zone. 
  • The External Factors model has been “movin’ on up” lately and is approaching an outright positive reading

The Takeaway…

As the saying goes, the most bullish thing a market can to is make new highs. And with the majority of the key indicators in decent shape, one really shouldn’t complain too loudly about the state of the market. However, as I’ve been saying for some time now, this does not appear to be a low risk environment. So, given the level of valuations and where we are on the calendar, I believe the best course of action is to remain invested in stocks but utilize a lower risk profile where possible – just in case.

Thought For The Day:

Treasure the love you receive above all. It will survive long after your gold and good health have vanished. – Og Mandino

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.

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 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.

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.