Dave Moenning

No Time To Have Your Foot To the Floor

The “State of the Markets”…

In an effort to make my weekly review of the state of the market models easier to digest, I am making some adjustments to the report.

For those readers who like to stay on top of what the market “is doing,” but don’t enjoy digging into the guts of all the market models/indicators, I suggest a quick review of the Primary Cycle board. These models represent some (but not all – I’ll be upgrading the board in the coming weeks) of my favorite big-picture market models. As such, I’ve moved this indicator board – as well as this “executive summary” – up to the top of the report to make it easier to get the “bottom line.”

In looking at the Primary Cycle models this week, it is clear that there is a lot of green on the board and that the historical returns are strong. But (you knew that was coming, right?), I believe there are some “yea, buts” to consider this week. For example, the State of the Tape Model, while positive, has weakened a fair amount over the past two weeks (this despite a fresh all-time high for the S&P 500). And then the External Factors Model is currently sitting, quite literally, right on the line between positive and negative.

So, my take here is that while my market models/indicators are still in pretty good shape overall, I don’t see the “state of the market” being as positive as some of the boards might lead one to believe.

My Bottom Line: It’s a bull market until proven otherwise and the dips should continue to be bought. But, in my opinion, this is no time to have your foot to the floor.

The State of the Big-Picture Market Models

Let’s start with my “executive summary” of the state of the market – I.E. a review my favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, popped back up into positive territory last week. In short, I breathe easier when this model is positive. 
  • We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model is has slipped to moderately positive. While not a reason to get defensive, this is indeed something to keep an eye on in the coming weeks/months. 
  • The Risk/Reward model continues to wrestle with negative sentiment readings and the weakening monetary environment. As such, the model is stuck in neutral. 
  • The newly expanded External Factors model includes a total of 10 indicators ranging from earnings, yields, sentiment, monetary, economic, and volatility. The current model reading is technically positive, but is currently sitting, quite literally, on the line. So, this too is something to watch.

The State of the Trend

Digging into the details, I like to start my weekly review with a look at the “state of the trend.” These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.


View Trend Indicator Board Online

Executive Summary:

  • The short-term Trend Model starts the week in positive territory, but only by a modest margin. While this may sound odd with the S&P finishing at a fresh all-time high on Friday, there is resistance overhead from a short-term perspective and only modest support. 
  • Both the short- and intermediate-term Channel Breakout Systems remain positive and on buy signals. 
  • The intermediate-term Trend Model starts the week positive once again.
  • The long-term Trend Model hasn’t budged and continues to sport a bright shade of green at this time. 
  • The Cycle Composite points to sloppy action over the next two weeks. 
  • The Trading Mode models continue to suggest the market is trending.
  • The recent sloppy action in the market was to be expected and the blue chip indices remain in good shape. However, the semiconductors bear watching in the near-term.

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 has flip-flopped between positive and neutral several times over the past two weeks – but is positive to start the week here. 
  • Our intermediate-term Trend and Breadth Confirm Model has been a very strong indicator of the overall trend and remains positive. 
  • The Industry Health Model continues to waffle in moderately positive territory and refuses to break into on outright bullish mode. 
  • The short-term Volume Relationship is positive to start the week, but only modestly so. I’ll be watching this situation closely for signs of a breakdown in market internals. 
  • The intermediate-term Volume Relationship remains in pretty good shape. My only complaint here is that Demand Volume peaked in March and remains well below the highs. A technical breakdown here would be worrisome. 
  • Since the Price Thrust Indicator is an oscillator, it is not surprising to see the model reading backing off here – but still positive. 
  • The Volume Thrust Indicator remains neutral this week. 
  • The Breadth Thrust Indicator also slipped back to neutral this week. However, note that the historical return of the market when in this mode is well above average.
  • In sum, market momentum is in decent shape. But I do see some weakness creeping in.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks worked off the persistent overbought condition and are now coming off a neutral reading. 
  • From an intermediate-term view, stocks remain overbought – although the condition is not nearly as extreme as it was in November. 
  • The Mean Reversion Model continues to waffle back and forth within the neutral zone as market volatility hasn’t been high enough to trigger a signal since mid-October. 
  • The short-term VIX indicator’s sell signal is now quite stale. However, there was not enough upside movement in the index on a closing basis to reverse the sell. Currently the indicator is working toward a renewed sell signal. 
  • Our longer-term VIX Indicator remains on a buy signal. 
  • From a short-term perspective, the market sentiment model remains negative. 
  • The intermediate-term Sentiment Model is stuck in the red zone. 
  • Longer-term Sentiment readings are also solidly negative. 
  • It is important to note that when the trend of the market is strong, extreme readings from the early warning board should be present before you think about changing directions.

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:

  • While it may sound odd with the Fed likely to raise interest rates for a fourth time this week, absolute Monetary conditions remain neutral. 
  • Ditto on the Relative Monetary Model… 
  • Our Economic Model continues to suggest a strong economic growth environment. 
  • The reading of the Inflation Model continues to move lower and is currently at the lowest level seen in nearly 2 years. 
  • The song remains the same for the Absolute Valuation Model – this market is overvalued. 
  • Our Relative Valuation Model continues to benefit from low rates and suggests stocks are not overvalued when the level of interest rates are taken into account.

Sample Risk Exposure System

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

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

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


View Sample Exposure Model Online

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

Thought For The Day:

There is no education like adversity. -Benjamin Disraeli

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Economy

      3. 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

The Next Leg Higher?

Good Monday morning and welcome back to what appears to be a celebration of tax reform on Wall Street. But before we get ahead of ourselves in terms of how far the bulls are going to run today, let’s start the week with a look at 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.

Executive Summary: My Take…

The most recent burst to the upside, which began on November 21, has definitely been impressive. However, the key question at this point is if the move represents the onset of a fresh leg higher in the cyclical bull market that began in February 2016 – or – a “blow off” phase, which is where price peaks tend to occur. Personally, I’d feel better about the current move if a new “breadth thrust” signal were to occur. But since the move is still quite new, we will have to wait a week or so to see if the bulls can succeed on this score. It is also worth noting that the rate of ascent is quite steep here, which brings the sustainability of the move into question. In addition, the surge in prices is causing valuation indicators to move the wrong way – I.E. the “P” in the p/e ratio is moving up faster than the “e” (earnings). However, the absolute bottom line is this is a bull market until proven otherwise. And while we can argue that this bull is showing signs of aging, the bulls continue to deserve the benefit of the doubt.

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:

  • Despite the intraday scare on Friday, the short-term Trend Model starts the week in positive territory. 
  • Both the short- and intermediate-term Channel Breakout Systems remain positive this week. A break below 2557 would be problematic for these indicators. 
  • The intermediate-term Trend Model continues to side with the bulls. 
  • The long-term Trend Model sports a bright shade of green again this week. 
  • The Cycle Composite points higher again this week. 
  • The Trading Mode models continue to confirm the market is in a trending mode.
  • The only negative that can be identified from a trend perspective is that the rate of ascent has become extreme and is unlikely to continue.

The State of Internal Momentum

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


View Momentum Indicator Board Online

Executive Summary:

  • Both of our Trend and Breadth Confirm Models remain positive to start the week. This is a sign that the market’s momentum is “in gear.” 
  • The Industry Health Model upticked last week but still has been unable to crack into the outright positive zone. 
  • The short-term Volume Relationship model has improved and is now positive. 
  • The intermediate-term Volume Relationship remains positive. However, it is worth noting that peak momentum from this model was reached earlier in the year. 
  • Not surprisingly, the Price Thrust Indicator remains positive to start the week. 
  • The Volume Thrust Indicator remains high neutral. The reason is this indicator uses volume on the NASDAQ, which has lagged during the most recent run higher. 
  • The Breadth Thrust Indicator is in good shape.
  • In sum, market momentum is “pretty good” but not as strong as is usually seen at the beginning of bull market moves.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks are in an overbought condition. 
  • From an intermediate-term view, stocks are overbought. However, since the market has been unable to become oversold from an intermediate-term perspective since spring, we view the current condition as “good overbought.” 
  • The Mean Reversion Model continues to struggle with the lack of volatility in the market and remains neutral. 
  • The short-term VIX indicator flashed a sell signal last week. However, the last 3 short-term sell signals have not been fruitful. 
  • Our longer-term VIX Indicator remains on a buy signal. 
  • From a short-term perspective, the market sentiment model is back in the red zone. 
  • The intermediate-term Sentiment Model also slipped back to negative last week. 
  • Longer-term Sentiment readings haven’t budged. 
  • While “early warning” signals have been all but useless for the majority of the year, there can be no denying that the table is clearly set for a pullback.

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 haven’t changed and remain neutral. 
  • The Relative Monetary Model reading pulled back a bit last week but remains in the positive zone. 
  • Our Economic Model continues to suggest a strong economic growth environment. 
  • The Inflation Model reading remains in “low inflationary pressures” zone. This has historically been positive for stocks. 
  • The Absolute Valuation Model remains quite negative and is moving in the wrong direction with the recent surge in prices. 
  • Our Relative Valuation Model remains neutral but the model reading is now the lowest seen since 2010.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, remains on a buy signal. However, the model reading is neutral to start the week. 
  • We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model is positive. 
  • The Risk/Reward model continues to be troubled by the state of market sentiment, market valuations, and monetary conditions. This explains the neutral reading. 
  • The newly expanded External Factors model includes a total of 10 indicators ranging from earnings, yields, sentiment, monetary, economic, and volatility. The current model reading improved to positive last week – but only by the slimmest of margins. And since the model reading is currently “on the line” we would prefer to see some confirmation before embracing the new reading.

Sample Risk Exposure System

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

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

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


View Sample Exposure Model Online

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

Publishing Note: I am traveling the rest of the week and have some very early commitments so I will publish reports as my schedule permits.

Thought For The Day:

Treat people as you would like to be treated, but don’t let anyone mistake kindness for weakness. -Art Rooney

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Earnings Season

      3. The State of the Economy

Indicators Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

One-Day Wonder Or The New Trend?

Well, that was interesting. In what can probably best be described as a fast money rotation game (something I like to call “Hedge Fund Follies”)- where traders sold the big-cap tech leaders and continued to buy the beneficiaries of the tax reform and the improving economy themes with both hands – the DJIA posted a triple-digit gain, while the NASDAQ 100 endured a triple-digit loss.

Yep, that’s right fans; the FANG’s had a bad day at the office while the banks and transports soared. Such is life at times in the stock market game. Odd yes, but definitely not unprecedented.

For those keeping score at home, the FANG’s did indeed have a rough outing. Facebook (NYSE: FB) fell 4%, Amazon.com (NASDAQ: AMZN) lost 2.71%, Netflix (NASDAQ: NFLX) dove 5.54%, and Alphabet (NASDAQ: GOOGL) dropped -2.44%.

But the losses weren’t limited to just the FANG’s as the semiconductors, which have been on quite a run since the middle of August, also got hit hard. For example, the Semiconductor Index declined 4.39% yesterday with components such as Micron (NYSE: MU) and Lam Research (NASDAQ: LRCX) suffering losses of 8.7% each and Applied Materials falling (NASDAQ: AMAT) 7.7%.

But before you get into a lather about selling the semis and/or the rest of your big-cap tech and heading for the hills, consider that the Semiconductor Index had soared 26% from mid-August through last Friday. As such, a pullback – yes, even a nasty one – was to be expected.

It is also worth noting that the NDX experiences these bad days at the office on a fairly regular basis. As the chart below illustrates, there have been a handful of ugly – albeit brief – periods on the NDX this year.

NASDAQ 100 – Daily

View Image Online

The question, of course, is if this time will be different. Maybe its the complacency talking, but my gut reaction is, no. In general, tech is where the growth is and after brief bouts of difficulty, institutional investors have tended to calmly and methodically return to the growth areas – once the fast money folks are done with their hysterics, that is.

However, there does seem to be an argument for the it’s-different-this-time camp. Michael O’Rourke, chief market strategist at JonesTrading Institutional Services, summed up the situation for Bloomberg yesterday by saying, “The large tech companies already have low effective tax rates because they were gaming the system… Any reform would have to close the loopholes, which obviously they’re trying to do, so they don’t benefit.”

On the other side of the aisle though, the banks stand to benefit handsomely from tax reform and the higher interest rates that are expected to follow. Perhaps a graph of what is happening in the banks would be worth more than a few hundred more words on the subject here…

KBW Bank Index – Daily

View Image Online

There is also the improvement in the economy/inflation angle to consider.

Yesterday, we got an update on Q3 GDP that was better than expected as well as a “Beige Book” report that suggests inflation pressures “have strengthened.”

In trader parlance, this equates to an all-out buy signal for cyclical issues. Now mix in the mood of the consumer (one report showed confidence at a 17-year high) and the e-commerce story continuing to improve and, well, traders are falling all over themselves to buy the transports.

Dow Jones Transportations – Daily

View Image Online

So there you go. Sell the stuff that loses in tax reform and buy the stuff that benefits. Load up the algos and let ’em fly. The FANGs are out and the banks and transports are in. Well, for now, anyway. It will be interesting to see if either of these new themes run out of steam or get overdone by the fast money folks in the near-term.

For now, my thought is to continue to buy the dips – especially the big, bad, scary dips. So, the primary question here is if yesterday’s big dive in tech will continue for a few days/weeks or turn on a dime. Stay tuned…

Thought For The Day:

If you stop learning, you will forget what you already know. -Proverbs 19:27

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Economy

      3. The State of the Earnings Season

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

A Productive Day On Several Fronts

I spent yesterday morning in meetings with the folks at Janus Henderson here in Denver. I’m a big believer in the idea that active fund managers will be worth their weight in gold (or should I say, bitcoin?) in the bond market as rates, global economic growth, and perhaps even inflation, potentially chart new courses in the coming quarters/years. The bottom line here is that London-based portfolio manager John Pattullo runs a strategic income fund with a macro-based theme approach and a strong record. As such, chatting with John and his Denver compatriots in the high yield/multi-asset class space was very productive.

At the mid-morning break, I checked in on the markets and was pleasantly surprised to see a double-digit gain on the S&P 500. When the meetings resumed, we chatted up the likelihood that the Case-Shiller data, the Richmond Fed Manufacturing Index reading, and the best Consumer Confidence numbers in 17 years were all contributing to the stock market’s rise.

As we were preparing to leave for lunch, I saw that stocks had advanced further. I learned that comments from Fed Governor Jerome Powell relating to the course of Fed policy and deregulation during his confirmation hearing to become the next Fed Chairman was the likely culprit for the spike to new highs.

Then, about the time the salads arrived, stocks began to nose-dive, losing about half a percent in fairly short order. After some brief exploration on our phones, we discovered that North Korea had decided to launch a new ballistic missile. A missile whose trajectory could purportedly hit Washington D.C.

Oh, and speaking of Washington, we also learned that the President had called off a meeting with top Dems to talk about averting a government shutdown on December 8th because, in Trump’s words, it didn’t look like a deal was gonna get done. Awesome.

Given that some volatility appeared to be returning to the corner of Broad and Wall, I immediately tuned into the business channels as I climbed into the car for the ride back to my office.

I then discovered that stocks had not only reversed course, but were spiking to new highs in a meaningful fashion. This move appeared to be sponsored by the fact that the Senate Banking Committee had voted to advance the GOP’s tax bill to a full vote in the Senate – a vote that could take place as early as tomorrow.

It turns out that Senator Corker had bargained for some sort of taxation trigger should reality not play out according to plan, which was good enough for him to get on board with a “yes” vote.

So, with the economy continuing to surprise to the upside, the new Fed Chair saying he’ll stay the course, and the potential for a tax bill to happen sooner rather than later, investors hit the buy button early and often yesterday afternoon.

From my seat, the word optimism appears to be the primary driver here. Optimism that the economy can finally break out of its long, post-crisis funk. Optimism that business-cramping regulations will continue to be reduced. And optimism that the Fed won’t make a “policy mistake.”

While I am not sure if yesterday’s action will become the impetus for a new Breadth Thrust Buy Signal (which, if history is any guide, could lead to the bulls remaining in charge of the game for at least another year), the action in the small- and mid-caps does suggest that optimism for the future is being priced into stock prices here.

So, all in all, yesterday was a productive day on several fronts. And here’s hoping that optimism continues to be the watch word going forward.

Finally, this just in… Q3 GDP was revised to 3.3% from 3.0%, which was above the consensus expectation for a reading of 3.2% and the best growth rate for the U.S. in three years. It is also worth noting that GDP has now topped the 3% mark for two consecutive quarters. And with the Q4 data looking good, the economy may be poised to make it three straight quarters of 3% or better growth for the first time since 2004-05.

Thought For The Day:

You can’t live a perfect day without doing something for someone who will never be able to repay you. -John Wooden

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Economy

      3. The State of the Earnings Season

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

An Indication of Waning Momentum

I have likely mentioned a time or two that I believe I have earned, at the very least, an honorary degree from Wall Street’s school of hard knocks over the last 30 years. You see, I didn’t have a mentor to teach me the stock market game. No, I simply tried to learn as much as I could, as fast as I could, and attempted to stay on Ms. Market’s good side as often as possible along the way. To be sure, it’s been an exciting and, for the most part, enjoyable ride.

It is for this reason that I derive a fair amount of pleasure from writing about some of the lessons I’ve learned. It is my sincere hope that I can pass along a nugget of wisdom every now and again about how the game is played. And I especially enjoy pointing out investing strategies/concepts that seem to work over long periods of time. Or on the other side of the coin, stuff that simply doesn’t work at all anymore.

On the subject of the former is something called a “breadth thrust.” I’m not sure who actually invented the concept, but I learned about it from Ned Davis and the late Marty Zweig. According to Mr. Davis, who possesses an enviable long-term record as a risk manager, “When truly long-lasting advances get started, they usually do so with a burst of strength much like a space rocket does when it leaves the launching pad.” Hence the use of the term “thrust” in the name of the indicator.

There are many variations of these “breadth thrust” indicators including price, volume, and advances vs. declines. The idea is simple. When stocks run higher in a meaningful fashion, the move tends to be accompanied by a thrust in market breadth. And history shows that such “breadth thrusts” have been wonderful predictors of above average returns over the ensuing week, month, quarter, and year.

The 10-Day A/D Thrust Indicator

As I mentioned, I follow several such “thrust” indicators, but one of the best involves a surge in advancing versus declining issues. One such indicator involves the ratio of 10-day advances to 10-day declines. When this ratio exceeds 1.9 – indicating that advancing issues have swamped declining issues over a two-week period – a buy signal occurs.

According to Ned Davis Research, the mean returns for the S&P 500 after the hypothetical buy signals since 6/23/1947 (the date of the first signal from the data available) are impressive. For example, NDR reports that since 1947, the average return for the S&P 500 five days after a breadth thrust buy signal has been 0.82%. This is nearly 5 times higher than the average for all 5-day periods of 0.17% seen over the same time period. And the market was higher 67% of the time (32 out of 48) after the signal.

Two weeks after a breadth thrust buy, the S&P has been up 1.57% on average, which is 4.75 times higher than the mean of 0.33% for all 10-day periods. And the batting average for a “successful” signal again stands at 67%.

One month after the signal, the S&P 500 has been up an average of 3.05%, which is 4.12 times the mean for all 22-day periods. And stocks have been higher after 83% of the signals.

Three months later, the S&P’s average gain is 4.63% vs. 2.09% and stocks were higher 37 out of 48 times.

Six months after a breadth thrust buy, the S&P advanced 10.53% on average, which is more than double the 4.25% average gain for all six-month periods – with stocks advancing 87.5% of the time.

One year later, the S&P sports a mean return of 16.54% versus 8.73% for all 252-day periods – and stocks were higher 47 out of 48 times. I.E. Stocks were higher one year after the “breadth thrust” signal 98% of the time. Pretty good signal, eh?

Yes, it is definitely true that “thrust” signals have become more frequent since the Great Recession. Since 2008, there have been 20 breadth thrust buy signals. And it is indeed worth noting that there were only 28 such signals from 1947 through 2007. The increased frequency of breadth thrust buy signals can be blamed on high-frequency trading, the advent of ETFs, etc.

However, the good news is the effectiveness of the breadth thrust signal appears to remain solid. For example, one month after the signal, the S&P was higher 2.58% on average versus 0.74% for all 22-day periods. And stocks were higher 85% of the time.

One year after the signals that occurred since 2008, the S&P has been higher 100% of the time, sporting an average gain of 15.6% (versus 8.7% for all 252-day periods). Not bad, not bad at all.

So, from my seat, it is fairly safe to say that the odds would seem to favor the bulls when a rally in stocks is accompanied by a “breadth thrust.”

The Problem Is…

Now for the bad news. According to NDR’s computers, the last breadth thrust buy signal occurred on 11/17/2016. And while the signal produced returns that were largely better than average – and positive across all time-frames measured – the signal has now expired.

As such, one can argue that the market’s momentum has waned and that after a long run higher, it could be time for the bulls to take a break. In fact, the last two times there was a “break” in the string of breadth thrust buy signals – 2010 and 2015 – the “mini bears” of 2011 and 2015/16 ensued.

So… If you find yourself firmly in the bull camp these days, you should probably be rooting for the bulls to find a way to get some “oomph” behind an advance – and soon. If not, it might soon be time for a break in the action and for some of that long-lost volatility to return.

Thought For The Day:

You don’t control your fate, but you do control the formation of your character. -Rod Dreher

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Economy

      3. The State of the Earnings Season

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

Ms. Market Sticking To The Script

Good Monday morning and welcome back. It is my sincere hope that everyone enjoyed the Thanksgiving holiday and the long weekend. But with the end of 2017 in sight, it’s time to buckle down and get back to work. As usual, let’s start the week with a look at 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.

Executive Summary: My Take…

Ms. Market stuck to the Thanksgiving script last week by advancing around the holiday. The fact that the S&P 500 finished at new all-time highs says that the bulls remain in charge of the game and should be given the benefit of any doubt. And with most of our short- and intermediate-term indicators in good shape, a buy-the-dips game plan should continue to work. However, since one of the primary jobs of a risk manager is to avoid falling victim to complacency, I will note that my favorite longer-term, big-picture models (shown on the Primary Cycle board) suggest that this is not exactly a low-risk environment. Yes, this is due primarily to the sentiment and monetary indicators, where a “yea, but” or two can definitely be applied. However, with the current bull run quickly approaching its 2-year anniversary, we should probably be on the lookout for something to come out of the woodwork and change the game – at least from a short-term perspective. In other words, a pullback/correction – or at the very least, a sloppy phase – is probably to be expected at some point.

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:

  • Not surprisingly, the short-term Trend Model improved to positive this week.
  • The move to new all-time highs caused both the short- and intermediate-term Channel Breakout Systems to flash a fresh buy signals
  • The intermediate-term Trend Model remains solidly positive
  • The long-term Trend Model continues to sport a bright shade of green
  • The Cycle Composite points higher again this week.
  • The Trading Mode models confirm the market is trending higher

The State of Internal Momentum

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


View Momentum Indicator Board Online

Executive Summary:

  • Both the short- and intermediateterm Trend and Breadth Confirm Models are positive to start the week
  • The Industry Health Model continues to suggest that leadership is not broad-based. This suggests that the current bull phase is aging.
  • The short-term Volume Relationship has improved to neutral to start the week. However, the bulls would prefer to see this model in the outright positive zone here.
  • The intermediate-term Volume Relationship remains in good shape. Not great, but definitely good.
  • The Price Thrust Indicator reversed course last week and is now positive.
  • The Volume Thrust Indicator moved up to the high end of neutral this week and is on the verge of turning green.
  • The Breadth Thrust Indicator upticked to positive last week.
  • All in, the momentum board is in pretty good shape for a late-stage bull phase.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks are once again modestly overbought. From here, the key will be whether or not the bulls can maintain an overbought condition without giving in to another pullback.
  • From an intermediate-term view, stocks are overbought, but not at the extreme level seen over the past month.
  • The Mean Reversion Model remains stuck in neutral, which is indicative of the low volatility environment.
  • The short-term VIX indicator is technically still on a buy signal. However, a slight uptick in volatility will cause the short-term signal to flip to a sell.
  • Our longer-term VIX Indicator also remains on a buy signal.
  • From a short-term perspective, the market sentiment model remains in the neutral zone this week.
  • The intermediate-term Sentiment Model managed to peek its head up into the neutral zone this week where stocks have been able to post decent returns historically.
  • Longer-term Sentiment readings continue to sport a bright shade of red. This is an indication of 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 composite model upticked a smidge last week and is now dead-neutral.
  • The Relative Monetary Model continues to sport a bullish reading for the second week in a row. This remains a positive for the bulls.
  • Our Economic Model continues to suggest a strong economic growth environment.
  • The reading of our Inflation Model continues to fall with the model now suggesting moderate disinflationary pressures.
  • The Absolute Valuation Model remains a problem from a big-picture standpoint. ‘Nuf said.
  • Our Relative Valuation Model remains in the neutral zone. However, the model reading does appear to be slowly working its way to the overvalued zone.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, remains something to watch here. The model reading is currently in the lower part of neutral and as such, is at risk of flashing a sell signal. But so far, the model says to stay with the bulls.
  • We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model is positive but has slipped a bit within the positive zone recently.
  • The Risk/Reward model upticked within the neutal zone last week. This model suggests that sentiment and monetary conditions are reasons for a bit of caution here.
  • The newly expanded External Factors model includes a total of 10 indicators ranging from earnings, yields, sentiment, monetary, economic, and volatility. The current model reading is high neutral. However, the fact that this model is neutral should be viewed as a modest warning flag.

Sample Risk Exposure System

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

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

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


View Sample Exposure Model Online

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

Thought For The Day:

Make peace with the past so it won’t screw up the present. -Regina Brett

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Earnings Season

      3. The State of the Economy

Indicators Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Is The Exuberance Rational This Time Around?

Just when you thought it might be time for stocks to pull back and for traders to perhaps rethink the low-volatility, steady march higher, the major indices blasted to fresh all-time highs yesterday. Just when you thought tax reform (or a lack thereof) and/or the political problems in Germany might become actual problems, traders decided to jump all over the buy buttons. And just when you thought that valuations in the high yield space might spill over into equities, even the beleaguered small- and mid-cap indices made a break for the border – and an impressive one at that.

So what gives? Why has the market mood flipped from worry to celebration? While we can never know for sure, it looks to me like the market narrative may be changing in a good way. And a little company named Goldman Sachs appears to have had a hand in the move.

You see, Goldman’s chief market strategist, David Kostin, has gone from being fairly cautious on his outlook for the U.S. stock market to something he’s calling “Rational Exuberance.”

Up until this week, Goldman’s year-end target for the S&P 500 stood at just 2400 – or about 7.7% lower than the venerable blue chip index closed Tuesday. And this is before the traditional year-end rally/window-dressing period to come. Oops.

But in a report to clients this week, Kostin suggested that there is plenty of room for stocks to run in the current environment. Assuming that tax reform passes and the economy doesn’t tank, that is.

Kostin writes, “Rational exuberance best describes our forecast for the trajectory of the S&P 500 during the next several years. Earnings drive stocks over time and should support the index rising to 2850 at year-end 2018, 3000 at the end of 2019, and 3100 by the close of 2020, representing a price gain during the next three years of 20%. Our price targets imply a modest expansion in forward P/E multiple to 18.2x at year-end 2018, a flat multiple in 2019, and a contraction to 18.1x in 2020.”

According to Kostin, “rational exuberance” is defined by “above-trend US and global economic growth, low inflation, low albeit slowly rising interest rates, and underlying corporate profits boosted by pending corporate tax reform likely to be adopted by early next year.”

In other words, Goldman believes the market’s fundamentals are going to continue to improve, something that the recent economic reports seem to bear out.

For example, First Trust’s Brian Wesbury opined in this week’s economic missive that “the economy is accelerating.” Here’s an excerpt from the report:

We’ve called it a “Plow Horse” economy, which was our metaphor invented to counter forecasters who said slow growth meant a recession was on its way. A Plow Horse is always slow, but that slowness hides underlying strength – it was never going to slip and fall. Now, the economy is accelerating.

Halfway through the fourth quarter, monthly data releases show real GDP growing at a 3%+ annual rate. If that holds, it would make for three consecutive quarters of growth at 3% or higher. Believe it or not, the last time that happened was 2004.

Last week saw retail sales, industrial production, and housing starts all come in better than expected for October, the latter two substantially better.

And while retail sales grew “just” 0.2% in October, that came on the back of a 1.9% surge in September. Overall sales, and those excluding volatile components like autos, gas and building materials, all signal a robust consumer.

The WSJ.com also chimed in on the subject this week. The following was part of Monday’s “Breakfast Briefing”:

Projections for U.S. economic growth from two Federal Reserve banks have risen in recent weeks. The Federal Reserve Bank of New York on Friday forecast that gross domestic product will rise 3.8% in the fourth quarter, up from a forecast of 3.2% a week earlier.

A separate measure from the Federal Reserve Bank of Atlanta forecast 3.4% growth last week. Research firm DataTrek noted that the rival forecasts are outpacing projections from human economists, who on average expect 2.7% growth for the quarter.

Even if the less optimistic Atlanta Fed model is correct, it would be the best quarter for the U.S. economy in more than three years.

Next, let’s toss in the better than expected readings from the likes of the Conference Board’s LEI. In October, the Index of Leading Economic Indicators surged 1.2%, which was well above the consensus estimate for a gain of 0.9% and was the biggest increase since December 2010. Additionally, the previous month was revised up to +0.1% from -0.2%. Oh, and nine of the ten LEI components made positive contributions to the index.

I know, I know, this is REALLY geeky stuff. And for that I apologize. But when you start to see this type of confluence of positive inputs on the economic front, it is hard for market geeks like me to curb their enthusiasm.

Here’s the bottom line. Unless the folks in Washington manage to screw up royally between now and the end of the year on the tax reform front, all of this positive fundamental stuff could continue to move the needle on the market’s exuberance scale.

Here’s hoping that things stay “rational” instead of getting out of hand. But then again, that never happens on Wall Street, right?

Finally, it is my sincere hope that everyone enjoys a wonderful Thanksgiving holiday. See you next week.

Thought For The Day:

He has not learned the lesson of life who does not every day surmount a fear. -Ralph Waldo Emerson

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Earnings Season

      3. The State of the Economy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Will Low Volatility Mean Lower Risk Next Time?

Well, it’s official. According to Ned Davis Research, this is now the longest period in history without the S&P 500 experiencing a correction of 3% or more. For those of you keeping score at home, NDR tells us that as of Monday’s close, it has now been 262 market days since the last time the S&P pulled back by at least 3%. The current run breaks the previous record of 256 days set back in 1995.

To put this feat into perspective, consider that since 1928, the S&P has experienced a correction of at least 3% every 22 trading days (or about once a month) on average. It is for this reason that pullbacks of 3% or more are often referred to as “garden variety” affairs.

In case you were wondering (I was), this is also the 4th longest period in history without a 5% correction, the 10th longest stretch without a 10% correction, and the 2nd longest span since early-1928 without a 20% correction (aka a “bear market”) for the S&P 500.

When these fun facts are added to the market’s lofty valuation levels – many of which are either near or above historic highs – it is little wonder that so many financial advisors are nervous about the outlook for the stock market these days.

Sure, the economy appears to be picking up steam. Yes, earnings are strong. It is true that rates are low and inflation doesn’t appear to be a threat. And no, the Fed isn’t likely to go on the war path anytime soon. Thus, it is fairly easy to argue that the market’s underlying fundamentals are pretty darn good.

Yet, investors and advisors alike remain nervous. The bottom line is nobody wants to get fooled again. No one ever wants to watch their 401K turn into a 201K the way they did during the crisis.

So, what have investors/advisors done to try and take less risk during this long bull run? From my seat, it appears they’ve plowed money into what have historically been lower risk plays such as high dividend paying companies and the so-called “low volatility” areas.

In fact, “low volatility” has become one of the popular factor-plays in stock picking. This is probably due to the fact that the low vol space has outperformed the broad market. According to PIMCO, the low volatility factor beat the CRSP/Compustat universe of U.S. stocks by 1.6% per year from 7/31/1968 through 6/30/2017.


View Larger Image Online

And as I’ve detailed in previous missives, the folks at BlackRock contend that focusing on the low volatility factor can reduce risk over time.

So, it is little wonder that investors who are nervous about the stock market would choose a low volatility approach.

The Fly in the Ointment

Such an approach has become very popular these days. Very, very popular.

So popular, in fact, that, according to PIMCO, the valuation measure for the low volatility factor currently resides in the 88th percentile.

As the chart below illustrates, the valuation level for the “low vol” factor is even higher (a lot higher) than the momentum factor – where the go-go stocks like the “FANGs” can be found.


View Larger Image Online

In their research report dated November 2017, PIMCO suggests that “valuations matter” when considering factor investing. “An expensive starting point reduces future return prospects,” the report contends.

My point on this fine Tuesday morning is one needs to beware of crowded trades – especially when they reach extremes. In other words, if the bears were to find a reason to occupy Wall Street for a spell in the near future, those low volatility and high dividend plays may not provide the protection that is expected. I can even argue that the opposite might even occur if “the crowd” heads to the exits in these ETFs – all at the same time.

Is this a reason not to employ low volatility or high divy factors in portfolios? No, absolutely not. However, it is yet another good reason to diversify your investing approach in a modern fashion.

Thought For The Day:

The most rewarding things you do in life are often the ones that look like they cannot be done. -Arnold Palmer

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Earnings Season

      3. The State of the Economy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Headline Risk Leads To Sloppiness, But So Far, So Good

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

The State of the Trend

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


View Trend Indicator Board Online

Executive Summary:

  • The short-term Trend Model remains neutral this week. 
  • The short-term Channel Breakout System produced a sell signal by a very slim margin last week. A close above 2597 would turn this indicator green next week. 
  • Despite the recent waffling, the intermediate-term Trend Model is in good shape. 
  • The intermediate-term Channel Breakout System was unfazed by the recent weakness and remains on a buy signal. A close below 2544 would be a cause for concern. 
  • The long-term Trend Model is also solidly positive. 
  • After a protracted period of projected weakness, the Cycle Composite begins to point higher here. 
  • The Trading Mode models continue to point to a trending market environment.
  • So far at least, the current sloppy action appears to be a “pause that refreshes.”

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:

  • After spending some time in negative territory, the short-term Trend and Breadth Confirm Model flipped back to positive late last week. However, this indicator is very sensitive and could easily change. 
  • Our intermediate-term Trend and Breadth Confirm Model has done a good job calling the overall environment this year and remains green this week. 
  • The Industry Health Model continues to struggle in the neutral zone. This is an indication that market breadth is not as strong as it normally is during bull market rallies. 
  • The short-term Volume Relationship model slipped to negative last week as down volume has outpaced up volume over the last month. 
  • However, the intermediate-term Volume Relationship remains on a buy signal. 
  • The reading of the Price Thrust Indicator took a bit hit last week and is now solidly negative. This tells us there is little upside momentum present here. 
  • The good news on the momentum front is both the Volume and Breadth Thrust Indicators remain in the neutral zone. Thus, I conclude that while upside momentum has slipped, there isn’t much in the way of downside momentum at this time.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks are neither overbought nor oversold. 
  • From an intermediate-term view, stocks remain in overbought territory. However, the extreme overbought condition has largely been worked off recently. 
  • The Mean Reversion Model continues to suggest that neither team has a strong edge. 
  • The short-term VIX indicator gave a buy signal last week. 
  • Our longer-term VIX Indicator confirmed with a buy signal of its own last week. 
  • From a short-term perspective, market sentiment is now dead neutral. 
  • The intermediate-term Sentiment Model slipped back into negative territory last week. 
  • Longer-term Sentiment readings point to a great deal of 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:

  • There was no change in Absolute Monetary conditions last week – the indicator remains neutral. 
  • However, the Relative Monetary Model popped back up into the green zone last week. 
  • Our Economic Model continues to suggest a strong economic growth environment. 
  • The Inflation Model also perked up last week, suggesting a mild disinflationary environment is underway – this has historically been positive for stocks. 
  • The Absolute Valuation Model has improved ever-so slightly over the past 3 quarters but remains at very high levels. This suggests that risk remains high. 
  • Our Relative Valuation Model remains neutral but contineus to move toward the overvalued zone.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, remains on a buy signal. However, the model reading has slipped to neutral in the past couple weeks. This remains something to watch. 
  • We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model is positive. However, the model is starting to wobble at bit from very high readings. 
  • The Risk/Reward model also remains on a buy signal, but continues to struggle with the state of the sentiment and valuation indicators. 
  • The newly expanded External Factors model includes a total of 10 indicators ranging from earnings, yields, sentiment, monetary, economic, and volatility. The current model reading is high neutral.

My Takeaway…

After ignoring the traditional seasonal weakness during the Sept – Oct period by marching to a series of new highs, it is not surprising to see some sloppy action in the stock market here. In my opinion, the action is largely tied to the headline risk associated with tax reform. The good news is that, so far at least, there hasn’t been any real damage done to the market from a technical standpoint or to the internal indicators. So, with plenty of time left on the tax reform deadline clock, we should probably expect more of the same in the coming weeks.

Sample Risk Exposure System

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

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

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


View Sample Exposure Model Online

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

Thought For The Day:

You’ve got to go out on a limb sometimes because that’s where the fruit is. -Will Rogers

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Earnings Season

      3. The State of Fed Policy/Leadership

      4. The State of the Economy

Indicators Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Is That Weakness Creeping In?

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

The State of the Trend

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


View Trend Indicator Board Online

Executive Summary:

  • Although the market has only see two down days, the short-term Trend Model has slipped to neutral. 
  • The short-term Channel Breakout System remains positive as long as the S&P 500 stays above 2565 this week. 
  • Although the bears are coming out of the woodwork to proclaim the end is near, the intermediate-term Trend Model is still in good shape. 
  • The intermediate-term Channel Breakout System remains positive above 2544 this week. 
  • The long-term Trend Model also remains solidly positive at this time. 
  • The Cycle Composite points lower again this week before starting to turn higher. 
  • The Trading Mode models suggest that this remains 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 as breadth had been weakening prior to the blue chip indices starting to falter. 
  • However, the intermediate-term Trend and Breadth Confirm Model continues positive. 
  • The Industry Health Model didn’t move much last week and remains neutral. 
  • The short-term Volume Relationship has also fallen to neutral. This is another sign that market’s internal action has not been as strong as the blue chip indices have indicated. 
  • The intermediate-term Volume Relationship is in good shape. 
  • The Price Thrust Indicator fell into the negative zone last week. 
  • The Volume Thrust Indicator actually improved to neutral last week. 
  • The Breadth Thrust Indicator also slipped to negative last week.
  • Although the S&P and DJIA remain very close to all-time highs, the underlying momentum indicators have weakened considerably.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks remain overbought. 
  • From an intermediate-term view, stocks remain very overbought. 
  • There hasn’t been enough volatility recently to trigger moves in our Mean Reversion Model. So, the model is stuck in neutral. 
  • With a modest uptick seen in volatility, the short-term VIX indicator is now in a position to trigger a buy signal should the VIX decline in the near-term. 
  • Our longer-term VIX Indicator has issued a sell signal. 
  • From a short-term perspective, the market sentiment model has reversed and is now neutral. 
  • The intermediate-term Sentiment Model has also reversed course and moved into the neutral zone – albeit by a slim margin. 
  • Longer-term Sentiment readings remain very 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 remain neutral – but at the lowest readings of the year. 
  • The Relative Monetary Model also remains neutral. 
  • Our Economic Model continues to suggest strong economic growth. 
  • The Inflation Model continues to fall within the neutral zone and is quickly approaching the “low inflation pressures” zone. 
  • The Absolute Valuation Model has seen some modest improvement over the past two quarters but the valuations remains elevated. 
  • Our Relative Valuation Model has fallen a bit recently. However, the overall reading remains in the neutral zone.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, remains on a buy signal but the model reading itself slipped into the neutral zone again last week. 
  • We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model is positive. 
  • The Risk/Reward model continues to struggle with the monetary and sentiment situation. As such, the model reading is stuck in neutral. 
  • The new, expanded External Factors model includes a total of 10 indicators ranging from earnings, yields, sentiment, monetary, economic, and volatility. The current model reading is high neutral.

My Takeaway…

If one focused their attention on the action of the Russell 2000 small cap index, the weakness seen in many of our models would make sense. However, with the S&P 500 just a couple days from its most recent highs, the divergence between the momentum boards and the price action is surprising to see. The bottom line appears to be that the underlying market indicators are not as strong as the blue-chip indices might suggest. And with stocks having avoided any kind of sell-off for months now, the bears contend that it is time to pay attention to the current price/momentum divergences. Time will tell on this score. But I will say that the dip that many investors have been hoping for may be underway here.

Publishing Note: I am traveling the rest of the week and have some very early commitments so I will publish reports as my schedule permits.

Sample Risk Exposure System

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

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

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


View Sample Exposure Model Online

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

Thought For The Day:

Life is the sum of all your choices. -Albert Camus

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Earnings Season

      3. The State of Fed Policy/Leadership

      4. The State of the Economy

Indicators Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

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

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