Dave Moenning

Out of Sync

I have written many times about the tendency for the market to follow various seasonal patterns. Frankly, it is eerie how often the S&P 500 winds up mirroring these historical cycles. To be sure, the market doesn’t always follow the seasonal patterns and therefore, it doesn’t pay to trade heavily on what history suggests may come next in Ms. Market’s game. However, since I’ve observed that the market does tend to follow cyclical patterns a fair amount of the time, I like to, at the very least, pay attention to what the cycles have to say about both the short- and intermediate-term trends.

As you are likely aware, I follow a composite of historical cycles developed by Ned Davis Research. NDR combines the 1-year seasonal, the 4-year Presidential, and the 10-year decennial cycles in order to create their composite projection for each calendar year. The bottom line is that the cycle composite winds up providing a pretty decent roadmap for the calendar year.

However, Ms. Market is currently making a mockery of the seasonal patterns. Instead of the meaningful decline that was to occur from the beginning of August through late October, stocks have instead “melted up” in a slow, grinding fashion. Take a peek at the chart below and you’ll see what I mean.


View Image Online

To say that the market is currently out of sync with the cycle projection is a bit of an understatement, right?

The question, of course, is, why?

On Wall Street it is said that something everyone knows isn’t worth knowing. In my opinion, this stems from the idea that once an idea becomes overly accepted or popular, it tends to (a) already be “priced in” to the market or (b) become a position that the fast money trader types simply “fade” or “go the other way” with.

So, my explanation for the market’s current divergence from the cycle projection is that (a) everybody on the planet knows that stocks tend to correct in the fall and (b) traders may be fading the trade.

Another thought is that investors are simply focused on the fundamentals at this particular point in time. And with the economy expanding and earnings growing, stocks continue to advance.

Yet another idea is that “performance anxiety” is setting in on Wall Street. With the S&P 500 up more than 14% on the year and the calendar quickly running out of pages, underperforming managers could be moving into “chase mode” where money is placed with the leaders in the hope that these stocks will help them catch up into the end of the year.

And then there is the idea that the market is discounting the benefits of tax reform. Wall Street is already out with projections of what the White House plan will do for earnings on the S&P. The bottom line is that if earnings are expected to get another boost, then prices can follow suit.

My guess is that stocks are benefitting from a pretty strong tailwind right now in the form of earnings growth, performance anxiety, and the expected benefits of tax reform. As such, I can argue that the dips will continue to be bought aggressively (I think yesterday was a good example of this). And with the caveat that stocks could easily pull back a couple percent in the near term for almost any reason, it looks like it may become tough for managers looking to put money to work to find an entry point in the coming two and a half months.

But we shall see. As a reminder, there is still some time left on the cycle composite’s call for a decline and another earnings parade is about to begin. So, stay tuned, this is gonna be interesting!

Thought For The Day:

If you can’t explain it simply, you don’t understand it well enough. – Albert Einstein

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 Economic/Earnings Growth (Fast enough to justify valuations?)

      3. The State of Fed Policy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

My Back-of-the-Napkin Take

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

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

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

What Do the Historical Cycles Say?

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

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

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

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

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

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

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

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

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

What Do My Market Models Say?

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

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

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


View Online

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

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

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

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

Summing Up

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

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

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

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

Thought For The Day:

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

Current Market Drivers

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

      1. The State of Trump Administration Policies

      2. The State of the U.S. Economy

      3. The State of Earning Season

      4. The State of World Politics

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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

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

Looking for More on the State of the Markets?


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Is It Really Time to “Sell in May and Go Away?”

From a near-term perspective, it appears the sideways consolidation phase continues for the broad market while the NASDAQ just keeps on keepin’ on. And with the Comey firing causing a stir in D.C., it isn’t a stretch to assume that the sideways action could stick around awhile.

From a bigger picture standpoint, the question at hand is whether or not the bulls will be able to break out of the trading range that has been in place for nearly 11 weeks. For clues to the answer in situations like these, I like to look at the macro backdrop, the historical tendencies, and my market models.

So, with the markets quiet so far this morning, I’d like to do a quick and dirty, back of the napkin, type of review of the current market situation.

The Macro View

From a macro perspective, I’m of the mind that it is fairly easy to argue both sides at this time. In short, the bulls are betting on blue skies ahead thanks to policy initiatives such as tax reform while the bears point to valuations and the idea that the economic data doesn’t support current levels seen in the market.

From my perch, the bulls would seem to have a slight edge here. Earnings are rising. The jobs market is strong, etc. However, at some point – and the timing is always the hard part – expectations will need to turn into reality. In other words, the hoped-for macro improvement will need to show up in both the economic data and the “E” in the market’s P/E ratio. Thus, the bulls would appear to have a limited amount of rope to work with here because hope can only take markets so far.

Taking a step back even further, I would be remiss if I did not recognize that perhaps the biggest macro factor at the present time is that the stock market remains in a secular bull phase. As such, (a) I’ve learned that the bulls should be given the benefit of any doubt, (b) the dips should be bought, and (c) any bearish action is likely to wind up in the short and shallow category.

Sell in May and Go Away?

Next, let’s look at the historical tendencies of the markets for clues as to what might come next. There are actually two considerations here, the cycles and the “Sell in May” idea.

Sell in May and go away. It’s one of Wall Street’s most popular clichés. And while my memory bank suggests that this tends to be of those rules that works when it works, history shows there is some validity to the approach.

To review, the idea here is to buy stocks on November 1 of each calendar year and then sell to cash on May 1 of the following year. According to the computers at Ned Davis Research, if one had implemented such a strategy, a hypothetical investment of $10,000 beginning in 1950 would have grown to $699,220 before any fees and/or trading costs by the end of 2016. Not bad, eh?

On the other hand, if one had invested $10,000 in 1950 and done the opposite (buying on May 1 and selling on October 31 each year), the hypothetical account would be worth… wait for it… $8,604 at the end of 2016. Ouch.

Therefore, it would appear that the “Sell in May” rule might be a good one. However, my caveat would be to implement such a game only if one has a 60+ year time horizon AND if stocks are in a secular bear cycle. In short, my take on the historical data is this is when such a plan works the best.

At the same time, it is worth noting that the markets have not performed particularly well during the May – October period in the current secular bull cycle. While there has really been no reason to “sell” in May, I note that since 2009 (when the current secular bull began), the S&P 500 has averaged gains of 3.96% during the May – October period and 9.56% in the November – April period.

In addition, the S&P has declined during 3 of the last 8 years from May through October and only once during the November through April time frame. And finally, it is worth noting that the gains seen during the November – April periods have been substantial, with 5 of the 8 occurrences seeing double digit returns.

The takeaway here is that while the calendar would seem to favor the bears in the coming months, the historical odds suggest the idea of buying any dips experienced during the “Sell in May” period.

Tomorrow, we will conclude my back-of-the-napkin review by looking at what the cycle composite projects for the remainder of the year and get to the bottom line of what the models are telling me right now.

Thought For The Day:

Find the good. It’s all around you. Find it, showcase it & you’ll start believing in it. -Jesse Owens

Current Market Drivers

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

      1. The State of Trump Administration Policies

      2. The State of the U.S. Economy

      3. The State of Earning Season

      4. The State of World Politics

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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

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

Looking for More on the State of the Markets?


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.