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

An Awful Lot of Green And Upgraded Models

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.

Note that we’ve upgraded a few of our models this week (the upgraded models have been highlighted). See “my takeaway” below for more details.

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:

  • With the market closing at yet another all-time high on Friday, it should not be surprising to see all three trend models positive. 
  • Ditto for the short- and intermediate-term Channel Breakout Systems 
  • The Cycle Composite, which is CLEARLY out of sync at the present time, points south again next week before turning green the week after. 
  • The Trading Mode models tell us that stocks remain in a “trending” mode.
  • In summary, sometimes it is best not to overcomplicate things. So, as the saying goes, the trend is your friend here.

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 intermediate-term Trend and Breadth Confirm Models are positive again this week. 
  • The Industry Health Model continues to flirt with positive territory but once again has fallen just shy of the mark this week. 
  • The short-term Volume Relationship remains positive, but the up-volume line has started to roll over a bit recently. While not a problem, this remains something to keep an eye on for signs of weakening momentum. 
  • The intermediate-term Volume Relationship remains in good shape from a near-term perspective. 
  • The Price Thrust Indicator continues to reside in the green. 
  • Although the Volume Thrust Indicator is neutral, the historical return in this mode is above the long-term mean. 
  • Ditto for the Breadth Thrust Indicator. The reading is neutral but the historical return is strong.
  • All in, the momentum board is in good shape and there is not a lot to complain about.

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 reamain oversold. However, since this has been the case since the end of August, the current condition should be viewed as a sign of strength. 
  • From an intermediate-term view, stocks are now very overbought. But again, this is what happens during long uptrends and an intermediate-term oversold condition would likely become a strong buy signal – but everyone knows this! 
  • The Mean Reversion Model remains stuck in never-never land. 
  • The short-term VIX indicator flashed both a sell and a buy on an intraday basis last week. However, on a closing basis, the last signal was a sell. 
  • Our longer-term VIX Indicator remains on its August buy signal. 
  • From a short-term perspective, the market sentiment model remains solidly negative as optimism about the market’s prospects continues to increase. 
  • The intermediate-term Sentiment Model is also negative. 
  • Longer-term Sentiment readings show extreme complacency and high levels of optimism.

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:

  • With rates trending higher since early September, absolute monetary conditions continue to weaken within the neutral zone. 
  • The Relative Monetary Model is also holding in the neutral zone this week. 
  • In order to provide a better “external” view of the market environment, we have switched to an economic model designed to indicate the current growth rate of the economy. Currently the model suggests “strong” economic growth. 
  • The reading of our Inflation Model continues to slide and while still neutral, it is very close to moving into the “low inflation” mode – which has historically been quite positive for the stock market. 
  • The Absolute Valuation Model remains elevated. However, we should note that the model reading continues to trend lower as earnings are growing at a faster pace than stock prices. 
  • Our Relative Valuation Model remains in the neutral zone due to the historically low level of rates.

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. 
  • 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 recently moved up into the positive zone, where it remains this week. 
  • 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…

With the stock market marching higher, I decided this was a good time to upgrade some of our models (due to the fact that the new models wouldn’t impact the board readings to any great degree). So, this week, I am VERY pleased to announce that we have new, upgraded models in the areas of economics, the “state of the tape,” and “external factors.” All three model changes represent significant improvements as each utilizes the latest in multi-factor, multi-methodology, model building techniques. The end result is I believe the “Primary Cycle” board now represents a “best of the best” in terms of my favorite models designed to provide the overall outlook for the market on an intermediate-term (3-9 months) basis. In my opinion, the Primary Cycle board really says it all here as the bottom line is (a) stocks are in a mode that has produced returns that are above the historic trends and (b) the outlook remains constructive.

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:

Fear makes the wolf bigger than he is. -German proverb

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

Indicator Review: Looking For Confirmation

Good morning. Sadly, the first week of October starts with the news of the deadliest gunman attack in U.S. history. So, let me first say that our thoughts and prayers go out to the victims, the injured, and all those traumatized by the sickening attack that occurred in Las Vegas last night.

My second thought this morning may not win me many friends as I normally try to avoid any political commentary in my morning market missives. However, in light of this event, I simply have to say it; why on earth these types of weapons available for purchase by the public?

To be sure, this type of event makes it tough to focus on mundane things like investing. However, the stock market will open in less than an hour, so let’s go ahead and review 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 is back to positive with the S&P closing a fresh all-time highs. 
  • The short-term Channel Breakout System remains on a buy signal. This system’s stop point stands at 2488 to start the week. 
  • The intermediate-term Trend Model is also positive. 
  • The intermediate-term Channel Breakout System did a great job issuing a buy signal on 8/22. The system would require a drop below 2443 to leave the positive zone. 
  • The long-term Trend Model remains solidly green. 
  • The Cycle Composite remains negative and is clearly out of sync from a short- and intermediate-term perspective at this time. 
  • The Trading Mode models are not yet convinced that the trend is “in gear” but one of the models is positive and the other two are moving in the right direction.
  • In sum, as the saying goes, the most positive thing a market can do is make new highs. Now if the Dow and NASDAQ 100 would just confirm.

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 intermediate-term Trend and Breadth Confirm Models are positive. 
  •  
  • The Industry Health Model continues to waffle in the moderately positive zone. As I’ve said many times, I would prefer to see this model in an outright positive mode. 
  • The short-term Volume Relationship remains negative and is not improving here. While the indicator could certainly turn in the near-term, this is a nagging concern 
  • The intermediate-term Volume Relationship has upticked and is improving. 
  • The Price Thrust Indicator remains positive. 
  • The Volume Thrust Indicator continues with a neutral reading. But we should note that the historical return in neutral is fairly strong. 
  • The Breadth Thrust Indicator remains positive this week.
  • From a momentum perspective, the bottom line is things are pretty good. However, I would like to see the volume relationship model confirm the overall message in the near-term.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks are once again overbought. However, it has been a more than a month since the S&P was oversold and as such, the bulls will argue that this is becoming a “good overbought” condition. 
  • From an intermediate-term view, stocks are have reached an overbought condition as well. However, we prefer for these indicators to reverse from an extreme position before turning negative. 
  • The Mean Reversion Model 
  • The shorter-term VIX Indicator has issued a sell signal while the intermediate-term model’s last signal was a buy. 
  • From a short-term perspective, market sentiment is become more optimistic but has not yet reached a level that is considered negative. 
  • The intermediate-term Sentiment Model remains negative and the indicator hasn’t budged. 
  • Longer-term Sentiment readings are worsening and approaching the lowest levels of the year. 
  • Yes, stocks are now overbought from short-, intermediate-, and long-term time frames. But it is important to remember, that overbought conditions can remain in effect for long periods of time when the bulls are running.

The State of the Macro Picture

Now let’s move on to the market’s “external factors” – the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.


View External Factors Indicator Board Online

Executive Summary:

  • Absolute Monetary conditions continue to weaken with the recent spike in rates. 
  • But… the Relative Monetary Model remains upbeat. The divergence between the two models has to do with the overall level of rates. 
  • Our Economic Model (designed to call the stock market) issued a sell signal last week. However, I note that the model designed to “call” the economy remains positive. 
  • The Inflation Models continue to show weakening inflation pressures. 
  • The Absolute Valuation Model remains negative. However, we should recognize that the trend of the model reading is slightly down. As such, one can argue that valuations are improving – albeit from extreme levels. 
  • On the other hand, our Relative Valuation Model continues to improve and is very close to turning positive.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, remains positive after giving a whipsaw signal earlier in the year. 
  • The overall message from “the tape” remains constructive, but it could be better with stocks at all-time highs. 
  • The Risk/Reward model continues to suggest this is not a low-risk environment 
  • The External Factors model sums things up nicely here from a big-picture perspective. While there are concerns, this composite of external indicators remains green.

My Takeaway…

I think the takeaway from this week’s indicator review is that despite the confluence of “issues” the bears continue to talk about, the market remains at all-time highs. Some will argue that this represents a classic case of stocks climbing a wall of worry. And with the majority of our indicators in decent shape, I can concur with this analysis. However, there are indeed some chinks in the indicator armor here. Of course, these problem areas could also be resolved with some time. So, with very positive seasonality just around the corner, it is probably a good idea to give the bulls the benefit of the doubt here and to continue to buy any/all dips.

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:

It requires less character to discover the faults of others, than to tolerate them. -J. Petit Senn

Current Market Drivers

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

      1. The State of Geopolitics

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

      3. The State of the Trump Administration

      4. The State of Fed Policy

Indicators Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Bulls Ignore Seasonality and March On

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

NEW SAMPLE EXPOSURE MODEL:
Over time, we have received numerous requests for suggestions on how readers might utilize the indicators/models shown in this report. Thus, we have developed an example of a “model of models” approach to determine longer-term exposure to market risk. Please note that this is merely an example of how these indicators can be used and is neither a recommendation or the positioning of any specific investing strategy. The idea is to illustrate how a disciplined approach may help one stay in tune with the “message” of the models/indicators.

In 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.

We’ve included a brief summary of the indicators/models used at the end of the report. It is our sincere hope that you find the upgrades to our weekly summary of interest.

The State of the Trend

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


View Trend Indicator Board Online

Executive Summary:

  • The short-term Trend Model weakened a bit last week but remains moderately positive 
  • Both the short- and intermediate-term Channel Breakout Systems remain on buy signals. However, a break below 2490 next week would trigger a sell on the short-term trading system. 
  • The intermediate-term Trend Model remains solidly green and the trend that began in November 2016 remains intact. A break below 2417 on a weekly closing basis would turn the model negative. 
  •  
  • The long-term Trend Model remains on a buy signal that was given in March 2016. 
  • The Cycle Composite continues to point lower this week and remains largely negative through the middle of October. However, it is worth noting that the market is diverging from the cycle projection at this time. 
  • The Trading Mode models continue to point to a mean reverting environment. To me, this indicator alone continues to be a reason to take a bit less risk.

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 is positive. 
  • Our intermediate-term Trend and Breadth Confirm Model is also positive. This tells us the bulls still have the upper hand. 
  • The Industry Health Model continues to waffle in the moderately positive zone. 
  • The short-term Volume Relationship remains negative. This indicator being negative gives me pause. 
  • The intermediate-term Volume Relationship has been improving over the last month. However, the longer-term trend of Demand Volume remains a concern. 
  • The Price Thrust Indicator remains green. 
  • The Volume Thrust Indicator is stuck in neutral. 
  • The Breadth Thrust Indicator is also positive. As such, this trio of indicators has to be viewed as moderately positive overall.
  • Overall, the momentum board looks to be in pretty good shape and for me, this means the bulls deserve the benefit of the doubt.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks are overbought. While not a sell signal on its own, this means that the risk of a correction is elevated. 
  • From an intermediate-term view, stocks are technically neutral, but very close to overbought territory. 
  • The Mean Reversion Model continues to suggest that the market is not in a trending mode. 
  • The VIX Indicators are conflicted here. 
  • From a short-term perspective, market sentiment is flip-flopping in the neutral zone. 
  • The intermediate-term Sentiment Model remains solidly negative. 
  • Longer-term Sentiment readings are also quite negative. 
  • The early warning board is clearly waving a yellow flag. This does NOT mean that stocks will decline. It merely means that the “table is set” for the bears if they can find a reason to do some selling.

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 are currently sliding back in the neutral zone. 
  • The Relative Monetary Model remains positive, but the model has been pulling back a bit. 
  • Our Economic Model (designed to call the stock market) has slipped back into the negative zone this week. Recall that this model was out of sync with the market for much of the recent rally. However, this remains something to watch going forward. 
  • The Inflation Model continues to move lower within the neutral zone. 
  • The Absolute Valuation Model is the same – very negative. 
  • Our Relative Valuation Model continues to improve and is actually very close to flipping to positive.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, is back to positive this week – but only by a slim margin. 
  • The Tape models continue to favor the bulls. 
  • The Risk/Reward model turned positive briefly last week but finished back in the neutral zone. 
  • The most positive development in the last month has been the External Factors model turning green. And the good news is the model continues to improve.

My Takeaway…

The bulls argue that the trend is their friend and since the S&P 500 made fresh all-time highs last week, the market is clearly in a positive mode. On the other sideline, the bears contend that momentum is anything but robust, the trend is long in the tooth, seasonality is ugly for another month or so, valuations are extreme, the last meaningful correction was eons ago, and earnings growth will likely slow. My take is that the cyclical bull trend that began in February 2016 is mature and that risks are elevated. However, the bulls remain in control and if they can continue to thumb their noses at the negative seasonality, we should probably expect the year to finish on a positive note.

Sample Risk Exposure System

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

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


View Sample Exposure Model Online

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

Thought For The Day:

Beware the barrenness of a busy life – Socrates

Current Market Drivers

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

      1. The State of Geopolitics

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

      3. The State of the Trump Administration

      4. The State of Fed Policy

Indicators Explained

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Bulls Get Benefit of Doubt, But…

It’s a new week, so let’s start things off right with an objective review of my key market models/indicators and see where things 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 order 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 has slipped to neutral – albeit by the slimmest of margins. 
  • The short-term Channel Breakout System remains positive. A break below 2428 early in the week and 2444 later in the week would turn the indicator negative. 
  • The intermediate-term Trend Model is currently positive. However a move below 2450 would cause a change. 
  • The intermediate-term Channel Breakout System continues on its 8/22 Buy signal. A break below 2417 flips the indicator to red. 
  • The long-term Trend Model remains positive. 
  • The Cycle Composite continues to point lower into mid-October. 
  • All three Trading Mode models call this a mean-reverting environment.
  • In sum, we’ll call the trend board modestly positive, but only by a slim margin.

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 intermediate-term Trend and Breadth Confirm Models slipped to neutral last week. 
  • The Industry Health Model remains stuck in the neutral zone 
  • The short-term Volume Relationship continues negative and up-volume is now at the lowest level seen since mid-2014 
  • The intermediate-term Volume Relationship continues to struggle with Demand Volume still in a clear downtrend. 
  • The Price Thrust Indicator managed to get up off the mat last week and remains neutral here. 
  • The Volume Thrust Indicator is also neutral to start the week. 
  • The Breadth Thrust Indicator remains positive by a small margin.
  • In sum, the momentum board is largely neutral as there isn’t any real “oomph” in the market 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 may start to “go the other way” — for a trade.


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks are now retreating from an overbought condition. 
  • From an intermediate-term view, stocks are neutral as the movement has been largely sideways for several months. 
  • The Mean Reversion Model has flipped to green and suggests that there is some upside potential here. 
  • The VIX Indicators remain on buy signals but are currently stuck in never-land. 
  • From a short-term perspective, market sentiment has deteriorated, which is a positive. 
  • The intermediate-term Sentiment Model remains neutral 
  • Longer-term Sentiment readings continue to suggest a great deal of complacency in the market, which is a negative. 
  • In sum, the early warning board suggests neither team has an edge here.

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 in the neutral zone this week where historical returns have been mediocre at best. 
  • With rates having moved to the lows for the year, the Relative Monetary Model continues to improve. This model is now solidly positive. 
  • Our Economic Model (designed to call the stock market) is neutral, which has led to returns on par with historical averages over time. It is worth noting that the Economic Model designed to call the economy continues to point to strong GDP growth. 
  • The Inflation Model is now smack in the middle of the neutral zone. This tells us there is little in the way of inflationary pressures in the system. 
  • The Absolute Valuation Model suggests stocks are still very expensive. 
  • However, the Relative Valuation Model continues to improve and is very close to a bullish reading.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, is now heading in the right direction again – but still neutral. 
  • The market’s leadership remains narrow, which causes our “State of the Tape” model to flash yellow. 
  • The Risk/Reward model slipped back to neutral this week. Thus, we need to recognize that this is not a low-risk environment. 
  • The External Factors model remains positive this week, but the model reading is well below that seen at the beginning of the current cyclical bull in early-2016.

The Takeaway…

Let’s see here… the trend of the market is between neutral and moderately positive, momentum is neutral, the early warning board doesn’t give either team an edge, the external factors are modestly positive, and my favorite big-picture models are sporting a largely yellow. At the same time, we must recognize that this is a bull market until proven otherwise. So, given the we remain in a seasonally weak period until at least the middle of October and there are several “issues” in the market these days, this is probably a good time to “chill” from a trading perspective. However, the bulls should be given the benefit of any doubt from a longer-term perspective – and the dips should be bought.

Publishing Note: I am traveling the first half of the week and then preparing for my son’s wedding at the end of the week. So, unless something major occurs in the markets, I will see you next week.

Thought For The Day:

It’s not the load that breaks you down, it’s the way you carry it. -Lou Holtz

Current Market Drivers

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

      1. The State of Geopolitics

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

      3. The State of the Trump Administration

      4. The State of Fed Policy

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

Indicators Suggest Some Caution Still Warranted

Please accept my apologies for the tardiness of this week’s report. We had traveled to Chicagoland for family gatherings over the weekend and I awoke Monday morning to no internet where we were staying. And while the trek home was an adventure thanks to Mother Nature, all is right with my world from a technology standpoint this morning.

While our thoughts and prayers remain with the folks in Houston this morning, geopolitical tensions have returned to the center stage. With North Korea’s boy-leader firing a missile over Japan last night, the concern is that retaliatory measures could be taken and the situation could easily escalate. Where this goes is anybody’s guess, but as far as the market is concerned, it appears that traders are taking a defensive stance in the early going today.

But before we get carried away with speculation, let’s turn our attention to our objective review the key market models and indicators and see where things stand. To review, the primary goal of this weekly exercise is to remove any subjective notions one might have in an effort to stay in line with what “is” happening in the markets. So, let’s get started.

The State of the Trend

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


View Trend Indicator Board Online

Executive Summary:

  • The short-term Trend Model is currently neutral, due at least in part to the recent sideways action. 
  • The short-term Channel Breakout System is currently positive but a break below 2417 would flip it back to negative. 
  • The intermediate-term Trend Model has improved but remains negative. 
  • The intermediate-term Channel Breakout System will require a move to new highs in order for the signal to go back to positive. 
  • The long-term Trend Model remains in pretty good shape. 
  • The Cycle Composite continues to point lower with only intermittent rallies through the middle of October. 
  • The Trading Mode models agree that stocks are back in a mean-reverting environment.

The State of Internal Momentum

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


View Momentum Indicator Board Online

Executive Summary:

  • The short-term Trend and Breadth Confirm Model has improved to neutral but it won’t take much for this model to return to negative. 
  • Our intermediate-term Trend and Breadth Confirm Model remains negative. 
  • The Industry Health Model is still stuck in the neutral zone. I continue to see this as a problem. 
  • Despite the bounce off the recent lows, the short-term Volume Relationship has continued to weaken as the up volume line is now at the lows of the year. 
  • The intermediate-term Volume Relationship model is moving in the wrong direction. 
  • The Price Thrust Indicator, which requires some “oomph” in order to move, didn’t budge during the recent rebound. 
  • The Volume Thrust Indicator is negative. 
  • The Breadth Thrust Indicator has upticked to neutral.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, the recent oversold condition has been worked off. Thus, this mean-reversion tailwind is now still. 
  • From an intermediate-term view, stocks remain in never-never land. 
  • The Mean Reversion Model is still on a buy signal. However, the model is weakening quickly and the most recent signal looks to have been false. 
  • The VIX Indicator is technically on a buy signal at the moment. However, the return of tensions in N. Korea could change this quickly. 
  • From a short-term perspective, market sentiment is now negative, which, is a positive. 
  • The intermediate-term Sentiment Model has returned to neutral. 
  • Longer-term Sentiment readings continue to be a negative input.

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 slipped back to neutral last week. 
  • The Relative Monetary Model continues to improve and is currently at the highest level seen since last summer. 
  • Our Economic Model (designed to call the stock market) remains on a buy signal but weakened a fair amount last week. 
  • The Inflation Model continues to suggest that inflationary pressures are receding. 
  • Our Relative Valuation Model continues to improve, but remains in neutral at this time. 
  • The Absolute Valuation Model remains resolutely negative.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model took a dive last week and is now only slightly above negative. This is something to watch closely. 
  • The Tape continues to be less than robust, which in my book, suggests risks are elevated. 
  • The Risk/Reward model peeked its head into positive territory and remains there this week. 
  • The External Factors model also improved enough recently to turn the box green. From a long-term perspective, this suggests that the secular bull is intact and dips should be bought.

The Takeaway…

My key takeaway this week is that from a big-picture standpoint, not much has really changed. Although some of my models have improved, the lack of green on the momentum board is very telling. And given the combination of negative seasonality and renewed geopolitical issues, I would not be surprised to see stocks test their recent lows in the near-term. The question of the day then is, do the bears have enough working for them to get something meaningful going?

Thought For The Day:

Life is 10% what happens to you and 90% how you handle it. -Unknown

Current Market Drivers

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

      1. The State of Geopolitics

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

      3. The State of the Trump Administration

      4. The State of Fed Policy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Looking To The Weight Of The Evidence

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

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

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

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

Going Back To The Beginning

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

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

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

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

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

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

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

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

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

The Exposure Method

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

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

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

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

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

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

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

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


View Model Online

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

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

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

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

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

Thought For The Day:

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

Current Market Drivers

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

      1. The State of the Trump Administration/Policies

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

      3. The State of Geopolitics

      4. The State of Fed Policy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Have The Bears Found Their Raison d’Etre?

Good morning and welcome back to the land of blinking screens. The key to the markets in the early going on this fine Monday morning is the apparent easing of tensions with North Korea. For example, Central Intelligence Agency Director Mike Pompeo said over the weekend he’d seen “no intelligence” to indicate the U.S. was on the cusp of being attacked. National security adviser H. R. McMaster added, “we’re not closer to war than a week ago.” As such, some of the “risk off” moves that had been put in play last week are being reviewed and stock futures point to a higher open on Wall Street.

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

The State of the Trend

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


View Trend Indicator Board Online

Executive Summary:

  • Not surprisingly, the short-term Trend Model flipped to negative last week on the back of geopolitical tensions and a “risk off” move. 
  • The short-term Channel Breakout System is negative and would require a move over 2491 to turn green. 
  • The intermediate-term Trend Model has moved to neutral. Almost any decline from here would turn this model negative. 
  • The intermediate-term Channel Breakout System is designed to “hold” during sloppy/sideways periods and would require a move below 2410 in the next few days to go negative. 
  • The long-term Trend Model remains positive. 
  • The Cycle Composite points lower again this week. 
  • The Trading Mode models say the “trending environment” has ended and that a “mean reverting” mode is here.

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 intermediate-term Trend and Breadth Confirm Models turned red last week. As you will recall, breadth had been weak for some time.
  • The Industry Health Model is stuck in neutral 
  • The short-term Volume Relationship is now negative. Recall that while up volume had been above down volume, the up volume line had been declining. Last week, the up volume line crossed below the down volume line, turning the model negative. 
  • The intermediate-term Volume Relationship slipped to neutral as demand volume is now in a downtrend 
  • The Price Thrust Indicator flipped to negative last week. 
  • The Volume Thrust Indicator remains negative to start the week. 
  • The Breadth Thrust Indicator confirms the negative environment as well.
  • The bottom line here is the market’s internal momentum was weak before the selling started and is now negative.

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks are now approaching oversold territory. 
  • From an intermediate-term view, the overbought condition has been worked off and is now neutral. 
  • The Mean Reversion Model remains neutral. 
  • The VIX Indicator has spiked and has thus far, not retreated. A sustained increase would suggest that a prolonged move lower could be at hand. 
  • From a short-term perspective, market sentiment is now so bad that it’s good. 
  • The intermediate-term Sentiment Model managed to move out of negative territory and is now neutral. 
  • Longer-term Sentiment readings remain negative. 
  • In sum, the “get ready to go the other way” indicators are starting to set up in the bulls’ favor. They are NOT there yet, but they are moving in the right direction.

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 moderately positive. 
  • The Relative Monetary Model slipped back into the neutral zone last week. 
  • Our Economic Model (designed to call the stock market) remains moderately positive and hasn’t moved in last few weeks. 
  • The Inflation Model continues to fall in the neutral zone. 
  • Our Relative Valuation Model suggests stocks are fairly priced given the level of interest rates. 
  • The Absolute Valuation Model remains SOLIDLY negative.

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, is in good shape. 
  • The Tape continues to muddle along. 
  • There is a lot of movement within the components of the Risk/Reward model, but the model itself remains neutral. 
  • The External Factors model remains in the positive zone, but only by the slimmest of margins.

The Takeaway…

This week saw the market internals weaken considerably in response to the increasing tensions with North Korea. In my opinion, the key takeaway is that market momentum was poor before the price action turned south. This tells me that the table was “set” for the bears if they could find a raison d’etre . The key question at this point is if this decline will reverse quickly – as all declines have recently – or will this become the meaningful pullback that the bears and the historical cycles have been calling for.

Publishing Note: The good news is my office is put together, I have internet, phones, and cable, and I there are only a couple boxes left to explore. The bad news is that completing the moving process may take longer than I anticipated and thus, morning reports may be sporadic this week.

Thought For The Day:

When you get to the end of your rope, tie a knot and hang on. -Franklin D. Roosevelt

Current Market Drivers

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

      1. The State of the North Korea situation

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

      3. The State of Tax Reform

      4. The State of Fed Policy

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.

Dave Moenning

Indicator Review: The Table Appears To Be Set For…

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

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

The State of the Trend

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


View Trend Indicator Board Online

Executive Summary:

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

The State of Internal Momentum

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


View Momentum Indicator Board Online

Executive Summary:

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

The State of the “Trade”

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


View Early Warning Indicator Board Online

Executive Summary:

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

The State of the Macro Picture

Now let’s move on to the market’s “external factors” – the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.


View External Factors Indicator Board Online

Executive Summary:

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

The State of the Big-Picture Market Models

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


View My Favorite Market Models Online

Executive Summary:

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

The Takeaway…

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

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

Thought For The Day:

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

Current Market Drivers

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

      1. The State of the U.S. Economic Growth (Fast enough to justify valuations?)

      2. The State of Earnings Growth

      3. The State of Trump Administration Policies

      4. The State of the Fed

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

David D. Moenning
Chief Investment Officer
Sowell Management Services

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


Disclosures

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

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

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

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

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

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

Advisory services are offered through Sowell Management Services.