A New Leg Higher? Or…

November 11, 2019|12:31pm


I’d like to start this week’s missive by wishing everyone a Happy Veterans Day and hoping that we can all take at least a moment to say a silent thank you to those who have kept our country safe for more than 240 years.

Banks and the bond market have the good sense to be closed today, while the stock exchanges are open during this holiday. A fact I discovered many years ago when I awoke late one Veteran’s Day morning, turned on my computer, and wondered why my screens were blinking!

I am going to try and keep this brief as I’ve got a plane to catch. I’m heading to Dallas for NAAIM’s Outlook Conference Monday and Tuesday, where I’m hosting the NAAIM Shark Tank Investing Strategy Competition. I think we have a great lineup of competitors and the event should be fun.

A New Bull Leg?

Looking at the stock market, the question of the day – at least in my mind – is if we are seeing the beginning of a fresh leg in an ongoing cyclical and secular bull move -or- the setup for yet another “breakout fakeout.”

Let’s Review

If you will recall, since January 2018, the stock market has made a series of new all-time highs. First there was the September 20, 2018 high, which was followed by a brief breakout flirtation and then a brutal decline of -19.8% as the world fretted about trade and a Fed overshoot.

Next came the Fed flip-flop, which produced a furious recovery. This move wound up pushing the S&P 500 to a new high on April 30, 2019. But, less than a week later, the market became obsessed with recession fears and the S&P fell -6.8% in a month.

As it became clear that the U.S. consumer hadn’t wavered from its job-induced good mood, the market once again looked ahead to better days and hit a fresh new high on July 28, 2019. What followed, as you might suspect, was an almost immediate reversal, which took the S&P down -6.1% within three short weeks of the most recent high-water mark.

From there, stocks once again recovered and by early September were knocking on the door of new highs again. However, yet another tweet/trade-induced pullback occurred – this time pushing stocks down -4% in short order.

Have Things Changed?

But then it happened (well, I “think” it happened, anyway). Apparently, investors took notice of the facts that the global economic data had stopped going down, that Global Central Bankers were on the case, and that the U.S. economy was still muddling along and nowhere near recession.

From my seat, the bottom line thinking appeared to be that the trade war wasn’t likely to get worse, lower rates were starting to work their magic on the economy, and U.S. consumers, while perhaps a bit concerned about the drama in D.C., appeared to remain in their happy place from a spending perspective.

The end result has been a steady climb for the S&P and NASDAQ indices over the last thirteen months. While the advance may best be described as painstaking, the good news is that we have seen a series of “higher highs and higher lows” along the way.

The Question At Hand

Yet, today’s review of how we got here doesn’t really address the question at hand. So here goes.

My take is that the most recent break for the border “looks and feels” better than those in the past. First, stocks appear to be ignoring the back-and-forth in trade negotiations. For example, while good news did create some enthusiasm last week, the market basically yawned when the White House “walked back” the hope that tariffs would be rolled back as part of the “Phase One” deal.

In addition, this time around, it isn’t just the big tech leaders doing the heavy lifting. Don’t look now fans, but those cyclical names are participating in the fun here. Industrials have stepped lively to a new all-time high. The left-for-dead health care sector is within a stone’s throw of a new high. Heck, even the much-maligned financials are movin’ on up. And with the NYSE A/D line hitting fresh new highs, it is hard to argue that the action should be viewed as bearish.

History Suggests Siding With The Bulls

Next, I’ve seen several reports detailing the historical positives of what transpires at the end of calendar years when the S&P has been up more than 20% at the end of October. If memory serves, history shows that the S&P 500 has advanced into the end of the year by an average of more than 5%. As such, a little something called “performance anxiety” by portfolio managers with cash on the sidelines may be creeping in here.

Yet at the same time, we MUST recognize that stocks are now overbought, and that sentiment is becoming overly upbeat. As such, a pullback would seem to be the next logical move. History supports this idea as the reports on what happens when stocks are up 20% through October also show that the S&P has moved below where it stood on October 31st on five of the seven occurrences.

So, while history suggests that this might be a good time to stay seated on the bull train, there also appears to be hope for anyone looking to “buy the dip” before the holiday spirit takes over Wall Street.

Since it’s the start of a new week, it’s now time to put aside my subjective view of the action and to review the “state” of our indicator boards.

Have a great week!

Weekly Market Model Review

Each week we do a disciplined, deep dive into our key market indicators and models. The overall goal of this exercise is to (a) remove emotion from the investment process, (b) stay “in tune” with the primary market cycles, and (c) remain cognizant of the risk/reward environment.

The Major Market Models

We start with six of our favorite long-term market models. These models are designed to help determine the “state” of the overall market. Put another way, these models indicate which team is in control of the primary trend.

There were no obvious changes to the Primary Cycle board this week. However, there was some nuanced improvement to report as my Fundamental Factors model that focuses on monetary conditions, the economy, earnings, inflation and valuation upticked in terms of the hypothetical average historical return based on the current readings of the indicators. The net result produces a hypothetical average return over 15%, which is well above the average since 1980 of 8.8%.

The State of the Fundamental Backdrop

Next, we review the market’s fundamental factors in the areas of interest rates, the economy, inflation, and valuations.

There was one change to the Fundamental Factor board this week. One of the components of the Earnings Composite upticked from negative to neutral. While this didn’t change the overall reading of the Earnings Composite model, it did boost the historical return from 2.3% to 10.9%, which, in my book, is worth noting. Overall, as I’ve been saying, I believe the Fundamentals continue to support an offensive stance in portfolios.

The State of the Trend

Next, we review the state of the current trend. This board of indicators is designed to tell us about the overall health of the current market trends.

The Price Trend board continues to sport an awful lot of green boxes. The lone holdout continues to be the Trading Mode model, which is comprised of five indicators designed to determine whether stocks are in a trending or mean reverting environment. To date, the model has been reluctant to call the current environment a trending market. However, if the breakout to new highs is confirmed by other indices, we should expect this model to turn green at some point soon.

The State of Internal Momentum

Next, we analyze the “oomph” behind the current trend via our group of market momentum indicators/models.

The Momentum board remains in good shape with only the Volume Thrust indicator not sporting a buy signal. Given that this is an intermediate-term indicator, this too is likely to turn green if the current rally holds. But my bottom line takeaway is that this market has enough positive momentum to sustain the bulls for a while from a big picture point of view.

Early Warning Signals

Once we have identified the current environment, the state of the trend, and the degree of momentum behind the move, we review the potential for a counter-trend move to begin. This batch of indicators is designed to suggest when the table is set for the trend to “go the other way.”

The message from the Early Warning board is now clear. Although I can argue we may be witnessing a “good overbought” condition (where the market gets overbought and stays overbought while it trends steadily higher), the board suggests that the table is now set for a counter-trend move. However, it is important to keep in mind that such moves generally need a “trigger” to get things going the other way. And with the number of trading days left in the year starting to grow thin, I expect the current trend to continue until/unless a bearish “trigger” presents itself and causes traders to rethink the current theme.

Thought For The Day:

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

All the best,
David D. Moenning
Investment Strategist

David D. Moenning


At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned: None

Note that positions may change at any time.

NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and Redwood Wealth and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as investment 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.

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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.

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