As the clock winds down on what little time remains on the 2019 calendar, I think we can all agree that both the year and the recent joyride to new highs have been impressive.
Frankly, I don’t know of anyone who called for stocks to rally 30% at this time last year or for the indices to move up in a straight line at the beginning of October. But if my trusty solar powered calculator is correct, the S&P 500 has advanced +11.75% since October 2nd. Impressive indeed.
To be sure, the current rate of ascent is unsustainable. As such, just about everyone in the game is now preparing for some sort of a pullback, a correction, a sloppy phase, or at the very least, a pause in the rally.
Yes, the indicators are in darn good shape and I can argue that we should expect the global economy to perk up a bit going forward thanks to the Phase One trade deal. But if there is anything I’ve learned since I entered this business in 1980, it is that markets don’t move in a straight line for very long.
Well, unless there is some new theme to discount, of course (think tax cut talk in 2017). So, since there isn’t any real plan for new tax cuts, more rate cuts to look forward to, or a breakthrough trade deal to kick start economic activity, I think it makes sense to take a breath here.
The good news is that while the portfolios I’m responsible for came into 2019 in a cautious position (I know, I know, what a silly idea! Risk? What risk?) I managed to get in tune with what the market was doing and have enjoyed the recent run in an overweight equities position.
However, one can’t help but feel that this move is getting a little frothy here. Anybody else having flashbacks to January 2018?
Yet at the same time, I can’t buy into the look-out-below arguments our furry friends in the bear camp continue to espouse when looking at the big picture. Let’s face it; the economy is moving forward. Inflation is low. Rates are historically low. The Fed is on hold – likely for some time. The threat of the trade war getting out of control is fading. And it looks like the global slowdown has seen its nadir.
So, with my Primary Cycle Model board (see below) sporting a six-pack of buy-signals and universally green ratings, I continue to believe that we have to give the bulls the benefit of the doubt here. And as I’ve been saying for many moons now, in this environment, any/all dips should be viewed as an opportunity.
Yet from a short-term perspective, I’m of the mind that sitting on one’s hands may be the best play. In English, this means that any buying plans I might have for new positions or for money that needs to be put to work, are on hold – at least until things calm down a bit.
So, at this time I think it’s time to sit back and enjoy the ride while it lasts. To step away from the computers. And to spend much of the next two of weeks focusing on the really important stuff – family, friends, and the holidays.
Here’s wishing you and yours a wondrous Holiday Season!
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.
The is one subtle changes to report on the Primary Cycle board this week. If you look closely, you will find that the average historical return of the Fundamental Factors Model is now below the historical average return for the S&P 500 from late 1979. This is due to the fact that the inflation component nudged its way into the neutral zone, where returns have been a bit below trend. But, as I’ve said a time or twenty this year, the message from the Primary Cycle board is to stay seated on the bull train and use any inevitable pullbacks as buying opportunities.
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.
As mentioned above, there is a change to the Fundamental Factors board this week. As we’ve noted recently, the Inflation Composite has been drifting lower and this week slipped into the neutral zone. While this does NOT mean that inflation is a problem, or that the Fed is likely to take action anytime soon, it does mean that modest inflation pressures continue to build. Sure, the uptick in inflation expectations could be explained away by the tariffs and the trade war, but from my seat, this remains something to watch as we head into 2020.
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 trend board gets a perfect 10 for a second consecutive week as all the models/indicators remain on “buy” signals and all the ratings are positive. And with the traditional Santa Claus rally pushing the S&P 500 to a fresh all-time high to close the week, it isn’t exactly surprising to see all the green on the board. While the trend is clearly the bull’s best friend here, there can be little argument that the ferocious rally that began in early October is due to take a break 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 picked up another green box this week as the Breadth Thrust indicator moved from neutral to positive. At this stage, I see this as confirmation of the current leg higher. But, given the recent big move in price, the fact that the Volume Thrust Indicator refuses to join the party suggests that a pullback or, at the very least, a pause, is to be expected.
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.”
While our Early Warning board still isn’t in a table-pounding position, it is getting darn close. This week, our Mean Reversion model flipped from Buy to Sell, the Short-Term VIX Indicator moved from Hold to Sell, and our Long-Term Sentiment Model also slipped into the red zone. As such, I can argue that stocks are overbought, sentiment is overly positive and as such, the table appears to be set for the bears here. But, if there is anything I’ve learned in my 32 years of managing money, it is that overbought markets can stay overbought and that the table can remain “set” for a counter-trend move for sometimes long periods of time. With that said however, I would not at all be surprised to see the bears stage an attack either before 12/31/19 or in the first week of the New Year. The bottom line is I’d put new buying on hold for a bit here.
Thought For The Day:
A good leader takes a little more than his share of the blame, a little less than his share of the credit. – Arnold Glasow
All the best, David D. Moenning Investment Strategist
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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