I’ve said it before, and I’ll say it again. With all of the issues, headlines, tweets, etc., it is a little surprising to see the S&P 500 sitting within a stone’s throw of an all-time high. Some will argue this is the market climbing a “wall of worry.” Others, such as yours truly, see this as traders assuming that stuff like the trade war and BREXIT will eventually be resolved in a positive fashion.
Our furry friends in the bear camp argue that such upbeat positioning in the market means that there is room for downside surprises if things don’t go well. And then the bearishly inclined talk about the important support levels and moving averages that, if violated, will surely mean a second straight Q4 debacle.
While I can certainly appreciate the bear camp’s point of view here, I am of the mind that the fact that stocks are not succumbing to the “fear of what might/could happen” and are looking ahead to brighter days.
Is this the proper outlook or are traders guilty of ignoring the potential risks? We shall see, of course. However, from a near-term perspective, it looks like the earnings parade is the focal point and once again, Corporate America has done a good job lowering the estimates bar to a height that can be easily hurdled.
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 market 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 are no obvious changes to the Primary Cycle board this week. However, I will note that the mean/median scoring for the models slipped a bit for a second straight week. While this isn’t anything to fret too much about or take any action on, it is part of the overall “message” I attempt to glean from my weekly review. And the bottom line is that I would prefer to see more green on the board, the models continue to suggest that it’s a bull market until proven otherwise.
This week’s mean percentage score of my 6 favorite models slipped again to +68.1% from 71.4% last week while the median pulled back to 70.0% from 72.5%%.
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 were also no changes to the Fundamental Factor board this week. Last week we pointed out the decline in our Earnings composite. However, there was some “esplainin” to do here as the change had more to do with the fact that we had expanded the model composite than any real change to the indicators. To review, the composite is now made up of two different models designed to measure the “state” of the earnings picture. One model charts the rate of change of reported earnings. The other model focuses on the drivers of earnings and includes indicators such as U.S. industrial production, the CRB Spot Raw Industrial Material Price Index, the Treasury yield curve, Institute for Supply Management (ISM) indices, corporate bond credit spreads, unemployment claims, and the trend in analyst earnings estimate revisions for the S&P 500. And while the second model is new, it is worth noting that the model, went negative. And history shows that stocks have done poorly when the model score would have been negative. And with the Monetary composite also pulled back a bit, I have no choice but to recognize that the fundamental case has slipped.
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.
Last week, I suggested that readers take the abundance of green on the Trend board with a grain of salt. Turns out that wasn’t great advice as stocks proceeded to advance throughout the week. And while the action definitely “feels” a bit fragile to me given the news-driven nature of this environment, the board continues to give the bulls the edge. Yet, on the other hand, there IS very important resistance overhead. So, stay tuned, this is likely to get interesting…
The State of Internal Momentum
Next, we analyze the “oomph” behind the current trend via our group of market momentum indicators/models.
While it doesn’t happen often, there were also no changes to the Momentum board this week. And although I continue to believe the momentum indicators are a mixed bag, the bottom line here is the average hypothetical historical return continues to be significantly higher than the mean. So, again, the bulls continue to get the edge here.
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.”
About the only thing that DID change this week is the fact that the Early Warning board moved a bit more toward the neutral zone. As I’ve mentioned a time or three, the Early Warning board provides its best signals when the stars are aligned in one direction and across all time frames. To be sure, this doesn’t happen often. But when it does, I call it a “table pounding” situation. And this is definitely NOT one of those times.
Thought For The Day:
You are BRAVER than you believe, STRONGER than you seem… and SMARTER than you think! – A. A. Milne / Winnie the Pooh
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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