Models In Good Shape But Short-Term It’s All About The News
October 7, 2019|3:33pm
Good morning and Happy Monday. The headlines continue to drive the daily action with this morning’s weakness due to (1) news that the Chinese want to limit the scope of trade talks this week and (2) confirmation that there is at least a second whistleblower with a firsthand account of the President’s dealings with Ukraine.
On the other hand, expectations for a rate cut at the end of the month as well as what is viewed as a “Goldilocks” jobs report appear to be keeping the downside action contained. Well, so far at least.
But since it’s the start of a new week, it’s time to put aside my subjective view of the action and review the “state” of our favorite market models. So, without further ado, please join us in this week’s review of the “state of the market.”
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 last week. Although, the recent volatility is starting to take its toll on some of the internal component readings, the message from my favorite big-picture market models remains upbeat.
This week’s mean percentage score of my 6 favorite models slipped to 74.7% from 82.2% last week while the median pulled back to 77.5% from 86.7%.
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.
The Fundamental Factor board was unchanged again last week. And while some of the indicators are moving in the wrong direction – albeit at an ever-so slight rate – the message from this board remains clear: This is a bull market until proven otherwise.
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.
As expected, last week’s break below important support at 2930 brought out the sellers for a while. However, with the prospects for further Fed easing improving, stocks rebounded smartly. The good news from the chart action is that the pesky gap at 2890 from the 8/29 open was finally filled. The bad news is Friday’s gap up open left a hole to be filled at 2911. Looking at the Trend board, the message looks to be largely upbeat. However, the short-term trend remains down and as such, the bulls have some work to do in order to fully regain possession of the ball.
The State of Internal Momentum
Next, we analyze the “oomph” behind the current trend via our group of market momentum indicators/models.
The recent pullback clearly did some damage to the Momentum board as all three intermediate-term oriented thrust indicators now reside in negative territory. However, I wouldn’t view this as an indicator of future weakness but rather the current state of the market. And as I wrote last week, this board is starting to show some strain.
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.”
Once again, the Early Warning board did a fine job of alerting us to the potential for some downside activity. In fact, both the Mean Reversion and VIX models all provided timely sell signals but have all now reversed. And while the board sports a fair amount of green, my thinking is the “easy” mean reversion money has already been made from this move as the S&P is now 96 points, or 3.36% above the intraday low seen on Thursday morning. Thus, my take is the “early warning” conditions are now tilted a bit more neutral.
Thought For The Day:
Right is right, even if everyone is against it; and wrong is wrong, even if everyone is for it — William Penn
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.
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