That Line In The Sand Again

October 28, 2019|4:28pm


Good day and welcome back to the land of blinking screens.

Breakout or fake out? Despite the impeachment and BREXIT drama, the punk economic numbers, the trade war, the geopolitical issues, the Fed meeting and, of course, the ongoing earnings parade, this is really the only question that matters.

In case you don’t spend your day staring at blinking screens and analyzing charts, the question I’m referring to is whether or not this morning’s break to a new all-time highs on the S&P 500 will hold.

S&P 500 – Dailly

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Point number one here would be that we’ve seen this movie before and so far at least, the crowd doesn’t wind up cheer for long at the end.

As CNBC’s Michael Santoli points out in his weekend report, this is not the bulls’ first try at breaking out of the trading range that has become well entrenched in the broad market since the beginning of 2018.

Santoli found that there appears to be a pattern between the S&P moving to new highs in front of FOMC meetings. And unfortunately for the bullishly inclined, who have the champagne on ice and are once again ready to party, the market has sagged almost immediately after the last 5 fed meetings.

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And for those of you thinking that the earnings season will make the sixth time the charm, Santoli argues that the two biggest declines this year also came during the midst of what appeared to be a better-than-expected earnings season. Argh.

The next point is that the venerable S&P 500 is currently alone in its break for the border. While the NASDAQ and NDX are close, the rest of the major indices including the Dow, Russell 2000 small cap, and S&P 400 mid cap, all have some serious work to do in order to reach new highs.

As such, our furry friends in the bear camp are quick to point out that even if the S&P 500 does manage to break to new highs – and actually stay there for a few days – a technical “non-confirmation” is in play. And until/unless some or all of those major indices confirm the S&P’s move, the bears will stick around and avoid throwing in the towel.

So, will the current move into the Promised Land last and represent of the next bull leg higher? Or will this turn out to be just another fake out/disappointment? Time will tell, of course, but I think most market pros are more than a little skeptical at this phase of the game.

For me, what this means in terms of portfolio management is that it’s okay to give the bulls the benefit of the doubt here. After all this IS a bull market until proven otherwise. But I would also suggest that this is NOT a low risk environment and therefore, one should keep portfolio turbochargers on the sidelines for the time being.

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 was one obvious change to the Primary Cycle board this week and one that is more subtle. The important move occurred in our Risk/Reward model, which improved to Buy from Hold. Next, my so-called Desert Island model’s reading ticked up enough to where the historical return upticked to 16.5% from 10.0%. Thus, I continue to contend that this is indeed a bull market and that our heroes in horns should be given the benefit of the doubt.

This week’s mean percentage score of my 6 favorite models improved to81.7% from +68.1% last week while the median also rose to 81.7% from 70.0%.

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 is also some improvement in the Fundamental Factor board this week as the Monetary Composite ticked higher and moved back to a Buy signal. Unfortunately, however, the move wasn’t enough to push the historical average return above the market’s long-term mean. My takeaway is that the Fundamentals, while not perfect, continue to support an “offensive” stance and any unpleasant dips in stock prices should be bought.

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.

To be sure, the Trend board is currently a healthy shade of green. Yet, given the lack of index confirmation and the fact that this remains a news-driven environment, I can’t help but believe that the trend isn’t quite as strong as the board might lead us to believe. So, for me, this means that it’s fine to stay long the stock market, but we probably shouldn’t get overexuberant here.

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 pretty good shape. And my guess is that the S.T. Volume model will flip to positive today. So, again, my take is that 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.”

As I’ve been suggesting the last few weeks, the Early Warning board does not present a table-pounding setup at this juncture. However, we do need to recognize that the board is moving toward the overbought zone in rapid fashion and some of our indicators that are mean reversion oriented could flash soon. So for me, the bottom line is we need to recognize that a dip, a pullback, a pause, or a test of the breakout (assuming it holds, that is) should be expected at some point.

Thought For The Day:

The two most important days in your life are the day you are born and the day you find out why. –Mark Twain

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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