Happy Monday and welcome back to the game; a game that must be a bit befuddling for the bears at this time.
Think about it. Our furry friends would seem to have an abundance of firepower at their disposal. For example, there is the ongoing trade spat, which seemingly improving with China (or not, depending on the day, of course!), is just getting started with the folks across the pond. There is #GlobalGrowthSlowing, which can’t really be disputed, even by the most ardent bulls. There is the punk manufacturing data here at home. There is the third straight quarterly decline in earnings. There is the threat of recession. There is record negativity seen among investing pro’s in Barron’s most recent Big Money Poll. And now an official impeachment procedure of sorts, which is likely to create some fireworks in Washington as it plays out.
And yet, the S&P, the NASDAQ, and the total market indices all finished the week at all-time highs, with the DJIA not far behind. And don’t look now fans, but the smallcaps, midcaps, banks and industrials are all starting to move up in earnest. If everything is so bad, how can this be happening, a bewildered bear might ask.
I know that I’ve said this a time or twenty over the years, but the key to understanding the current market action, which, again, appears to be simply insane to many, is to remember three key points.
First, stocks look forward, not backward. Second, the stock market can “handle” just about anything once the situation is out in the open. And finally, surprises and uncertainty are what really rocks Wall Street’s boat.
Look Ahead, Not Back
Repeat after me. “The stock market is a discounting mechanism for future expectations.” And from my perch, the bottom line here is that investors are looking ahead to better days. Days when recession isn’t on the table, when economic growth rebounds, when the recent rate cuts work their way through the economy, when the removal of a President isn’t a concern, and when the Fed isn’t cutting rates.
Sure, the bear camp will argue that stocks are currently looking at the future through rose-colored glasses. Yes, the U.S. consumer, which has singlehandedly kept the U.S. economy moving forward, could stop spending on a dime if something bad actually happens. And I will agree that if Europe, China, et al continue to slump that the U.S. might not be immune forever.
But for now, at least, stocks appear to be looking at strong employment, solid consumer stats, decent earnings growth, good-enough GDP numbers, and maybe, just maybe, a turn in the #GrowthSlowing data.
So, given that a lot of stocks have made no progress for nearly two years now (take a peek at the weekly charts of the midcap and smallcap indices for confirmation) while earnings have been rising, I can argue that there is definitely room for advancement.
There’s Nothing New Here
If you think the trade war with China is going to kill the U.S. stock market, think again. The trade spat has been with us for going on two years now. And the bottom line is that investors are moving on.
Wall Street now knows what the impact of the trade war will be as the data geeks have been crunching and re-crunching for some time now. And while the trade war is definitely impacting the economy (sorry Mr. President, the Fed isn’t the enemy here), it does not appear to be enough to send us into recession. And it is the threat of recession that scares the market.
Oh, and with no end in sight to the spat, manufacturers have been busy making other plans. Corporate America is all about making money. So, if changes are needed, changes are made. It’s called moving on.
Are There Any New Surprises?
One might have argued that the impeachment proceedings might bring new surprises and uncertainty to the corner of Broad and Wall. However, the assumptions are that (a) the President will go to trial in the Senate for his less-than becoming behavior and (b) he will not be convicted due to the state of partisan politics.
Next up, Powell & Co. appear to have finally learned how to communicate with Wall Street. And so far, at least, traders like the idea that the Fed is effectively on hold. This means that the Fed doesn’t see big problems lurking and yet took enough action to help the economy get through the trade war.
So, unless/until something changes, there doesn’t appear to be anything causing a great deal of uncertainty. And this is just the way Wall Street likes it – from a big-picture perspective, anyway.
But 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 changes to the Primary Cycle board this week. From my seat, the message from these big-picture, market models is that investors should be positioned either at or above the high end of their equity allocation levels. What if you are currently underinvested, you ask? My plan would be to put money to work into weakness – especially at this time of year. Remember, we have now entered the strongest 6-month period for stocks (according to the Stock Trader’s Almanac) where the vast majority of history’s stock market gains have been generated.
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 no obvious change to the Fundamental Factor board this week. However, I would like to point out that we have expanded our Earnings Composite, which now includes 4 separate models designed to measure the state of the earnings. In sum, as I’ve been saying, I believe the Fundamentals continue to support the idea of keeping your offense on the field.
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 a healthy amount of green. Given that the S&P 500, NASDAQ, and total market indices all scored all-time highs on Friday (with the Dow just a whisker away), the “state” of the trend board isn’t surprising.
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 continued to show improvement last week and remains in good shape. As expected, the S.T. Volume model did indeed flip to positive last week. The only fly in the ointment is the volume thrust indicator, which is based on the NASDAQ. But overall, I think the market’s “mo” is strong enough to continue to support the bulls from an intermediate-term perspective.
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 becoming clearer. While I do think we are beginning to see a “good overbought” condition (where the market gets overbought and stays overbought while it trends higher), the board appears to be telling us that it might be time for the bulls to take a breather at some point soon. At the same time, we must remember that breaks to new highs have been met with selling in rather short order this year. So, with the rest of the boards telling me to give the bulls the benefit of the doubt, it is probably best to buy the next dip – especially one that fills the gap on the chart of the S&P. But investors looking to put money to work may want to be cautious here.
Thought For The Day:
The Gods cannot help those who do not seize opportunities. -Confucius
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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