The Message From The Models: Stay the Course

September 16, 2019|3:50pm


Good Monday morning and welcome back. Although I had every intention of “penning” a market missive last week and have an abundance of topics to comment on, a business trip to LA left me with little time to get anything written. My apologies for anyone missing my subjective take on the state of the markets.

The good news is this week’s schedule appears to provide some time for thought/writing – the question is which topic to address first!

But since a new week is upon us, let’s first focus on the readings of the models, which, in my humble opinion, have done a darn good job in calling the environment during what has been a fairly challenging year.

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.

In this process, we analyze our big-picture market models, the market’s current trend and momentum, the potential for a trend reversal, and the fundamental factors such as monetary conditions, inflation, earnings, the economy, and market valuation. So, without further ado, please join us in this week’s review of the “state of the market.”

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.

While there has been some modest movement within the component models recently, the signals and the readings of the individual models contained in the Primary Cycle board haven’t changed and continue to remind us that this is a bull market until proven otherwise. As such, a “buy the dip” strategy when news sends the algos into a tizzy probably remains the best approach.

This week’s mean percentage score of my 6 favorite models dipped slightly to 73.9% from 74.7% last week (Prior readings: 72.2%, 68.9%, 62.8%, 71.1%, 70.3%) while the median also slipped to 75% versus 77.5% last week (Prior readings: 75.0%, 65.0%, 63.4%, 70.0%, 68.4%).

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.

Once again, there were no outright changes to the Fundamental Factors board this week. And while the inflation timing model has moved down a little, the overall reading is still solidly in the green. As such, the message from this big-picture board is to give the bulls the benefit of doubt when things get dicey.

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.

While the bears remind us that there is critical resistance overhead, there can be no denying that our furry friends have failed to put much fear in the hearts of investors. My take is the market is in the process of discounting the outcome of the trade war as well as the odds of a recession in the U.S. – and the current positioning of the indices suggest that stocks are looking forward to better days.

However, the attack on the Saudi oil fields certainly puts the geopolitical category in play. And Wednesday’s FOMC meeting certainly will be in focus. Thus, we will have to stay alert this week. But so far, so good this morning.

The State of Internal Momentum

Next, we analyze the “oomph” behind the current trend via our group of market momentum indicators/models.

It is positive that the Momentum board has perked up recently. To be sure, this removes one of my nagging concerns about the overall state of the market. However, the collective ratings of the individual indicators aren’t as robust as I’d like them to be given that the major indices are threatening to break out to new highs. Thus, we should be on alert for the dreaded “breakout fake out” if the move to new highs is not accompanied by some real enthusiasm. The bottom line is while momentum is in decent shape here, it does not present a “table pounding” message at this point.

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 Early Warning board is currently quite clear as the table does not appear to be set for either team. If forced to make a call, I’d say that the bears may hold a slight edge as many of the indicators are closer to flashing sells than buys. But over the years, I have learned that this board is best used when the message is clear and the mean reversion stars are aligned.

Thought For The Day:

The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge. – Daniel J. Boorstin

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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Mr. Moenning and Redwood Wealth may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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