Indicator Review: The Trend is Your Friend, But…

Let’s start the week off right with a review of our major stock market indicators. To review, the goal is to set aside our subjective views of what we think might be happening in the markets and focus on a disciplined, unemotional review of what “is” happening in the market.

The State of the Trend

We start with a look at the “state of the trend” from our objective indicator panel. These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

Executive Summary:

• The S&P 500 has now spent 14 consecutive days above its 5-day moving average. This suggests the bulls are in control and should be given some room to work.
• Both the short- and intermediate-term Trend models are positive
• Both the short- and intermediate-term Trend-and-Breadth confirm models are positive
• Both the short- and intermediate-term Channel Breakout models are positive
• The cycle composite points to higher prices over the next two weeks
• The Mode model still suggests stocks are in a mean-reverting environment. However, these are lagging indicators that will flip if the bulls can hold the recent gains over time.
• In sum, the trend board is in great shape

The State of Internal Momentum

Now we turn to the momentum indicators…

Executive Summary:

• The momentum board also sports a bright shade of green this week
• The only model not fully onboard the bull train is the Industry Health Model, which while currently moderately positive, has not been in the outright positive mode in some time.
• It is also a little disconcerting that our “thrust” models, while positive, did not issue new buy signals during the current romp higher.
• Other than that, this board suggests the bulls be given the benefit of any doubt here

The State of the “Trade”

Next up is the “early warning” board, which is designed to indicate when traders may start to “go the other way” — for a trade.

Executive Summary:

• By contrast, the Early Warning board is doing just that – providing a warning
• Stocks are now overbought from the short-, intermediate-, and long-term perspectives
• The Mean Reversion model has already flashed a sell signal
• All three sentiment models are negative at this time – this doesn’t happen often
• The VIX indicator has moved into the “get ready” zone, but has yet to reverse and flash a sell signal (it wouldn’t take much downside action to trigger a sell)
• Bottom line is the table is now set for a pullback of sorts
• However, keep in mind that when the market gets overbought and STAYS overbought, it is actually a bullish sign

The State of the Macro Picture

Now let’s move on to the market’s “external factors” – the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.

Executive Summary:

• The recent spike in interest rates is wreaking havoc with the “external factors” area
• Historically, rapidly rising interest rates have been negative for stocks – But will this time be different? (I personally can argue both sides on this one)
• Rates are currently rising on expectations for better economic growth and higher inflation
• Economic “reality” is likely needed for rates to move significantly higher from here
• However, asset allocation models will likely cause massive changes to portfolios in coming months – so money flow is an important part of this situation
• The Relative Monetary model moved from negative to neutral this week
• The Economic model (a model designed to “call” the stock market based on economic indicators) remains negative
• There is no change to the Inflation models – but it is important to remember that inflation expectations have been moving higher for months now

The State of the Big-Picture Market Models

Finally, let’s review our favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.

Executive Summary:

• There is improvement on the Primary Cycle board this week
• The Leading Indicators model moved back up into the moderately positive zone this week – and stocks have historically performed well when the model is in this mode
• The State of the Tape model remains moderately positive
• But the Risk/Reward model has refused to budge from the negative zone – this is largely due to the weakness in the monetary indicators.
• All in, we should label the board moderately positive

The Takeaway…

As the saying goes, “the trend is your friend” – especially at this time of year in the stock market. Our trend and momentum indicators tell us that the market is “in gear” and that the bulls should be given the benefit of the doubt for a while. However, stocks are overbought and the sentiment models are negative. As such, the stars would appear to be aligned for some sort of pullback or pause. Yet we should also remember where we are on the calendar. The calendar reminds us that (a) the traditional year-end rally appears to be underway and (b) that asset allocation moves are right around the corner. As such, we can argue that bonds could easily remain under pressure in the coming weeks. In short, this is no time be asleep at the wheel or to assume that traditional allocation strategies will function as expected.

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of the “Trump Trade”

    2. The State of Global Central Bank Policies

    3. The State of Interest Rates

    4. The State of Global Economies

Thought For The Day:

What lies behind us and what lies before us are tiny matters compared to what lies within us. -Ralph Waldo Emerson