Monday Morning Market Model Review: Bulls Retain Possession

By David Moenning of Heritage Capital Research

Monday, September 9, 2019 7:58 AM EDT

Monday Morning Market Model Review: Bulls Retain Possession image

Good Monday morning and welcome back to the land of blinking screens. As long-time readers are likely aware, my weekly missive has been comprised of two sections. First, there has been my subjective take on the state and the drivers of the current stock market environment. And second, I have presented a summary of my weekly research, which I break up into categories or "indicator boards."

Since Monday morning is usually committed to research and making sure I am in tune with the objective weight of the evidence, I've decided to break up my reports going forward. So, on Monday mornings, I will focus on the data, the indicators, and the models. And then later in the week, time permitting, I will present what I like to call my oftentimes meandering market missive, where I will focus on the topics of the day.

The overriding idea is to separate the objective data points (which drives my investing process) from my subjective musing on what is happening in the market. It is my sincere hope that you find this format valuable.

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.

The bulls got some good news this week on the trade, economic, and Fed fronts and stocks moved accordingly. As I've been saying for some time now, this remains a news-driven environment. So, it will be interesting to see if traders continue to discount a positive resolution to the trade war and better days ahead for the global economy.

This week's mean percentage score of my 6 favorite models rose to 74.7% from 72.2%% last week (Prior readings: 68.9%, 62.8%, 71.1%, 70.3%, 84.1%) while the median also improved to 77.5% versus 75% last week (Prior readings: 65.0%, 63.4%, 70.0%, 68.4%, 86.5%).

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.
View My Favorite Market Models Online

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 were no changes to the Fundamental Factors board this week. The only item of note is the movement of the inflation timing model, which continues to edge lower within the positive zone. To be clear, this is not a reason for alarm. However, the US Dollar's strength appears to be putting "some" pressure on inflation expectations from a longer-term perspective. As such, my concern is how the bond market reacts going forward. Something to watch, in my opinion.

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.

With the S&P moving back to within spitting distance of its all-time high, it isn't surprising that the Trend board continues to sport a lot of green. The good news is the major indices appear to have broken above the recent short-term trading range. However, there are a couple of gaps on the charts that if filled, could put the breakout call at risk. In addition, there is meaningful resistance overhead at the old highs. So, while the bulls clearly have the ball, it is probably a good idea to keep the champagne on ice for now.

NOT INDIVIDUAL INVESTMENT ADVICE.
View Trend Indicator Board Online

The State of Internal Momentum

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

As you will recall, I've been whining about the status of the Momentum board for some time now. And while it is hard to argue that the current state can be rated as positive, there has been some improvement of late. However, if the bulls hope to break out to new highs, we will want to see some "oomph" behind the move, which should be evident on this board. Remember, if an important move in price is not confirmed by momentum, the move should be considered suspect.

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 mixed at this time. For example, while all three sentiment models are now positive - suggesting that the sentiment pendulum has finally swung far enough to support a reversal - the VIX indicators suggest that volatility has fallen to levels that could support a reversal. As such, neither team appears to have an edge here from a mean-reversion perspective.

Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

The opinions and forecasts ...

Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as 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.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

Mr. Moenning 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.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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