The Driving Force Behind The Current Action Is...

Next up is Japan. The PMI in the Land of the Rising Sun also fell into contraction mode for the first time in two and one-half years.

Here at home, we learned last week that Existing Home Sales fell to a 3-year low. Durable Goods Orders showed weak momentum. The Philly Fed General Business Activity Index plunged 21.1 points, which was the biggest decline since August 2011, signaling contraction. And the Conference Board's LEI fell in January instead of gaining ground, as economists had expected.

Is This A Problem?

No, none of the above means that a recession is imminent in the U.S. And this is part of the reason that investors keep buying stocks without too much concern here. However, I think we need to admit that, at the very least, we've got another "soft patch" on our hands.

Below is a chart from Martin Pring (the man whose videos on technical analysis got me started in the business in the mid-1980's) showing the stock market (adjusted for inflation), the secular bull/bear cycles, and recessions (in red) versus "slowdowns" (in beige).

(Click on image to enlarge)

Image Source:

As you can see, the stock market never fares well during/around recessions. However, slowdowns are another story.

As the chart illustrates, the bulls didn't pay much attention to the three mild slowdowns that occurred during the 1982-1999 secular bull market. Basically, stocks paused for a bit when things slowed down and then continued to power forward.

But since then, the story is a little different as stocks have struggled at the beginning of each slowdown. So, the question in my mind is whether this slowdown is just getting started or closer to an end?

Two Ways To Play

If it's the former, then a "retest" scenario is the likely outcome and a tactical, trend-following approach could come in quite handy. Remember, waterfall decline lows tend to be "tested" within a couple months of the low as the original reason for the decline usually resurfaces. So, will the bears return if the #GrowthSlowing issue isn't "fixed" by a trade deal tout suite?

On the other hand, if the current data winds up being merely confirmation of the slowdown everybody already knows about and a trade deal can reinvigorate global growth, then a move to new highs is a logical outcome. And as far as the appropriate strategy for the market driver is concerned, in a rebounding growth environment, a buy-the-dips strategy is usually a good way to play.

Another Driver to Consider

Yet, I believe there is an additional driver of market action to consider here. It's called "positioning."

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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 ...

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