Thirteen Charts Tell The Story

It is said that a picture is worth a thousand words. So, this week, I've decided to try and sum up the keys to the current market environment with a series of charts and graphs. I started out looking for five key charts. That quickly turned into ten. And before I knew it; I had a baker's dozen. And frankly, I'm sure I've skipped some key stuff. So many messages, so little time!

The areas I focused on include the technical picture of the market, the state of the current trade, market valuations, the Fed/monetary policy, and the #GrowthSlowing theme. So, without further ado, let's get to it.

The Technical Picture

Some analysts suggest we are currently experiencing a replay of last year's Q1 market action. We had a very nasty/scary pullback that was followed by a return to rally mode and eventually, new highs. However, one thing that was missing from last year's rebound were indications that there was some "oomph" behind the move. And as most analysts know, it is that "oomph" which usually accompanies a fresh leg of a major move.

As it turned out, the lack of "oomph" to last year's rally turned out to be a precursor of bad things to follow. Sometimes, it does indeed pay to read the tea leaves in this game.

The good news is that this time is different. This time around, there are an abundance of "breadth thrust" indicators that have flashed buy signals, which is a sign that there indeed is some "oomph" behind the move. Below the latest signal to trigger - the percentage of stocks over their 50-day moving averages.

Breadth Thrust Buy Signal

(Click on image to enlarge)

Source: Ned Davis Research

History shows that when 90% of stocks are above their 50-day ma's, the trend tends to favor the bulls for a decent length of time. In fact, I've often referred to such triggers as an "all clear" signal. You see, according to data from Ned Davis Research, on average, the S&P 500 moves higher at an above-average rate in the ensuing 3-, 6-, and 12-month time frames after breadth thrust buy signals.

One caveat with the "thrust" indicators is that in the era of decimalization, the preponderance of ETFs, and high-speed trading, these signals have been much easier to come by. Therefore, we need to look around for other indicators to confirm that the bulls are indeed large and in charge. As Ned Davis himself likes to say about these signals, "trust but verify." While history suggests one can "trust the thrusts," Ned says it is important to "verify" the validity of the signal with other indicators/models.

Along those lines, one of the things we like to see is a positive "technical divergence." In short, we're looking for indicators to "diverge" from the current picture being shown on the charts. In this case, we see that the Advance/Decline line of an all-cap equity universe has moved to all-time highs.

Positive Technical Divergence

(Click on image to enlarge)

Source: Ned Davis Research

And since the major indices are not (yet?) at all-time highs, this represents a divergence - in a good way.

Another age-old confirmation factor used to determine whether or not a move is "real" involves volume. Granted, a massive percentage of the volume on the various exchanges these days is driven by machines. As such, simple measures of volume have become distorted over the years.

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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.

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