By Dave Moenning on Dec 30, 2019 10:09 am
In light of the fact that the vast majority of Wall Street is on vacation this week, I'm going to dispense with my oftentimes meandering market missive and let the indicators and models do most of the talking.
However, I would like to share one thought before I move on to finishing my prep work for the new year. I think it is worth noting that it has been a remarkable year on many fronts. While the financial markets had a very shaky/scary start, investors in the stock market are surely smiling as 2019 draws to a close. To be sure, the Fed's abrupt U-Turn played an important role in flipping this market from bear to bull. Sure, the trade "deal" lent a hand. And yes, the resilient U.S. consumer did their part in keeping the global economy out of recession. But I think the real key to this year was to recognize that it rarely pays to "fight the Fed." So, with central bankers around the world once again in an "easy money" mode, well, traders knew what to do.
From my seat, 2019 was the type of year that reinforces the idea of utilizing a flexible approach in one's portfolio. The bottom line is if you held a view that went against what the market was doing - and you stuck to your guns - you paid dearly. And it is for this reason that I prefer to focus on what "is" happening in the market and simply ignore any tendency to invest according to what I think "should" be happening. As the saying goes, "It's okay to be wrong, you just can't stay wrong for long."
Looking ahead, while lots of folks on Wall Street are predicting single-digit returns for stocks in 2020, I'm thinking there might be some fireworks ahead - perhaps in both directions. But for now, I'm going to continue to stay seated on the Bull train and keep my risk-management tools close at hand.
Here's wishing everyone a Safe, Happy, Healthy, and Prosperous New Year!
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.
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.
The are two modest changes to the Primary Cycle board this week. Although you have to look closely to find them, I note that (a) the rating of the Leading Indicators Model slipped a bit and (b) the average historical return for the Fundamental Factors Model perked up a bit. And with the average historical return for the board standing well above the mean for the S&P going back to late 1979, it is hard to argue for anything less than a bullish stance at this stage of the game - from a longer-term, big-picture standpoint, that is.
This week's mean percentage score of my 6 favorite market models held slipped to 71.8% from 74.7% while the median fell to 72.5% from 77.5%.
* 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.
As mentioned above, there is a minor change to the Fundamental Factors board this week as both the reading and the historical return of Monetary Composite improved. This caused the average historical return of the board to move up as well, and back above the market's long-term mean. While there is clearly room for improvement on the Fundamental board, the overall reading of the board continues to lean bullish.
* 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 Fundamental Indicator Board Online
The State of the Trend
After looking at the big-picture models and the fundamental backdrop, I like to look at the state of the trend. This board of indicators is designed to tell us about the overall technical health of the current trend.
With the major indices closing at all-time highs again this week, it isn't surprising to see the trend board register a perfect 10 again (for a third consecutive week). However, after the recent joyride to the upside, which has been sponsored in large part by a sigh of relief on the trade front and hopes for global economic improvement, I can't help but wonder if this is as good as it gets. But as the saying goes, the trend is your friend and there is no reason to fight the tape here.
The State of Internal Momentum
Next, we analyze the "oomph" behind the current trend via our group of market momentum indicators/models.
While the Momentum board is clearly in good shape overall, I will note that it might be starting to wobble just a bit. I note that the S.T. Trend and Breadth Confirm indicator fell to a "hold" this week and the intermediate-term breadth model slipped to moderately positive. From my seat, this suggests that the rally has lost some steam and that a pause is to be expected at some point in the near term.
* 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 Momentum Indicator Board Online
Early Warning Signals
Once we have identified the current environment, the state of the trend, and the degree of momentum behind the move, we then 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 the Early Warning board is pretty clear: In short, I'm thinking this might not be a great place to chase stocks and that there will likely be a better buying opportunity ahead. While Ms. Market often does her level best to frustrate as many folks as possible and overbought markets can and often do stay overbought for long periods of time, I can't help but note the extreme readings seen in sentiment models. As such, anyone looking to buy into a dip may need some patience - but should be standing at the ready all the same.
* 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 Early Warning Indicator Board Online
Thought For The Day:
I saw the angel in the marble and carved until I set him free. -Michelangelo
Wishing you green screens and all the best for a great day,
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