In early June, my newly completed mid-term trading model indicated a continued, sustained, upward move in the market. At the time that I reported this in Seeking Alpha, the market of course immediately entered a corrective phase but then indeed moved upward significantly. Obviously I should have quit while I was ahead; however, in fairness, I have decided to provide the present reading. The medium-term (several-month) trend of the domestic stock market is strongly upward. Interest rates have remained at a very low level. The consumer has been reluctant to borrow money, instead reducing debt and increasing the potential to support future economic growth. The future impact of the Fed in the next several months is enigmatic, in that its interest rates are as low as they can go, rendering reductions in short-term rates unlikely. In spite of the absence of further stimulative interest rate changes by the Fed, one must consider its position to be very supportive.
The bottom line is that the model continues bullish on a time scale of several months. This is very uncomfortable, given the historically negative bias of the market during the September-October time frame. Further, a conventional interpretation of the market price action is that we have reached an overbought extreme. On the other hand, the negative seasonal tendency has achieved the level of “mantra,” and thus is mitigated by my investing Rule Number 2: “Market ‘wisdom’ is either a lie or an error.” The short-term overbought condition could result in a correction. Nevertheless, the model supports higher market prices several months from now and implicitly augers against another disaster like that of last fall and winter.
One thing worthy of note is that copper, a useful indicator of inflation, has been rising noticeably. A concurrence of several precursors of inflation could force us to revisit Rule Number 2 as applied to the influence of inflation on market prices. Presently, inflation remains mild and deflation appears to be under control.
Anyone who wishes to avoid risk, but who does so by using a model with monetary, economic, and trend indicators, will likely hold stocks in agony over the next several months. That is what I plan to do. Almost certainly, investors’ anxiety will become extreme as the Dow reaches 10000. If the upward trend is superseded or if other elements of the model become neutral or negative, I will report that event here. Meanwhile, holding stocks should be profitable, but it will not be easy money.
Disclosure: Author holds an index investment equivalent to VXF.