Daily State Of The Markets: Let's Be Clear, The Table Is Set...

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by: David Moenning

Good Monday morning and welcome back. Now that all the Oscar hoopla and all the political commentary is behind us, we can return to our normal lives. So, let's start the week off with a review my key market models and indicators.

The State of the Trend

We start each week with a look at the "state of the trend" from our objective indicator panel. These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

Executive Summary:

  • Three age-old market sayings sum up the situation here:
  • 1. The most bullish thing a market can do is...
  • 2. The trend is your friend
  • 3. Don't fight the tape
  • The question of the day is how far can the bulls run. The rest of the boards are designed to help us figure that out.
  • The cycle composite is positive for the next two weeks and then don into mid-April. Sounds about right.
  • All three "trading mode" indicators confirm the market is trending right now. But then again, that's pretty obvious.

The State of Internal Momentum

Now we turn to the momentum indicators...

Executive Summary:

  • Given the action on the Dow and S&P, it is surprising to see the short-term Trend & Breadth indicator neutral
  • This is likely due to the pullback in semis and transports, which caused the NASDAQ, Midcap and Russell to lag behind last week's late run
  • Intermediate-term T&B Confirm model remains in gear
  • While close, the Industry Health model cannot seem to break up into the outright positive zone
  • The Short-Term Volume Relationship model has perked up over last couple weeks - a positive
  • The Volume Thrust indicators is yellow when it should be green
  • The Breadth Thrust indicators is also oddly neutral

The State of the "Trade"

Next up is the "early warning" board, which is designed to indicate when traders may start to "go the other way" -- for a trade.

Executive Summary:

  • Song remains the same on the early warning board,
  • This appears to be a "good overbought" condition
  • But with market overbought across all three major time-frames, means table is "set" for some sort of surprise
  • VIX can't reach either dynamic extreme "trigger" level - even in short-term model
  • The Short-term Sentiment Model is negative but improving
  • Ditto on the Intermediate-term Sentiment Model
  • Long-term Sentiment Model at most negative level since late 2014

The State of the Macro Picture

Now let's move on to the market's "external factors" - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.

Executive Summary:

  • This board remains worrisome and should remind us that this is NOT a low-risk environment
  • The Absolute Monetary Model is still heading south
  • The Relative Monetary Model remains solidly negative
  • The Economic Model (the model built to call the stock market) is bouncing a bit, but still negative
  • To repeat, the Inflation Model is in negative territory and at the worst reading since spring 2011
  • Valuation remains an area for discussion, but the key takeaway is Bulls can no longer argue that "Relative" valuations are positive

The State of the Big-Picture Market Models

Finally, let's review our favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.

Executive Summary:

  • This board really says it all as none of the models are outright positive and two are neutral
  • But - and this is important - the average return of the market while in this mode remains above the historical mean. This tells us that the current situation can soldier on.
  • The Leading Indicators model is still in positive zone - but only modestly so. Remember, this is the model that did a good job of "calling" 2008, 2011, and last year's mini bear. As such, I look at this model daily.
  • The Risk/Reward model still at dead neutral reading
  • The External Factors model is moving in the wrong direction.

The Takeaway...

I'm going to keep this short and sweet. The bulls are in charge but the market is "set up" for a pullback in the near-term. While not negative, our external factors models are waving warning flags. Thus, the bottom line is, as I've been saying, this is not a low-risk environment. Yet, history is replete with examples of such conditions remaining intact for a long time. So, the bottom line is the trend remains our friend but for risk managers, this is no time to be asleep at the switch.

Thought For The Day:

The unexamined life is not worth living. - Socrates

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

1. The State of Trump Administration Policies

2. The State of the U.S. Economy

3. The State of Global Central Bank Policies

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