Daily State Of The Markets: Are 9 Warnings Enough?

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by: David Moenning

Good Monday morning and welcome back. Based on early indications, it appears that the bears may be trying to get something going to the downside here. Everybody knows that the current trend is stretched to the upside and that the market is overbought. As such, some downside exploration would certainly make sense right about now. But before we wander too far down the prognostication trail, let's start the week off with an objective review my key market models and indicators - to make sure we recognize what "is" happening in the market.

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:

  • The short-term trend model remains positive, but bears will likely attempt to make a stand here.
  • The short-term channel breakout system is positive above S&P 2350
  • The weekly trend remains strong
  • The intermediate-term channel breakout system is positive above 2270
  • The cycle composite is positive this week but then points to a stair-step pullback into mid-April
  • The market is currently "trending" and you don't need fancy math to confirm

The State of Internal Momentum

Now we turn to the momentum indicators...

Executive Summary:

  • The short-term Trend & Breadth Confirm model is neutral. For me, this is the first warning sign.
  • However, the intermediate-term T&B Confirm model is solidly positive
  • The Industry Health model is STILL not outright positive. This is also a warning sign.
  • The short-term Volume Relationship model is positive, but not super strong at this time - this indicates a tired market trend.
  • The intermediate-term Volume Relationship model is solid as a rock
  • The Volume Thrust indicator is providing conflicting signals here. The indicator is neutral but still has strong historical return readings. But, this indicator should be better here.
  • Ditto for the Breadth Thrust indicator. This combo is a third warning sign.

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:

  • Market is short-term overbought and giving what would normally be a mean-reversion signal
  • The intermediate-term Overbought/sold indicator is overbought and reversing = Sell signal. Warning sign #4
  • The Mean Reversion model remains confused
  • Talk about confused... The S.T. VIX is about to give sell signal, the I.T. just gave buy signal
  • The Sentiment models remain negative. Sentiment is a problem - Warning Sign #5
  • The long-term Sentiment model has reached an extreme level, a level from which corrections tend to occur

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:

  • There is no change from last week for the Absolute Monetary model - neutral and still falling
  • Relative Monetary model remains negative. Important to note that this model isn't negative very often. Warning sign #6
  • The Economic model (designed to "call" the stock market) has been on a false signal so far as the model that calls economy is strong
  • The Inflation model is negative - for only 5th time since 2000. Also note that this model has done a good job of signaling the uptick in inflation seen over past year and a half
  • As for Valuations, there is nothing new here - but I'm going to call this warning #7

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:

  • The Leading Indicators model - which provided timely signals for both the beginning and end of the mini-bear that occurred between August 2015 and February 2016 - remains modestly positive.
  • The fact the Risk/Reward model is neutral is warning #8
  • The fact that the External Factors model is at the low end of neutral is warning #9
  • However, the historical return for the current mode of the indicators on this board remains solid.

The Takeaway...

I count at least 9 warning signs at this time - a number that could easily have been higher. This, when combined with the fact that the current joyride to the upside has become stretched and has reached extreme levels in terms of sentiment, suggests that a pullback in the near-term would appear to be inevitable. And with our cycle work calling for a pullback into mid-April, the question for short-term traders isn't if a counter-trend move will occur, but rather how far it can go. On this front, we will be watching the 2350 level on the S&P 500 as the near-term line in the sand and the 2280 level as the key to the bulls retaining control of the intermediate-term trend. My final point is to note that the dip-buyers have been extremely aggressive since the election and if those looking to put money to work into weakness continue to play hard, the bears could once again go home frustrated.

Thought For The Day:

To wish you were someone else is to waste the person you are -Sven Goran Eriksson

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 Fed's Next Move

3. The State of the U.S. Economy

4. The State of Global Central Bank Policies (Think ECB pulling back on QE)

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