Daily State Of The Markets: Divergences Are Yellow Flags

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: David Moenning
Summary

The NASDAQ closed at a new all-time high on Friday.

The S&P 500 appears to have broken out of the recent range.

But some of my favorite market models are diverging.

The NASDAQ - you know, the index where most of the market's hot stocks tends to trade - closed Friday at a fresh new all-time high. The S&P 500 appears to have broken out of the recent range. The small-cap indices are in uptrends and just a stone's throw from last week's record closes. Thus, it is easy to argue that the price action is bullish.

From a macro perspective, the economy is growing at the fastest pace in years. Consumers are upbeat. Business owners are very optimistic. And earnings are set to grow at a 20%+ clip again this quarter. So, our heroes in horns suggest things are looking good.

What's not to like, right? As such, the bulls can't be blamed for thinking that all is right with the world.

But... My guess is you knew that was coming... I find myself increasingly uncomfortable with the 'everything is peachy keen' view of the world.

No, I'm not talking about the news flow stuff regarding the trade war, Russia, political instability, etc. I'm talking about too much red and not enough green on two of my important indicator boards.

To clarify, the Trend, Momentum, and Early Warning indicator boards I post each Monday focus on what is happening in the market from a shorter-term perspective. It's the other two boards that are starting to give me some indigestion: the External Factors and the Primary Cycle board.

The Primary Cycle board includes five of my favorite, long-term, big-picture market models. In reality, I could easily manage money with these models alone. The problem is that two of the five models are currently on sell signals, which is two too many if you want to be outright bullish. And while three models remain on buy signals, two of those models are currently neutral, leaving only a single green box. Oh, and the Leading Indicators Model is just barely in the neutral zone.

Then there is the External Factors board. The bottom line here is there is a lot of red and very little green. While the monetary and valuation components have been negative for some time (and are both LOUSY timing indicators), the economic composite (remember, this is a set of economic indicators designed to "call" the stock market) recently slipped to neutral. And the Inflation composite slid into the red zone a few weeks back.

And yet, the indices are either at or near all-time highs. This, folks, is what a "divergence" looks and feels like. The market makes new highs, everybody is upbeat, and it looks like nothing can go wrong. Until it does, of course.

My main point this morning is the External and Primary Cycle boards should be viewed as warning flags. To be clear, there is no reason to head for the hills at this point. I do not see a bear market developing.

But in reality, most folks never see a bear coming. They don't see recessions, bubbles, or external events coming either. And the key is that with several important indicators waving yellow flags, it is probably a good idea to take one's foot off the gas for a while. Or at the very least, to be on the lookout for something "out of the blue" to occur that could change the game.

Now let's move on to a review of my favorite indicators and market models...

The State of the Big-Picture Market Models

I like to start each week with a review of the state of my favorite big-picture market models, which are designed to help me determine which team is in control of the prevailing major trend.

View My Favorite Market Models Online

The Bottom Line:

  • The Primary Cycle board remains a concern. While the NASDAQ finished at an all-time high Friday and the S&P 500 is only 2.5% off its high-water mark, the fact that only one of my favorite big-picture market models suggests all is not right in indicator-land at this point. At the very least, this board tells me that this is not a low-risk environment.


The State of the Trend

Once I've reviewed the big picture, I then turn to the "state of the trend." These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

View Trend Indicator Board Online

The Bottom Line:

  • Despite all the worries in the market, the trend board is in pretty good shape. However, should the S&P slip back below the 2790 level, the board would likely see some deterioration. So, while there is a lot of green here, the margin for error is thin.


The State of Internal Momentum

Next up are the momentum indicators, which are designed to tell us whether there is any "oomph" behind the current trend.

View Momentum Indicator Board Online

The Bottom Line:

  • The momentum board remains moderately positive. I think the issue here is the few areas of the market that are moving higher are doing so with gusto while the rest of the market is slogging along.


The State of the "Trade"

We also focus each week on the "early warning" board, which is designed to indicate when traders might start to "go the other way" -for a trade.

View Early Warning Indicator Board Online

The Bottom Line:

  • The "Early Warning" board suggests stocks are overbought from a short-term perspective and moving that direction quickly on an intermediate-term basis.


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.

View External Factors Indicator Board Online

The Bottom Line:

  • If you are looking for a reason to be concerned about the overall "state of the market," the External Factors board is your ticket. There is simply too much red on the board to be comfortable here.

Thought For The Day:

One loyal friend is worth a thousand relatives. -Euripides