Market Pulse Signal: Trend Turns Positive As Concerns Persist

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by: VanEck
Summary

Towards the end of January, Federal Reserve (Fed) Chairman Jerome Powell's tune seemed to change on future interest rate increases, stating "the case for raising rates has weakened somewhat."

Market expectations for rate increases shifted to later in 2019 or into 2020. Powell's pivot may have given the market the confidence needed to extend its recovery.

On Wednesday, March 20, the Fed caught up to market expectations and seemed to signal that there would be no more changes to rates this year.

Market Pulse Signal Update

The Market Pulse model has increased its equity allocation from 40% to 100%. The model informs the Ned Davis Research CMG US Large Cap Long/Flat Index and produces signals that allow the Index to tactically allocate between various levels of equity and cash. This latest change was precipitated as the trend in the Composite Score, the model's measure of market breadth, stabilized since the beginning of the year and turned positive.

On March 19, the Composite Score rose to 59.33, which is higher than its value 42 days ago of 59.17. When the Composite Score trend is positive, the model allocates 100% to equity regardless of the score itself. The allocation change is reflected in the Ned Davis Research CMG US Large Cap Long/Flat Index today.

Market Regained Confidence After Q4 Stumble

An aging bull market, stretched valuations, trade tensions, and rising interest rates combined to create the uncertainty that led to a harrowing end to 2018. Given the magnitude and velocity of the decline in December, one might have expected the market to bounce, and it did. Market technicians also warned that after such a strong decline and recovery, it was possible to see the market retest December's lows. The positioning of the Market Pulse model was consistent with the technical picture. It had reduced equity allocation from 80% to 40% on January 15, 2019, as market breadth was still relatively weak.

Towards the end of January, Federal Reserve (Fed) Chairman Jerome Powell's tune seemed to change on future interest rate increases, stating "the case for raising rates has weakened somewhat." Market expectations for rate increases shifted to later in 2019 or into 2020. Powell's pivot may have given the market the confidence needed to extend its recovery. On Wednesday, March 20, the Fed caught up to market expectations and seemed to signal that there would be no more changes to rates this year. It remains to be seen if that will actually be good for stocks or if the market reads the reasons for the Fed's patience - slowing economic activity and muted inflation - as issues to worry about.

The model's Composite Score of 59.33 isn't terribly broad, but the trend seems to have stabilized and moved positive, thus triggering the allocation change.

Composite Score
Current vs. 42 days prior

Source: Ned Davis Research. Data as of March 19, 2019.

Since the last allocation change on January 15, industry participation has improved substantially. Sixteen of the 24 industry groups now sport a trend score of 50 or greater.

S&P 500 Industry Trend Scores

Source: Ned Davis Research. Data as of March 19, 2019.

Among industry groups, Software & Services and Technology Hardware & Equipment were the largest contributors to returns, with Apple and Microsoft accounting for most of that improvement. In addition, Capital Goods, Media & Entertainment, Banks, Semiconductors, Energy, Diversified Financials, Health Care Equipment, Retailing, Utilities, and Real Estate combined accounted for over half of the improvement of the S&P 500 in this time period. Telecommunication Services was the only industry to post negative returns during this period, and the contribution was negligible when compared to the S&P 500's 8.95% run.

On an individual stock level, 36 names accounted for over half of the S&P 500's returns from January 15 to March 18, 2019. Many of these were the same companies that contributed to the decline in the fourth quarter of last year. So, a few big names continue to influence the market's returns. As trade tensions, slowing global growth, and richly priced stocks persist, investors should continue to proceed with caution.

01/15/2019 - 03/18/2019

Security Name

Weight

Total Return

Contribution To Return

Cumulative Percent of Total Return

Totals

100

8.95

8.95

1

Apple Inc.

3.31

23.36

0.73

8.1%

2

Microsoft Corporation

3.65

12.44

0.44

13.0%

3

Exxon Mobil Corporation

1.40

14.38

0.19

15.2%

4

Cisco Systems, Inc.

0.95

21.56

0.19

17.4%

5

Alphabet Inc. Class C

1.50

9.94

0.15

19.0%

6

Bank of America Corp.

1.15

12.90

0.15

20.7%

7

Philip Morris International Inc.

0.55

28.70

0.14

22.3%

8

Mastercard Incorporated Class A

0.85

17.23

0.14

23.8%

9

Visa Inc. Class A

1.10

13.03

0.14

25.4%

10

Alphabet Inc. Class A

1.47

9.39

0.14

26.9%

11

Facebook, Inc. Class A

1.69

7.73

0.13

28.4%

12

Chevron Corporation

0.98

13.40

0.13

29.8%

13

Procter & Gamble Company

1.05

11.20

0.12

31.1%

14

Intel Corporation

1.01

12.02

0.12

32.4%

15

Amazon.com, Inc.

2.95

4.04

0.11

33.7%

16

Johnson & Johnson

1.57

6.74

0.11

34.9%

17

Berkshire Hathaway Inc. Class B

1.72

4.95

0.09

35.9%

18

Wells Fargo & Company

0.91

9.52

0.09

36.8%

19

Merck & Co., Inc.

0.88

9.93

0.09

37.8%

20

International Business Machines Corporation

0.53

16.54

0.09

38.8%

21

Comcast Corporation Class A

0.74

11.41

0.08

39.7%

22

JPMorgan Chase & Co.

1.50

5.42

0.08

40.6%

23

Altria Group Inc.

0.41

19.60

0.08

41.5%

24

General Electric Company

0.37

21.56

0.08

42.3%

25

Broadcom Inc.

0.49

14.56

0.07

43.1%

26

Honeywell International Inc.

0.48

14.52

0.07

43.8%

27

Abbott Laboratories

0.57

11.86

0.07

44.6%

28

Danaher Corporation

0.31

21.92

0.06

45.3%

29

United Technologies Corporation

0.43

14.94

0.06

46.0%

30

Boeing Company

0.91

6.23

0.06

46.7%

31

Anthem, Inc.

0.33

18.70

0.06

47.3%

32

Oracle Corporation

0.57

10.50

0.06

48.0%

33

NIKE, Inc. Class B

0.46

13.05

0.06

48.7%

34

PepsiCo, Inc.

0.70

8.46

0.06

49.3%

35

3M Company

0.51

11.12

0.06

50.0%

36

Texas Instruments Incorporated

0.44

13.32

0.06

50.6%

Source: FactSet. Data as of March 18, 2019. Past performance is no guarantee of future results. For illustrative purposes only. Not a recommendation to buy or sell any security. Visit vaneck.com to view daily ETF and index holdings.

How The Market Pulse Model Works

The Ned Davis Research CMG US Large Cap Long/Flat Index's model (i.e., Market Pulse) measures the overall health of the market through an evaluation of market breadth. In this case, market breadth refers to advancing and declining price trends and countertrends at the GICS®1 industry group level. The model computes a robust moving average score daily to capture multi-industry and multi-term trend and countertrend measures to gauge overall market health. It then calculates the score's directional trend to see if it is improving or declining. Collectively, the score and its directional trend determine the equity allocation of either 100%, 80%, 40%, or 0%. At 0%, the allocation would be entirely to cash.2

Equity Allocation Based on Level and Trend of Composite Score

Trend
Composite Declining Increasing
Above 70 100% 100%
Between 60-70 80% 100%
Between 50-60 40% 100%
Below 50 0% 100%

There are a few key reasons why measuring market breadth provides sound trend analysis for guiding equity allocations. Steve Blumenthal of CMG Capital Management Group, Inc., the Index's co-developer, wrote a whitepaper, Risk Management for all Markets, detailing this tactical approach. Historically, market breadth has typically weakened before top-line prices have at major market peaks, and breadth thrusts3 often occur just before major bull market recoveries. Furthermore, the S&P 500 is considered a very efficient market, meaning the underlying securities' fundamentals and macro environmental factors tend to be priced in almost immediately.

Important Definitions and Disclosures

1 Global Industry Classification Standard (GICS®) is a widely accepted equity securities classification system developed by Morgan Stanley Capital International (MSCI) and Standard & Poor's.

2 Allocations to equities (long) represented by the S&P 500 Index. Allocations to cash (flat) represented by the Solactive 13-week U.S. T-bill Index.

3 Source: Ned Davis Research. Breadth thrust is a technical indicator used to ascertain market momentum and signals the start of a potential new bull market after what may have been an oversold market.

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