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Does Slow Mo Mean No Mo?

Daily State of the Markets
Tuesday Morning - March 13, 2012

Good Morning. You have to give the bears credit for at least being steadfast in their views. After getting their heads handed to them for much of the last twelve weeks, I was told by a card carrying member of the-glass-is-completely-empty club yesterday that stocks were no doubt going to begin a major correction in the next day or two. Exhibit A in this particular bear's argument was the fact that the upside momentum has all but stopped in its tracks and as a result, I'd best find my hard hat.

Given that I pride myself of being at least semi-objective, I decided to spend some time yesterday afternoon and dig into our vast array of market indicators in an attempt to determine if a slowdown in momentum tends to lead to big, nasty declines. After all, with the S&P now having gone seven trading days without making a new high for the rally (insert gasp here) even the most ardent bulls will have to admit that momentum is slowing. And with the resistance that is forming overhead, I can clearly see that the bears may have a case in the near term. But does slow mo really mean no mo' (as in the end of the bulls' run)?

In our daily market model, which is designed to keep us in tune with what IS happening in the market; we allocate 30% to the short- and intermediate-term trend of the market, 15% to market sentiment (a contrary indicator group), 15% to overbought/sold indicators, and fully 40% to momentum indicators and models. Thus, as you can see, market momentum gets the largest weighting in the overall model. The reason for this is simple; if momentum indicators confirm the trend of the indices, you know you've got a strong, sustainable move on your hands. And if not, well, you'd best lay off the leverage and the high-beta stuff.

For much of the current rally, our momentum indicators have been in lock step with the rally. Although it took a while for the momentum indicators to get on board, once the bulls train started rolling in January, "mo" confirmed the ride. But recently, our momentum indicators have stumbled and a couple of the models/indicators are now in negative territory. Thus, it hasn't been surprising to see the action get a little sloppy over the past couple of weeks.

Running down the indicators, our Trend-and-Breadth indicators are moderately positive at the present time (they account for 20% of our daily market model), while our "Price Thrust" indicator is neutral, our "Volume Thrust" indicator is negative, and our "A/D Thrust" indicator is also negative. Thus, this combination doesn't sound too terribly encouraging.

However, each of these indicators also has an historical "batting average" based on the mode the indicator is in. For example our short-term Trend-and-Breadth indicator is neutral at the moment. But when the indicator has been neutral, the broad market has gained ground at an annualized rate of +12.8% per year (since 1998). Next up, our intermediate-term Trend-and-Breadth indicator is positive and the market has gained ground at almost 19% a year when the indicator has been in this mode. Moving on, the Price Thrust indicator is neutral but stocks have still gained ground at 3.5% per year. Things are less positive however when looking at the Volume Thrust indicator, where stocks have lost ground at a rate of -11% per year when negative. And finally, the same can be said for our A/D Thrust indicator, which is also negative and where the market sports a batting average of -8.4% when in the red.

Finally, let's do some math and look objectively at the historical returns of the market based on the readings of our momentum indicators. By averaging the historical returns of the five different indicators, we come up with an annualized return of +3.16% per year. For sure, this is not a great number. But at the same time it is also hardly a reason to don the helmet and stock up on canned goods because, the bottom line is the bottom line: a green number.

So to summarize, we can say that unless/until some of these indicators weaken further, slow mo means, well... slow mo gains and that the dire predictions being offered by our furry friends in the bear camp may be off base. Unless of course, slow mo morphs into no mo at all, which is a horse of a completely different color.

Turning to this morning... Optimism over the approval of the Greek bailout, a strong ZEW confidence report in Germany, and falling rates at the latest Italian bond auction have put a bid under European markets and in turn, the U.S. futures.

On the Economic front... The Commerce Department reported that Retail Sales were up +1.1% in the month of February, which was a tenth below the consensus for +1.2%, but above January's upwardly revised +0.6%. When you strip out the sales of autos, sales were up +0.9%, which was above the consensus for a reading of +0.8%. In addition, last month's ex-Auto's number was revised higher to +1.1% from +0.7%.

Thought for the day... Just for fun, try smiling at everyone you meet today...

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: +1.13%
    • Shanghai: +0.97%
    • Hong Kong: +0.86%
    • Japan: +0.09%
    • France: +1.03%
    • Germany: +0.98%
    • Italy: +1.21%
    • Spain: +1.27%
    • London: +0.83%
  • Crude Oil Futures: +$0.46 to $106.80
  • Gold: -$4.20 to $1695.60
  • Dollar: lower against the yen and pound, higher vs. euro
  • 10-Year Bond Yield: Currently trading at 2.058%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +9.06
    • Dow Jones Industrial Average: +74
    • NASDAQ Composite: +18.35

Positions in stocks mentioned: None

For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

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