Portfolio Strategy, ETF investing, Long/Short Equity
Contributor Since 2009
David Moenning is founder and Chief Investment Officer at Heritage Capital Research, a Registered Investment Advisor. Heritage is an independent, privately owned, investment management firm located in the Denver area. Mr. Moenning has more than 33 years of portfolio management experience and focuses on a risk-managed approach to capital markets via modernized portfolio development and dynamic adaptation to ever-changing macro environments. Most recently Chief Investment Officer for a $1.3 billion RIA firm.
It's been a hectic weekend and as such, I'm going to keep my subjective analysis of the market brief and let the indicators and market models do most of the talking this morning.
However, since returning from our trip across the pond late last week, I have been asked a few times about my take on the current state of the market. In short, I continue to believe that we have a news-driven environment on our hands with the outlook for the global economy and the trade war being the primary focal points. (Feel free to deposit this statement in the "duh!" category.)
To be sure, the action remains volatile as the algos exaggerate moves in both directions. When good news hits the wires, stocks lurch forward and then conversely, when there is bad news, the major indices tend to experience a "whoosh" lower.
But from a longer-term perspective, the end result is, to borrow a phrase, much ado about nothing. Don't look now fans, but stocks have gone nowhere over the past twelve months. And from a shorter-term perspective, the S&P 500 has been moving sideways in a 100-point range between 2850 and 2950.
So for me, one of the key takeaways here is that the majority of the day-to-day machinations should probably be viewed as nothing more than "noise." Well, until the current range breaks, anyway.
The good news is that from an intermediate- and longer-term perspective, things continue to be in pretty good shape. For example, take a look at both the Primary Cycle and Fundamental boards below. As has been the case for some time now, these two big-picture indicator boards still sport a lot of green.
From a chart perspective, things also look decent when looking at at the market longer term, which, for me, means viewing a weekly chart.
S&P 500 - WeeklyView Larger Chart
Sure, stocks are in the midst of a corrective phase. No one is going to argue that. And yes, the action has been extremely volatile. But as the chart above illustrates, there are solid uptrends intact from the beginning of the most recent bear market low (early 2016) as well as the December panic low.
So, if you want to keep it simple, you can argue that as long as the S&P 500 doesn't make a "lower low" on the weekly chart, the trend remains bullish.
And for those with a shorter-term view, a meaningful break below the early-June low would turn the technical picture negative. But until then, it is probably best to keep the big-picture in mind, to ride out the volatility and the trading range, and to give the bulls the benefit of the doubt - for now.
Weekly Market Model Review
Now let's turn to the weekly review of my favorite indicators and market models...
The State of My Favorite Big-Picture Market Models
While the market certainly feels a little wobbly lately and the bears continue to make there case that stocks have nowhere to go but down, I will note that none of my favorite big-picture market models are currently on sell signals. This suggests that the weight of the evidence remains positive at this stage. And while things can certainly change, the current market environment continues to be news driven. This week's mean percentage score of my 6 favorite models rose to 72.2% from 68.9%% last week (Prior readings: 62.8%, 71.1%, 70.3%, 84.1%, 79%, 83.9%) while the median also improved to 75.0% versus 65.0% last week (Prior readings: 63.4%, 70.0%, 68.4%, 86.5%, 80%, 86.7%, 82.5%).
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.View My Favorite Market Models Online
The State of the Fundamental Backdrop
There was no obvious change to the Fundamental Factors board this week. However, I will note that the Monetary, Economic, and Inflation Composite all slide a little. There wasn't enough movement to change the rating or the mode of the models, but I do think it's important to note that these models are weakening - again, just a bit. Yet at the same time, the "relative" Valuation model that incorporates the level of rates continues to improve. As such, the overall movement appears to be a wash and the bulls continue to deserve the benefit of any doubt from a macro perspective.
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.View Fundamental Indicator Board Online
The State of the Trend
Somewhat surprisingly, the Trend board remains in pretty good shape. As such, it is hard to be overly negative on the market here. Looking at the charts, I have written recently that I had been placing less importance on price levels of the major indices. My argument was that news/headlines/tweets were driving the algos and that the algos don't really care about things like trendlines, support/resistance levels, and the like on an intraday basis. However, this week I need to adjust my stance a bit due to the obvious trading range that has developed since early August. As such, a meaningful break above S&P 2940 or 2850 would be meaningful.
NOT INDIVIDUAL INVESTMENT ADVICE.View Trend Indicator Board Online
The State of Internal Momentum
As I've been saying the last few weeks, the Momentum board remains a problem for the bullishly inclined. My take has been that the state of this board means that some caution is warranted. The good news that three of the component models improved from negative to neutral this week. And while the current readings are hardly reason for celebration, I'll take the improvements.
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.View Momentum Indicator Board Online
The State of the "Trade"
As I have said a time or twenty, the best moves in the market tend to occur when the stars are aligned on the Early Warning board. In other words when the table is set up well across all three time frames, the moves can be explosive. However, at this stage of the game, the stars are most definitely not aligned. As such, neither team really has much of an edge here.
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.View Early Warning Indicator Board Online
To have striven, to have made the effort, to have been true to certain ideals - this alone is worth the struggle -William Penn
Wishing you green screens and all the best for a great day,
David D. Moenning Founder, Chief Investment Officer Heritage Capital Research
HCR Focuses on a Risk-Managed Approach to InvestingWhat Risk Management Can and Cannot Do
At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.
Leading Indicators Model: A group of indicators that have historically shown tendencies to lead the market at major turning points.
Intermediate-Term Market Model: A composite model (model of models) focused on trend and momentum indicators which has been designed to provide identify intermediate-term trading opportunities.
Risk/Reward Model: A model-of-models intended to provide an overall view of the state of the risk/reward environment. The model includes tape, monetary, and sentiment indicators as well as 7 big-picture market model readings.
Desert Island Model: If I was stranded on a desert island with access to only one market model to manage money with, this would be the model. The model is a comprehensive model-of-models comprised of trend, momentum, mean reversion, economic, monetary, sentiment, and factor-based indicators/models.
External Factors Model: A model-of-models designed to provide a reading on the "macro state" of the market environment. The model is comprised of indicators/models in the areas of various index yields, industrial production, investors sentiment, and historic volatility.
Short-Term Trend-and-Breadth Signal Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates NDR's All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.
Channel Breakout System Explained: The short-term and intermediate-term Channel Breakout Systems are modified versions of the Donchian Channel indicator. According to Wikipedia, "The Donchian channel is an indicator used in market trading developed by Richard Donchian. It is formed by taking the highest high and the lowest low of the last n periods. The area between the high and the low is the channel for the period chosen."
Intermediate-Term Trend-and-Breadth Signal Explained: This indicator incorporates NDR's All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 45-day smoothing and the All-Cap Equal Weighted Equity Series is above its 45-day smoothing, the equity index has gained at a rate of +17.6% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +6.5% per year. And when both are below, the equity index has lost -1.3% per year.
Cycle Composite Projections: The cycle composite combines the 1-year Seasonal, 4-year Presidential, and 10-year Decennial cycles. The indicator reading shown uses the cycle projection for the upcoming week.
Trading Mode Indicator: This indicator attempts to identify whether the current trading environment is "trending" or "mean reverting." The indicator takes the composite reading of the Efficiency Ratio, the Average Correlation Coefficient, and Trend Strength models.
Volume Relationship Models: These models review the relationship between "supply" and "demand" volume over the short- and intermediate-term time frames.
Price Thrust Model Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.
Volume Thrust Model Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -14.279% per year.
Breadth Thrust Model Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.
Short-Term Overbought/sold Indicator: This indicator is the current reading of the 14,1,3 stochastic oscillator. When the oscillator is above 80 and the %K is above the %D, the indicator gives an overbought reading. Conversely, when the oscillator is below 20 and %K is below its %D, the indicator is oversold.
Intermediate-Term Overbought/sold Indicator: This indicator is a 40-day RSI reading. When above 57.5, the indicator is considered overbought and wnen below 45 it is oversold.
Mean Reversion Model: This is a diffusion model consisting of five indicators that can produce buy and sell signals based on overbought/sold conditions.
VIX Indicator: This indicators looks at the current reading of the VIX relative to standard deviation bands. When the indicator reaches an extreme reading in either direction, it is an indication that a market trend could reverse in the near-term.
Short-Term Sentiment Indicator: This is a model-of-models composed of 18 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a short-term perspective. Historical analysis indicates that the stock market's best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.
Intermediate-Term Sentiment Indicator: This is a model-of-models composed of 7 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a intermediate-term perspective. Historical analysis indicates that the stock market's best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.
Long-Term Sentiment Indicator: This is a model-of-models composed of 6 independent sentiment indicators designed to indicate when market sentiment has reached an extreme from a long-term perspective. Historical analysis indicates that the stock market's best gains come after an environment has become extremely negative from a sentiment standpoint. Conversely, when sentiment becomes extremely positive, market returns have been subpar.
Absolute Monetary Model Explained: The popular cliche, "Don't fight the Fed" is really a testament to the profound impact that interest rates and Fed policy have on the market. It is a proven fact that monetary conditions are one of the most powerful influences on the direction of stock prices. The Absolute Monetary Model looks at the current level of interest rates relative to historical levels and Fed policy.
Relative Monetary Model Explained: The "relative" monetary model looks at monetary indicators relative to recent levels as well as rates of change and Fed Policy.
Economic Model Explained: During the middle of bull and bear markets, understanding the overall health of the economy and how it impacts the stock market is one of the few truly logical aspects of the stock market. When our Economic model sports a "positive" reading, history (beginning in 1965) shows that stocks enjoy returns in excess of 21% per year. Yet, when the model's reading falls into the "negative" zone, the S&P has lost nearly -25% per year. However, it is vital to understand that there are times when good economic news is actually bad for stocks and vice versa. Thus, the Economic model can help investors stay in tune with where we are in the overall economic cycle.
Inflation Model Explained: They say that "the tape tells all." However, one of the best "big picture" indicators of what the market is expected to do next is inflation. Simply put, since 1962, when the model indicates that inflationary pressures are strong, stocks have lost ground. Yet, when inflationary pressures are low, the S&P 500 has gained ground at a rate in excess of 13%. The bottom line is inflation is one of the primary drivers of stock market returns.
Valuation Model Explained: If you want to get analysts really riled up, you need only to begin a discussion of market valuation. While the question of whether stocks are overvalued or undervalued appears to be a simple one, the subject is actually extremely complex. To simplify the subject dramatically, investors must first determine if they should focus on relative valuation (which include the current level of interest rates) or absolute valuation measures (the more traditional readings of Price/Earnings, Price/Dividend, and Price/Book Value). We believe that it is important to recognize that environments change. And as such, the market's focus and corresponding view of valuations are likely to change as well. Thus, we depend on our Valuation Models to help us keep our eye on the ball.
NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and Heritage Capital Research and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
Mr. Moenning of Heritage Capital Research is an investment adviser representative of Eastsound Capital Advisors, LLC, a registered investment advisor. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.
Mr. Moenning and Heritage Capital Research may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.
The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
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Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.
Disclosure: I am/we are long SPY.