Posted |
Can We Trust the Bulls' Latest Stampede? image

With the S&P 500 having blasted up +10.9 percent in just 12 days, it is safe to say that the bulls have displayed a little "oomph" in their latest joyride to the upside. And to students of the game, it is the "oomph" behind the move that is really the key.

You see, the important question on everyone's minds after a move such as we've seen over that last couple weeks is: Can it continue?

The beauty of staying in tune with the trend of the market is that price cannot deviate from itself as a directional indicator. In other words, if one is long and price is moving higher, it is a good thing - always. However, the fact that price is moving up does little to help one with the question of whether or not the move can continue.

Where's the Beef?

For help in this regard, one can turn to momentum indicators. Put simply, if the bulls are rallying with gusto, it is generally a good indication that the move has not yet run out of steam. However, if an uptrend is merely limping along, then the move tends to be susceptible to any number of negative inputs.

The uptrends that took place this summer were good examples of rallies that looked good from a price perspective but didn't have much in the way of "oomph" or momentum behind them. In fact, our Market Environment Models was actually neutral at the S&P's August and September highs, asking in effect, "Where's the beef?"

S&P 500 - Daily

View Larger Image

However, this time around things are a little different. First, our Environment Model is positive. In fact, our weekly model has moved up to its highest reading of the year. And while anything can happen in the near-term, a strong reading from our primary market model is usually a good thing from an intermediate-term perspective.

This Time There is Some "Oomph"

Perhaps more important than the set of new all-time highs seen on the Dow, S&P, and NASDAQ 100 is the fact that our momentum indicators have started to flash positive "thrust" signals. And the bottom line here is that when momentum thrusts occur, the market has historically stayed in a positive mode for a decent chunk of time.

The Price Stampede Indicator

One such indicator is called a price stampede. The indicator is simple, yet effective. When the percentage of stocks above their respective 10-day moving averages exceeds 90, it is a good indication that the bulls are on the move. No, make that stampeding!

One month after a price stampede, the S&P 500 has been up +1.24 percent on average since late 1980 versus the average gain of +0.77 percent seen for all 21-day trading periods. Of the 28 occurrences since 10/10/1980, the S&P 500 was higher 61 percent of the time.

Three months later, the S&P 500 has gained +4.14 percent versus the +2.32 percent gain for all three month periods - and the trades were positive 70.3 percent of the time.

Six months later, the song remains the same as the S&P 500 was higher 81.5 percent of the time after the price stampede signal and sported an average gain of +9.22 percent - compared to the average of all six-month periods of +4.75.

And even one year after a price stampede, the S&P 500 still outperforms all one-year periods +16.5 percent to +9.9 percent, with a winning percentage of 96.1 percent. The word you are probably looking for right now is, "impressive!"

So, given that for the last 35 years, the market has usually outperformed by a handsome margin after a price stampede, it is safe to say that the bulls have history on their side right now.

And the good news is that the latest price stampede occurred on October 21, 2014.

But Should We Still Trust the Stampede?

The problem is that this signal, which once only fired every other year or so, now occurs with regularity. For example, over the last 35 years, there have been 28 price stampede buy signals. Ten of which occurred from 1980 through 2007, meaning that a price stampede occurred about once every 2.6 years on average. Therefore, this was once a VERY important buy signal to watch.

But since 2007 the character of the market has clearly changed. The elimination of the uptick rule for short-sales creates boatloads of buying when the shorts cover. The advent of broad based market ETFs where as many as 3,000 stocks can be traded with the click of a button has added tremendous upside movement to stocks. And the invention of HFT designed to scalp fractions of a penny from trades and the ever-increasing use of high-speed algorithmic trading have clearly increased both the size and speed at which trends occur.

Because of this, there have been significantly more price stampede signals in the last seven years. While there were 10 buy signals in the 28 years between 1980 and 2007, there have been 18 price stampede signals since the beginning of 2008.

So instead of there being one price stampede every three years, there are now more than 2.5 per year on average. As such, the question begs to be asked: Does this indicator still work?

The Recent History

In looking at the price stampede signals since 2007, one finds that there were several VERY large moves - in both directions after buy signals have occurred. The key here is to understand that during bear markets, the "dead cat bounces" almost always create momentum signals that wind up being quite negative 1, 3, and 6 months out - because the bears tend to quickly return after a brief blast higher.

However, if one removes the signals that occurred in 2008, the price stampede indicator produces returns that are similar to the historical averages over the next 3 and 6-month periods as well as the 12-month periods. Therefore, it would appear that this indicator, while not as pound-the-table strong as it once was, is still worth paying attention to.

But since the market moves have been coming faster and harder in recent years, it is probably a good idea to utilize a protective stop strategy on any momentum-based buy signal one follows. The bottom line is that a price stampede can quickly turn on you if the computers start to sense bad news or a new crisis.

In conclusion, it would appear that the price stampede signal is either a harbinger of good things to come or merely a big move within an ugly market. And given that the S&P has just moved to a fresh all-time high, here's hoping it's the former.

Turning To This Morning

While the recent market has been all about QE, today the focus appears to be shifting back to the prospects for global growth. First, China is said to be planning to spend $16.3 billion on a 'New Silk Road' project which would link its markets to three continents. Next, the European Commission cut its outlook for growth. The 2014 GDP forecast was cut to +0.8% from +1.2% and the 2015 growth rate was cut to +1.1% from +1.7%. Specifically, Germany's growth rate was cut to just +1.1% in 2015 from 2.0%, France's was reduced to +0.7% from +1.5% and Italy's was cut to +0.6% from +1.2%. And finally, Oil is continuing yesterday's decline on word that Saudi Arabia has unexpectedly cut prices for crude sold to the United States. Apparently the Saudis have lowered crude prices to the U.S. by $0.45 per barrel. Turning to the global stock markets, Japan continued to rally on the expansion of the QQE plan, China markets were flat, European bourses are down slightly, and U.S. futures point to a soft open on Wall Street.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +2.73%
    Hong Kong: -0.29%
    Shanghai: +0.04%
    London: -0.05%
    Germany: +0.26%
    France: -0.12%
    Italy: -0.38%
    Spain: -0.41%

Crude Oil Futures: -$2.42 to $76.33

Gold: -$1.30 at $1168.50

Dollar: lower against the yen and pound, higher vs. euro

10-Year Bond Yield: Currently trading at 2.318%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -5.56
    Dow Jones Industrial Average: -35
    NASDAQ Composite: -16.38

Thought For The Day:

If you wait until you're ready, you may be waiting the rest of your life. -Unknown

Important Reminder: In order to keep pace with our growth, better serve our advisors and clients, and to provide scale for future growth, Heritage is teaming up with CONCERT Global - an SEC Registered Investment Advisor with more than $2 Billion in assets under management. CONCERT will provide more robust back-office, compliance, technology, and trading infrastructure. Client packets to make the transition will be arriving in the coming weeks.

Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
Check Out the NEW Website!

Investment Advisory Services Offered Through CONCERT Wealth Management, Inc. An SEC Registered Investment Advisor


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 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 nor any Portfolio 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.

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.

David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

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.