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Is Sideways the New Normal? image

We've been saying that the key to the current stock market environment is to recognize that the indices have been basically stuck in the middle with you (hat tip to 70's one-hit wonder, Stealers Wheel) for some time now. Some will argue that the S&P 500 has been trapped in a sideways trading range since late February, while others contend that the trendless environment began back in November of last year.

Personally, I believe that the current trading range began in 2015. But whether you believe that the rangebound environment commenced in November 2014 or February 2015 is really beside the point. In looking at the chart below, I think we can all agree that the market has been moving in a sideways fashion for many moons now, right?

S&P 500 Index - Daily

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But at Ned Davis Research, they like to quantify stuff like this. In a recent report, their technical team, which is second to none, by the way, found that the range from top to bottom on the S&P 500 over the past 9 months has been 7.4%.

While that may not sound all that "tight," it turns out that since 1928, such a range is pretty darn rare. According to NDR's computers, the market has traded in a range of 8% or less over a 9-month period just 1.4% of the time.

However, since the up and down, back and forth environment has been so prevalent this year, many fear that this is the "new, new normal."

Has This Happened Before?

Being a bit of a student of market history, I know that this type of environment has indeed happened before. I recall the 2005-2006 period as being particularly difficult to navigate. And sure enough, NDR informs us that there were two brief rangebound markets during that period.

But in looking back at history, we note that most of the rangebound markets were fairly brief. Such was the case in 1965, 1973, 1984 and 2006. In each of these markets, volatility quickly ensued after the range ended and a trend developed in one direction or the other.

However, in the early 1990's these protracted, tight ranges occurred fairly frequently. By my count, from 1991 through 1994, it appears that there were no fewer than seven instances of tight, 9-month ranges. So, while most of the prior protracted rangebound markets didn't last long, there is indeed precedence of this type of environment sticking around for a while.

What Comes Next?

The next logical question is, what does the market tend to do after a long trading range? Before answering the question it is important to recognize that we are looking at a fairly small sample size here. As such, one should take any statistical conclusions with a fairly large grain of salt.

However, history shows that the market tended to move higher after tight, 9-month trading ranges the majority of the time. But let's also keep in mind that the market itself tends to move higher over a 9-month range the majority of the time.

The other takeaway from a review of the historical occurrences of tight ranges is that the gains seen over the ensuing three and six month periods weren't much better than average. But over the next twelve months, when the market return was above average, it was actually well above average.

The Takeaway

Based on a review of history, one can argue that long, tight trading ranges tend to be consolidation periods. In addition, it appears that the direction of the next important trend tends to be determined by the state of the secular trend. In other words, during secular bear periods, the resolution of the range occurred to the downside. But when the bulls were firmly in control, the consolidation tended to be a "pause that refreshes."

So, if you believe that stocks entered a secular bull market in March 2009, then you can expect to see blue skies ahead when the current range ends. But if not, well, that's another story entirely.

At our shop, we don't make predictions and instead employ a weight of the evidence approach. And as I've written recently, our longer-term indicators are not exactly robust at the present time. In fact, the majority are waving yellow warning flags. But given that stocks have been moving sideways for a long period of time, it will be interesting to see whether our indicators are merely reflecting the weakened, sideways environment or actually warning of trouble ahead. So stick around, this ought to be interesting.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: +0.30%
    Hong Kong: +0.56%
    Shanghai: -1.13%
    London: -0.09%
    Germany: +0.13%
    France: +0.41%
    Italy: +0.35%
    Spain: -0.64%

Crude Oil Futures: -$0.90 to $47.62

Gold: -$7.40 at $1081.30

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

10-Year Bond Yield: Currently trading at 2.257%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -3.05
    Dow Jones Industrial Average: -17
    NASDAQ Composite: -2.75

Thought For The Day:

In the right light, at the right time, everything is extraordinary. - Aaron Rose

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Global Economic Growth
      2. The State of Fed/ECB/PBoC Policy
      3. The State of the U.S. Economy
      4. The State of the Earnings Season

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Neutral
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 2 years)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Key Near-Term Support Zone(s) for S&P 500: 2065
  • Key Near-Term Resistance Zone(s): 2135

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator (Short-Term): Positive
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator: Negative
  • Breadth Thrust Indicator: Negative
  • Intermediate-Term Bull/Bear Volume Relationship: Moderately Negative
  • Technical Health of 100+ Industry Groups: Moderately Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • S&P 500 Overbought/Oversold Conditions:
          - Short-Term: Neutral
          - Intermediate-Term: Moderately Oversold
  • Market Sentiment: Our primary sentiment model is Moderately Positive .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.

  • Weekly Market Environment Model Reading: Neutral

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

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research


Indicator Explanations

Trend and Breadth Confirmation Indicator (Short-Term) 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 an 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.

Price Thrust Indicator 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 Indicator 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 -8.5% per year.

Breadth Thrust Indicator 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.

Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.

Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.

Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.


Disclosures

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., a 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.