Posted | by David Moenning |
A Healthy Dose of Patience is Required image

Executive Summary:

The song remains the same again this morning as the stock market indices continue to be pushed and pulled by the status of stimulus talks. While past and present Fed officials continue to pound the table publicly about the need for additional fiscal stimulus (this time, more targeted, of course), the reality of the situation is it appears that politics are the priority in Washington.

Although the polls indicate that the vast majority of Americans have already (a) made up their minds about the Presidential election and who they want to represent them in the senate, and (b) begun casting their ballots in a big way (a new poll shows 38% have already voted), it looks to me that the powers that be in D.C. continue to pander to their respective bases. So... The logic seems to be that we aren't going to see anything other than perhaps a "skinny" stimulus bill before the election.

The good news is that Wall Street seems to believe that a Biden win will bring more meaningful stimulus to the table. And if there is indeed a blue wave after the election, the stimulus could happen fast. And from my seat, this is why the S&P 500 remains perched above near-term support levels.

Next, let's take a look at what our Early Warning indicator board tells us about the near-term outlook...

The State of the "Early Warning" Indicators

The Early Warning board remains neutral. Stocks are neither overbought nor oversold from both the short- and intermediate-term perspectives, the VIX indicators are mixed, and our three sentiment models sport one buy signal, one sell signal, and a hold. Can you say no-man's land? My takeaway is that since the bulls were in control of the ball before the recent pullback began and there does not appear to be any table-pounding negatives or any real mean reversion tailwinds, the bulls deserve the benefit of doubt in the near-term.


* 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.

Stochastic Review

As you can see on the chart below, the stochastics and the current pricing for the S&P are both in neutral territory. The overbought condition on the stochastics has been "worked off" and the reading us now neutral. So, for me, the question of the day is if the bears will be able to produce some additional downside exploration - creating an oversold condition in the process - or if the current consolidation will be enough to set up the next leg higher. To be clear, I believe there will be another leg higher as (a) the election uncertainty will recede and (b) we appear to be getting closer to a vaccine (which will allow traders to discount a return to "normal" in the next 12 months). However, both outcomes require time to pass. Thus, I think a healthy dose of patience remains appropriate here.

S&P 500 - Daily

View Large Chart Online

Thought For The Day:

The great question is not whether you have failed, but whether you are content with failure. -Chinese Proverb

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

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

Early Warning Models Explained

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 when 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 indicator looks at the current reading of the VIX relative to a series of Donchian Channel 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.

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.

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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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