Bulls Not Out Of The Woods Yet
Last week, I opined that the key to the near-term action was the battle that looked to be raging over the 50-day moving average. While I haven't placed much emphasis on the 50- and/or 200-day moving averages in decades, it appears that the press and a great many algos do. As such, I like to use the action around these technical levels as possible "tells" to help determine which team has control of the ball. The good news for the bull camp is they appear to have won the most recent skirmish over the 50-day. The bad news is there is another - and in my opinion, more important - line in the sand just above current levels that our heroes in horns need to breach in order to declare victory and be able to argue that a new uptrend has begun. It is also positive that the Trend board continues to sport an awful lot of green here. But... I'm also of the mind that the bulls are not out of the woods yet and all of the "good stuff" that looks to be happening now could easily be reversed if talks for additional stimulus break down.
The State of the Trend Indicators
The Trend Board remains in good shape, with all models save one being positive this week. And it is worth noting that the Cycle Composite will turn green next week. Looking a little farther ahead, the Cycle indicator turns red the week after next and then is largely green (except for a couple down weeks) for the majority of the remaining weeks in calendar 2020. Although markets don't always follow the historical script, I have learned that when the markets are in sync with their historical patterns, they tend to stay that way until/unless some external event takes control. And with the Coronavirus raging in the West Wing and the election on tap, it is easy to argue that there could be a headline or two between now and New Year's Eve that could influence traders. But for now, the trend board suggests the bulls hold the edge.
NOT INDIVIDUAL INVESTMENT ADVICE.
About The Trend Board Indicators: The models/indicators on the Trend Board are designed to determine the overall technical health of the current stock market trend in terms of the short- and intermediate-term time frames.
My Take on the State of the Charts...
Once again, I largely summarized the state of the chart action in my executive summary above. In short, it looks to me as if the bulls have the ball at the present time but are definitely not "rolling" just yet. One indicator I'll be watching closely in the coming days is my customized 5-day smoothing (I prefer a weighted moving average that is moved ahead 3 days). I have learned that when the S&P 500 can move above and remain above the 5-day for 10 consecutive days, the odds of further gains increase. And with today being day number 7 in my count, it will be interesting to see if the bulls can continue to make progress and break above near-term resistance. But again, the news flow will likely continue to play an outsized role for the foreseeable future.
S&P 500 - Daily
View Larger Chart
Next, let's check in on the state of the market's internal momentum indicators.
* 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.
Last week I suggested that if the bulls were expecting to make a run anytime soon, we needed to see some improvement in the Momentum board. The good news is the board did indeed perk up over the last week. One week ago, there were 3 sell signals on the board and only 2 buy signals. This week, we've got 4 buy signals and only 1 sell. And while there is still room for additional improvement, I am pleased to see the bulls moving in the right direction.
Thought For The Day:
An inch of time cannot be bought with an inch of gold -Chinese Proverb
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.
Trend Models Explained
Short-Term Trend Model: A series of indicator designed to identify the status of the stock market’s short-term (0-3 weeks) trend. The model compares the current price of S&P 500 relative to 5-day customized smoothing (weighted and moved forward 3 periods), the relationship of the 5-day to the 10-day, and the relationship of 10-day to 39-day.
Short- and Intermediate-Term Channel Breakout Systems: 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 Model: A model designed to identify the status of the stock market’s intermediate-term (3 weeks to 6 months) price trend. The model compares the current weekly price of S&P 500 relative to relative to customized 10-week smoothing (weighted and moved forward 3 periods), the relationship of the 10-week to the 30-week, and the relationship of 30-week to 55-week.
Long-Term Trend Model: An indicator designed to identify the status of the stock market’s longer-term (>6 months) trend. The indicator compares the 50-day smoothing of the S&P 500 relative to its 200-day smoothing. When the 50-day is above 200-day, the indicator is positive and vice versa.
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.
Short- and Intermediate-Term Trading Mode Models: These indicators attempt to identify whether the current market action represents a "trending" or "mean reverting" environment. The indicator utilizes the readings of the Efficiency Ratio, the Average Correlation Coefficient, and Trend Strength models.
Momentum Models Explained
Short-Term Trend-and-Breadth Model: History shows the most reliable market moves tend to occur when the breadth indices are in tune 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. At the time of this writing, when the A/D line has been 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 +26.5% per year since 1980. When one of the indicators is above its smoothing, the equity index has gained at a rate of +14.5% per year. And when both are below, the equity index has lost over -20% per year.
Intermediate-Term Breadth Model: A proprietary diffusion index developed by Ned Davis Research. The indicator is designed to determine the technical health of the market’s 157 sub-industry groups (GICS categorizes the market into 11 sectors, 20 industries, and 157 sub-industry groups). Technical health is determined by the direction of each sub-industry’s long-term smoothing and the rate of change of the sub-industry’s price index.
Short- and Long-Term Volume Relationship Models: These models review the relationship between "supply" and "demand" volume over the short- and intermediate-term time frames.
Intermediate-Term Price Thrust Model: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average.
Intermediate-Term Volume Thrust Model: 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 to the 10-day total of daily declining volume. The indicator 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.
Breadth Thrust Model: 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. Historically, the NASDAQ Composite has performed 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.
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.
The author neither endorses nor warrants the content of this site, any embedded advertisement, or any linked resource. The author or his managed funds may hold either long or short positions in the referenced securities. Republication rights must be expressly granted by author in writing.
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.