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Good Monday morning and welcome back. Since it's Monday, let's get right to our objective review the key market models and indicators. The primary goal of this exercise is to remove any subjective notions about the markets and ensure that we stay in line with what "is" happening in the market. So, let's get started...

The State of the Trend

We start each week with a look at the "state of the trend." These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

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Executive Summary:

  • The short-term Trend Model is technically negative at this time, but could move into neutral with modest upside move.
  • The short-term Channel Breakout System remains negative but could quickly give a buy signal with market now in a "mean reverting" mode.
  • The intermediate-term Trend Model remains positive.
  • The signals are the same for both intermediate-term and the short-term Channel Breakout System given the move back to a "mean reverting" mode.
  • The long-term Trend Model remains solidly positive.
  • The Cycle Composite suggests the bulls have the wind at their backs for the most part through the end of June.
  • After a brief stint in the "trending" mode, the Trading Mode models have now flipped back to "mean reverting"

The State of Internal Momentum

Next up are the momentum indicators, which are designed to tell us whether there is any "oomph" behind the current trend...

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Executive Summary:

  • The short-term Trend and Breadth Confirm Model has been whipped around a bit lately, but is now neutral.
  • Our intermediate-term Trend and Breadth Confirm Model has slipped to neutral.
  • There is no change to the Industry Health Model again this week - stuck in neutral. To review, this suggests narrow leadership in the broad market.
  • The short-term Volume Relationship remains negative - but only by a small margin.
  • The intermediate-term Volume Relationship continues in positive territory, but the trend of the indicators continues to head the wrong direction. This tells me that market internals aren't great right now.
  • The Price Thrust Indicator had been falling prior to last week's selloff and is now negative.
  • The Volume Thrust Indicator remains in neutral mode.
  • The Breadth Thrust Indicator is also neutral.

The State of the "Trade"

We also focus each week on the "early warning" board, which is designed to indicate when traders may start to "go the other way" -- for a trade.

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Executive Summary:

  • From a near-term perspective, stocks are neither overbought or oversold.
  • From an intermediate-term view, stocks remain neutral as well. This condition means neither team has an edge at the moment.
  • After a timely sell signal, the Mean Reversion Model is back to neutral and very close to flashing a buy signal.
  • The intermediate-term VIX Indicator has moved to a buy signal.
  • From a short-term perspective, market sentiment has become overly negative, which means the indicator is now green.
  • However, the intermediate-term Sentiment Model remains in the red zone.
  • Longer-term Sentiment readings are also negative. As such, we can conclude that the market would need more downside exploration to work off the complacency seen over past couple of months.

The State of the Macro Picture

Now let's move on to the market's "external factors" - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.

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Executive Summary:

  • Our Absolute Monetary condition model continues to work lower in the neutral zone.
  • On a relative basis, our Monetary Model is technically neutral, but the reading weakened last week.
  • Our Economic Model (designed to call the stock market), improved slightly but remains in the red zone.
  • The Inflation Model, which did a very good job of indicating that inflationary pressures were heating up over the past year, is now pulling back. Thus, we can argue that any fear regarding inflation overheating are unwarranted at this time.
  • Our Relative Valuation Model remains in the neutral zone - but ticked higher last week in reaction to the improvement in earnings and the decline in rates.
  • The Absolute Valuation Model is still screaming for attention.

The State of the Big-Picture Market Models

Finally, let's review our favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.

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Executive Summary:

  • The Leading Indicators model, which did a fine job during the last bear phase, tells us that caution is warranted here.
  • The Tape remains neutral at this time and warns of narrowing leadership (think FANG's)
  • The Risk/Reward model remains on a sell signal, with a neutral reading at this time.
  • The External Factors model has been improving a bit lately and is now on the north side of the dead-neutral line.

The Takeaway...

While the victories have been few and far between for the bear camp of late, last week can be awarded to our furry friends as the recent microscopic breakout to new highs was reversed in an emphatic way. This does NOT mean that the bears are in control of the game or that an important trend reversal is imminent. No, this would require a meaningful and sustained move below 2320 on the S&P 500. But, with the short-term trend in neutral and the Primary Cycle board yellow across the board, my song remains the same this week as I believe risk is elevated and investors should play the game accordingly.

Publishing Note: My life is a little complicated for the next two weeks as my wife and I are moving from our home in Evergreen, CO into a rental while we wait for our new home to be finished. Thus, I will publish morning reports as my schedule permits.

Thought For The Day:

Life is not complex. We are complex. Life is simple, and the simple thing is the right thing. --Oscar Wilde

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 Trump Administration Policies
      2. The State of the U.S. Economy
      3. The State of Earning Season
      4. The State of World Politics


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

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

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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 constitutes a solicitation to purchase or sell securities or any investment program.

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