Posted | by David Moenning |

As I have mentioned a time or twenty, I believe in a rules-guided approach to managing the markets. The idea here is fairly straightforward. I have learned over my 30 years of professional investing that staying in tune with the weight of the evidence (as in cold, unemotional, objective market model readings) can help one avoid the "big mistake." And make no mistake about it; it is the "big mistake" the ruins portfolios and careers. As such, avoiding a period of significant underperformance (or worse) is mission critical for investors and portfolio managers alike.

In fact, I'd like to think that "mistake avoidance" is probably more important than trying to dream up the perfect market management strategy. The problem with the latter is the fact that the drivers of markets change - all the time. Market structure can change. Securities change. The players change. The rules change. As such, the trading game itself is constantly changing. So, anyone thinking they have either found, or is in the process of developing a "Holy Grail" market system they can turn on and let run ad infinitum, is fooling themselves (and others).

To be sure, one of the biggest mistakes a manager or investor can make in this business is to allow themselves to believe they know what is going to happen next in Ms. Market's game. It is one thing to have a thesis. But it is another thing altogether to "bet" heavily on what you think is going to happen and then stick with it no matter what.

So, with the caveats that (a) when the evidence changes, I change with it, and (b) I do not invest according to my outlook or "view," I do have an opinion on what is going on in the stock market at the present time that I'd like to share.

My Take

First, I believe stocks remain in a secular bull market that began on March 9, 2009. Take a look at a monthly closing chart of the S&P 500 since the 1960's and you'll see what I'm talking about. These moves tend to last a decade or two.

Next, I believe we are currently experiencing a cyclical bull phase within the context of the secular bull. My stance is this cycle began on February 12, 2016. However, since cyclical bulls tend to last a couple years or so, I am definitely on the lookout for something that could cause a cyclical bear phase to begin.

Frankly, the jury is still out on whether we are seeing the beginning a cyclical or "mini" bear such as we experienced from July 2015 through February 2016.

Currently, my models remain positive on balance, which tells me to side with the bulls. However, the models are not universally positive and a couple that tend to have leading tendencies have recently flashed sell signals. Therefore, I must be on "high alert" for any kind of change in the environment.

This is where one's "view" comes into play. While I don't know what will happen next, or why, I can try and prepare mentally/emotionally for the possible outcomes. The bottom line is knowing what "could" happen makes it easier to pull the trigger when the time comes to make a change in your position.

So... My current "subjective" view is we are experiencing a consolidation phase in the stock market. I note that since 12/31/17, stocks have gone nowhere, albeit in a rather loud, violent fashion. But, the key is that time is passing without prices rising, which, in turn, provides "E" (As in earnings in the P/E ratio) time to catch up. And this is what consolidation phases are all about.

The point is that while I cannot say that valuations are cheap at this time, I can say that valuations have improved. And given that the economy continues to grow, this means that risks from a valuation standpoint have eased.

The bottom line for me is that unless the economic expansion is interrupted, the current consolidation phase is likely to be "resolved" to the upside. Yes, the ride will probably remain bumpy and may even get scary if the bears are able to make another run at the lows. But, so far at least, this appears to be a garden-variety correction that wrings out some of the excesses that had built up in the market.

What if I'm wrong, you ask? Simple. I let my indicators guide me in an attempt to stay on the right side of the major market cycle. Remember, it's okay to be wrong. But it's not okay to stay wrong for long. So, as always, flexibility remains the key to success in the long run.

It is my sincere hope that this helps in some small way.

Thought For The Day:

Strive to be the person your dog thinks you are -unknown

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

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

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


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.

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 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.

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.