Posted |

Modern times demand modern thinking in portfolio design. Learn more...

I always enjoy speaking in front of a group of financial advisors. Cutting to the chase, the time before and after my speaking slot provides an opportunity to interact with the folks that are out there on the front lines, helping clients day in and day out plan their financial futures.

What I took away from my discussions with advisors this week in Dallas was that nobody wants to be considered "the crowd." After the smack-down that occurred in 2000-03 and then the wipeout of 2008, financial advisors of all sizes, shapes and colors are now wary of what is referred to in the business as a "crowded trade." In other words, nobody wants to do what everybody else is doing and the word "contrarian" came up in discussions early and often this week.

Next, advisors are laser focused on what might be lurking out there in the financial markets because advisors, like their clients, simply can't afford to experience a repeat of the two brutal bear markets that occurred in the first 9 years of the new century.

So, for fun, I decided to ask people what they thought the contrarian move would be at this time from a macro standpoint. The responses were many and varied, with most having something to do with energy and/or the emerging markets. Several people mentioned the idea of interest rates rising. And as expected, there was the usual obsession with gold. However, what I found eye-opening was the fact that not a single advisor I spoke with had anything positive to say about the outlook for the U.S. stock market.

No, when the subject of the stock market came up, "lower expectations" was the nearly universal response. It seems that based on my limited and purely anecdotal evidence, everybody on the planet has now accepted the idea that the stock market will be a long slog going forward. Hmmm...

The TRUE Contrarian Play

After a handful of these conversations, which usually occurred with a beer in hand, it hit me; NOBODY expects the stock market to provide returns that are even remotely close to the historical norm. Nor do they expect strong returns anytime soon. Earnings, the economy, oil, China, the "Brexit," Japan's deflation, Europe (and this includes the perennial difficulties with Greece), and the dollar were all cited as reasons to embrace a "new normal" of lower stock market returns.

So just about the time the Texas Rangers started to really whup up on the Yankees in the rain at Globe Life Park in Arlington, it hit me; the TRUE contrarian play at this point isn't betting on oil rising. No, it is looking for something good to happen in the stock market!

Think about it; just about every firm on the street is calling for stocks to produce returns in the low single digits this year. Even Bob Doll, the respected stock picker and macro analyst now with Nuveen, who starts each year with a list of 10 possible surprises, is looking for the S&P 500 to rise about 7% this year (which is about 30% below the historical norm). And most Wall Street firms have projections that are below Bob's projection.

Another Reason To Be Optimistic

So, I'm going to go on record as suggesting that this may indeed be the time to get excited about your stock market investments. Why? Because in short, NOBODY else is!

But in all seriousness, recall that I wrote recently about the fact that U.S. stocks are currently in the midst of a secular bull market - and that returns during secular bulls tend to be about 40% higher than average.

This morning I'd like to offer up another reason to turn that stock market frown upside down in terms of the outlook for stocks over the next 12-18 months.

Long-time readers know that it usually pays to "trust the thrust" in the stock market. In case you are not familiar with the term, a "thrust" occurs when a preponderance of the data surges in one direction or the other within a very short period of time. History shows that when these "thrusts" occur, good things tend to happen in the ensuing 3, 6, 9, and 12 months.

And here's the good news: We've seen several breadth thrusts in the market since the mid-February bottom. The latest signal occurred on 3/30 when the percentage of stocks above their 50-day moving average breached the 90% level. In short, this means that just about all stocks are heading in a positive direction!

According to the computers at Ned Davis Research Group, 1 month after 90% of stocks move above their 50-day moving averages, the S&P has gained 3.08% on average. This compares very favorably to the average monthly gain for all 1-month periods of +0.63%. And of the 17 times this signal has occurred since 1967, stocks were higher 1-month later 14 times. Three months after the signal, the S& has risen an average of +6.12% (versus +1.89% for all 3-month periods), with stocks higher 16 out of 17 times. Six months later, stocks are up +11.15% vs. the average for all 6-month periods of +3.91%. And one year later, stocks have been higher 17 out of 17 times, with an average gain of 17.2%, which is more than double the average of 8.07%.

Sure, these "thrust" signals have been more frequent in the last decade as trading in decimals, the elimination of the uptick rule, HFT, and the use of algo trading strategies has taken hold. Yes, the "Sell in May and go away" season is upon us. And to be sure, valuations remain a problem, the economy isn't hitting on all cylinders, and earnings are heading the wrong direction.

However, from both a big-picture and contrarian standpoint, there are some reasons to be optimistic about stock prices in the future - if you bother to look for them!

Modern times demand modern portfolios!
MPD™ (Modern Portfolio Diversification™) goes beyond the usual, failed asset allocation approach
Learn More about using MPD™ to modernize your portfolio!

Today's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -3.61%
    Hong Kong: +0.12%
    Shanghai: -0.27%
    London: -1.10%
    Germany: -1.21%
    France: -1.47%
    Italy: -1.56%
    Spain: -2.12%

Crude Oil Futures: +$0.01 to $45.34

Gold: +7.70 at $1258.10

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

US 10-Year Bond Yield: Currently trading at 1.847%

German 10-Year Bund Yield: Currently trading at 0.245%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -12.75
    Dow Jones Industrial Average: -128
    NASDAQ Composite: -14.00

Thought For The Day:

Look at everything as though you were seeing it either for the first or last time. -Betty Smith

Do you really want Robots in charge of your portfolio?
We believe in building Customized Portfolios fit to YOUR needs
Learn More...

Here's wishing you green screens and all the best for a great day,

David D. Moenning
Founder: Heritage Capital Research
Chief Investment Officer: Sowell Management Services

Looking for More on the State of the Markets?


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.

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 is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell 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.

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.

Advisory services are offered through Sowell Management Services.