Posted | by David Moenning |
Time For A Rally? image

Perhaps one of the most important qualities necessary to survive long-term in this business is an open mind. As I've lamented a time or two hundred over the years, too many investors are focused on making market predictions and/or about "being right." Yet, as more than forty years of professional investing experience has taught me, this game is really all about "getting it right."

While it is tough on the ego in the beginning, it is important to recognize that nobody cares what you think is going to happen next. And if you try to build a business on making market predictions, you may not be in business long as no one, repeat: NO ONE has ever been able to predict what is going to happen next in Ms. Market's game for any length of time. Trust me, the list of those who have tried is very long. Anybody remember a guy named, Joe "I'm the Greatest" Granville?

The best one can hope for is to "get it right" when the really big moves occur. You know, the kind of bull thrusts or bear attacks that really impact a portfolio. One of the key lessons I've learned is if you can get it "mostly right, most of the time," you will set yourself up nicely to succeed in the long run.

No, you won't get all the moves right. It's impossible. So, the point is, why even try? Instead, why not try to stay "in line" with the weight of the evidence - I.E. What Ms. Market is doing right now. Regardless of whether you believe the action is right or wrong. Remember, markets are never wrong. But people often are!

All About Yields

For example, the move up in interest rates is a bit of a head scratcher right now. Most economic data is weakening - at least to some degree - around the world. Yet, bond yields continue to move higher. Hmmm...

If I had to make a "bet" regarding which way rates "should" be going right now, I'd say that the macro fundamentals suggest rates should be heading down, not up. Yet, the way a market "trades" is often more important than the fundamental backdrop because, again, markets are never wrong.

Currently, it appears that there is simply too much supply being issued in the government bond market. And since global central bankers are now selling bonds instead of buying them with both hands - the way they did for the last decade - traders are basically voting with their feet. So, for now anyway, the path of least resistance for yields - again, from a trading perspective - looks to be higher.

Of course, this isn't good for the stock market. Stocks hate higher rates - for a myriad of reasons. So, despite the fact that the calendar has flipped to October and that the best six-month span for the stock market will quickly be upon us, the direction of yields seems to be the focus on a daily basis. Joy.

Some Good News

However, there is some good news to be had this morning. Take a peek at my "Early Warning" indicator board below. This is a summary of my favorite overbought/oversold, cycle, and sentiment indicators. The board is designed to suggest when the market may be ripe for a reversal on a short-term basis.

The key here is the abundance of green on the board. Well, that and the fact that all of the indicators save one are currently on buy signals.

While no indicator or set of indicators/models is perfect, I like to pay attention when the "weight of the evidence" is lined up on one side or the other. And right now, these indicators, which are designed to give me a heads-up when conditions are ripe for a trend to change directions, are clearly lined up.

In short, this board is in what I like to call "pounding the table" mode. And while markets rarely react the way they "should," the early warning indicators tell me to start thinking about a rally.

Although the traditional "year end rally" is still a month or so away, these indicators are encouraging me to get ready for the trend to change. Personally, I find this helpful as it is VERY easy to allow your mindset to get "stuck" in the current trend. So, while yields continue to push higher and the action in stocks continues to look very sloppy, it might be time to start preparing that shopping list. After all, trends do change in this game. It's just a question of when.

Thought for the Day:

People are habitually guided by the rear-view mirror and, for the most part, by the vistas behind them. -Warren Buffett

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

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


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