David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

Market Outlook: Even The Indicators Are Confused

Some say the stock market is a discounting mechanism for future expectations. Others suggest it is an example of crowd psychology in motion. So, given that the market appears to once again be “stuck in the middle with you” what can we take away from the recent action?

It was three months ago that the Chinese devalued the yuan and sent investors large and small scrambling for cover. It took just six trading days for the S&P 500 to dive -11.2% as worries about global growth took hold. As such, one could argue that stock prices were discounting an uncertain future.

After the indices followed the crash playbook for a while (and to the letter I might add), talk of more QE and economic stimulus was enough to create an impressive mood swing in October. And before long, the correction that had transpired in mid-August had itself been corrected.

So, after an 11% decline and then a 12% rally, stocks were back to square one at the beginning of November.

But then the worry – and the selling – began again. While not nearly as dramatic as the August swoon, the early-November decline appeared to put an end to any hopes of a breakout and/or another leg higher. And with commodities like oil and copper breaking down in the process, many are starting to wonder if the traditional year-end rally is going to materialize.

S&P 500 – Daily

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In fact, many investors are beginning to wonder if anything other than this back and forth, up and down environment is ever going to exist. I hear lots of folks now calling this the new, new normal.

What Do The Indicators Say?

Whenever I find myself in doubt about what the heck is going on in the markets, it is usually a good idea to check the indicators. In short, more often than not there is some sort of message to be gleaned from the market models.

So, as I do each morning, I ran through the indicators and market models. And what I find is, well, a whole lot of confusion.

With stocks trying to decide which way to go, I first looked at some of my favorite momentum indicators. The good news is my intermediate-term trend-and-breadth confirm model is positive. History tells me that stocks have gained at a rate of 16.4% when this model is positive. The bad news is the short-term trend-and-breadth confirm model is negative. And when in this mode, the model says the market has lost ground at an annualized rate of -22%. Wait, what?

So, I then looked at my volume-relationship models and found just the opposite – the shorter-term model is currently moderately positive but the intermediate-term model is moderately negative. Hmmm…

With these models clearly confused, I turned to our big picture, longer-term exposure models. I was hoping that this might provide some clarity. But sure enough, the model reading was… wait for it… 55%. Can you say neutral?

Speaking of neutral, one of my favorite market environment models is currently flip-flopping between neutral and negative. Not exactly a desired result.

Finally, I decided to see if my models designed to tell me whether the market is trending or not had changed. Nope. As you might suspect at this point, these models confirm that this is trendless market. Super.

So, what’s the takeaway here? With stocks stuck in the middle of, well, the middle, and the indicators conflicting each other left and right, what is an investor to think?

While this missive rarely, if ever, provides any certain answers, it doesn’t take a PhD in finance or fancy algorithms to figure this one out. In short, this market remains in a neutral mode and I’m of the mind that the consolidation phase that began just about a year ago looks to be ongoing.


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