Steady As She Goes

Although we’re getting a late start to the week, market analysis definitely falls into the “better late than never” category. So, let’s go ahead and review my key market models/indicators and see where we stand. To review, the primary goal of this exercise is to try and remove any subjective notions about what “should” be happening in the market in an attempt to stay in line with what “is” happening in the markets. So, let’s get started.

The State of the Trend

We start our review 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.

Executive Summary:

The short-term Trend Model likes nothing more than new all-time highs.

Both Channel Breakout Systems remain on their 8/22 buy signals and are in stellar shape.

Not surprising that the intermediate- and long-term Trend Models are solidly positive.

The market continues to thumb its nose at the historical cycles, which means that the Cycle Composite is currently “out of whack” with what the market “is” doing.

Two of the three Trading Mode models now indicate the market is in a trending environment. The fact that these models have lagged and that one is still in “mean reversion” mode suggests that the current move doesn’t have a lot of “oomph” behind it.

Overall though, not much to complain about from a trend standpoint.

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…

Executive Summary:

Both the short- and intermediate-term Trend and Breadth Confirm Models remain positive. This tells us that “market breadth” is in gear.

The Industry Health Model is inching ever closer to the outright positive zone but isn’t there yet. We should note however that the global version of this indicator remains positive.

The short-term Volume Relationship is now positive.

The intermediate-term Volume Relationship model has also made a strong move back up into positive zone.

The Price Thrust Indicator is in good, but not great, shape.

The Volume Thrust Indicator has finally confirmed the movement in price and is positive. Note the extremely strong historical return from the market when this indicator is positive.

The Breadth Thrust Indicator continued to improve last week.

When the momentum board is solidly green, investors tend to smile – a lot.

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.

Executive Summary:

From a near-term perspective, stocks remain overbought. However, I will now argue that this is a “good overbought” condition that should be seen as a sign of strength. As such, I’ve changed the “current signal” to “hold”.

From an intermediate-term view, stocks are now very overbought. But again, a market that “gets overbought and stays overbought” is positive.

The Mean Reversion Model suggests that it is time to “go the other way.”

The VIX Indicators are conflicted right now. The shorter-term model just issued a sell while the intermedite-term model remains on a buy

Note that we’ve now broken out the VIX indicators into short- and intermediate-term

From a short-term perspective, market sentiment is back to negative.

The intermediate-term Sentiment Model remains negative

Longer-term Sentiment readings are also quite negative.

Bottom Line: Stocks are overbought and sentiment is overly optimistic. However, this alone does not “cause” declines – it merely increases the risk of a decline and the potential severity of a decline if/when a bearish catalyst emerges.

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.