THE “STATE OF THE MARKETS”…

Another week, another all-time high. Ho-hum.

Despite the relentless rise in stock prices, the current market environment seems to offer an awful lot for analysts to complain about. There is the lack of volatility, something that hasn’t been seen for decades. There are the valuation levels, which, at the very least, have become extreme (and are worsening). There is the rate of the recent rise, which is starting to look a bit “parabolic” and purportedly tied to the passing of the Trump tax plan. There are concerns about inflation. There are worries about the ability of corporate earnings to continue to deliver. There is the Bitcoin mania. And finally, there are my seemingly constant whining that the indicators aren’t as strong as they “should be.”

However, if there is anything that I’ve learned about the markets over the last 30 years, it is that Ms. Market doesn’t give a hoot about what we “think” should be happening in her game. In addition, it is important to note that moves such as we are seeing now can drive a bear to drink as they tend to last longer than almost anyone can imagine.

Thus, I believe the key to this environment isn’t to try and figure out what is “wrong” with the market (remember, markets are never wrong, but traders often are), but rather to recognize that we have to play the cards we are dealt. In other words, it is what it is and we need to deal with it. So, from my seat, we must keep in mind that the bulls remain in charge of the game but, as I’ve been saying for some time now, this is not a low-risk environment.

THE STATE OF THE BIG-PICTURE MARKET MODELS

Let’s start with my “executive summary” of the state of the market – I.E. a review my favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.

Executive Summary:

  • The Leading Indicators model, which was our best performing timing model during the last cycle, is in pretty good shape.
  • We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model has pulled back a bit recently but remains positive.
  • The Risk/Reward model continues to fret about sentiment and monetary conditions.
  • If I had to manage money from a desert island and could only use one model, it would be this one – a combination of internal and external factors. Currently, the model remains on a long-term buy signal, however, the model reading is only modestly positive.
  • The newly expanded External Factors model includes a total of 10 indicators ranging from earnings, yields, sentiment, monetary, economic, and volatility. The current model reading is modestly positive. But, green is green, right!
  • As I wrote last week, the models suggest stock market returns in excess of the historical average. So, the bottom line is the bulls remain in charge.
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