Ms. Market Sticking To The Script

With the end of 2017 in sight, it’s time to buckle down and get back to work. As usual, let’s start the week with a look at 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.

Executive summary

Ms. Market stuck to the Thanksgiving script last week by advancing around the holiday. The fact that the S&P 500 finished at new all-time highs says that the bulls remain in charge of the game and should be given the benefit of any doubt. And with most of our short- and intermediate-term indicators in good shape, a buy-the-dips game plan should continue to work. However, since one of the primary jobs of a risk manager is to avoid falling victim to complacency, I will note that my favorite longer-term, big-picture models (shown on the Primary Cycle board) suggest that this is not exactly a low-risk environment. Yes, this is due primarily to the sentiment and monetary indicators, where a “yeah, but” or two can definitely be applied. However, with the current bull run quickly approaching its 2-year anniversary, we should probably be on the lookout for something to come out of the woodwork and change the game – at least from a short-term perspective. In other words, a pullback/correction – or at the very least, a sloppy phase – is probably to be expected at some point.

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:

Not surprisingly, the short-term Trend Model improved to positive this week.

The move to new all-time highs caused both the short- and intermediate-term Channel Breakout Systems to flash a fresh buy signals

The intermediate-term Trend Model remains solidly positive

The long-term Trend Model continues to sport a bright shade of green

The Cycle Composite points higher again this week.

The Trading Mode models confirm the market is trending higher

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 are positive to start the week

The Industry Health Model continues to suggest that leadership is not broad-based. This suggests that the current bull phase is aging.

The short-term Volume Relationship has improved to neutral to start the week. However, the bulls would prefer to see this model in the outright positive zone here.

The intermediate-term Volume Relationship remains in good shape. Not great, but definitely good.

The Price Thrust Indicator reversed course last week and is now positive.

The Volume Thrust Indicator moved up to the high end of neutral this week and is on the verge of turning green.

The Breadth Thrust Indicator upticked to positive last week.

All in, the momentum board is in pretty good shape for a late-stage bull phase.

The state of the “trade”

We also focus each week on the “early warning” board, which is designed to indicate when traders might start to “go the other way” — for a trade.

Executive Summary:

From a near-term perspective, stocks are once again modestly overbought. From here, the key will be whether or not the bulls can maintain an overbought condition without giving in to another pullback.

From an intermediate-term view, stocks are overbought, but not at the extreme level seen over the past month.

The Mean Reversion Model remains stuck in neutral, which is indicative of the low volatility environment.

The short-term VIX indicator is technically still on a buy signal. However, a slight uptick in volatility will cause the short-term signal to flip to a sell.

Our longer-term VIX Indicator also remains on a buy signal.

From a short-term perspective, the market sentiment model remains in the neutral zone this week.

The intermediate-term Sentiment Model managed to peek its head up into the neutral zone this week where stocks have been able to post decent returns historically.

Longer-term Sentiment readings continue to sport a bright shade of red. This is an indication of complacency in the market.

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.