The State of the Markets:
Now that the S&P 500 has managed to move to new all-time highs, the obvious question becomes, where do we go from here?
Our furry friends in the bear camp contend that the prolonged period of consolidation that occurred between January 26 and August 24 means the current run for the roses is likely doomed to fail. The bear thinking is the January peak had been overdone and the bulls simply don't have the macro firepower to keep things going. And the fact that it took the bulls nearly 7 months to make a fresh new high is Exhibit A in the latter argument. There seems to be a general consensus that long pauses in between new highs aren't a good thing.
Those seeing the market's glass as at least half empty also suggest that seasonality, the possibility that earnings have peaked, the Fed's plans to keep raising rates, the mid-term election uncertainty, the trade war, and the President's legal issues will combine to keep stock prices from getting overly enthusiastic in the near-term.
However, if one removes the talking head chatter and the daily news flow, the actual history of long pauses between new highs in the stock market appears to be encouraging.
The History Of Long Pauses
According to Ned Davis Research Group, there have been seven prior instances where the S&P 500 experienced a long pause between new all-time highs (defined as a period of at least 6 months). So, the first point is that while long pauses between new highs aren't the norm, they are not all that unusual either.
Digging into the data, we find that once the long pause ended and the S&P 500 made a new high, the bulls tended to remain in control of the game for some time. An average of 355 trading days to be exact.
And during that time, the bulls managed to distance themselves from the old highs and keep movin' on up - by an average of 38.7%. Thus, one could argue that strength tends to beget strength in these types of markets.
Yes, there were a couple instances where the bulls quickly surrendered - 1948 and 1990. The 1990 case can be blamed on the start of the first Gulf War. If you will recall, there was a great deal of angst about what would happen to the economies of the world when Iraq decided to try and expand its beach front holdings. I don't have much info on the 1948 event. So, I'll go ahead and say that with these two exceptions (where the S&P 500 gained 6.6% and 4.1% respectively before the bears took charge), history shows that most of these long pauses in between new highs appeared to reinvigorate the bulls.
The Only Game In Town?
The bears are also quick to point out that the U.S. stock market appears to be the only game in town these days as a great many foreign developed and emerging markets are struggling mightily. The thinking here seems to be that the U.S. simply can't go it alone.
However, history suggests otherwise.
Again, turning to the historical data (and the computers at NDR), it appears that since MSCI started keeping the ACWI ex-US index in 1987, there have been 10 prior cases where the S&P 500 has outperformed the ACWI ex-US Index by a significant margin (defined here as at least 10%) over a 12-month period.
Cutting to the chase... In all 10 cases, the S&P 500 was higher one year later - by an average of 16.8%.
Yes, there were drawdowns along the way - there usually are over a twelve-month period. However, when the S&P 500 was not in the midst of a bear market during the time of the drawdown, the pullbacks were much shorter and much shallower than average.
So, the takeaways from this morning's brief history lesson are (1) long pauses between new highs in the stock market are not bearish omens. In fact, the bulls tend to romp higher once the pause ends. (2) The U.S. can "go it alone" with regard to the global markets. One can even argue that the U.S. leadership keeps the bulls engaged.
And finally, if the bears do come to call after a long pause where the U.S. is leading the charge, the damage tends to be less severe than average.
So, from my seat, these are a couple more reasons why it is probably a good idea to continue to stay seated on the bull train. Sure, the ride may be bumpy at times - it usually is. But, this is simply how the game is played and it is important to remember that some of the bear arguments these days aren't rooted in fact.
Moving On... Now let's turn to the weekly review of my favorite indicators and market models... "But first a word from our sponsor ;-)"...
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I like to start each week with a review of the state of my favorite big-picture market models, which are designed to help me determine which team is in control of the primary cycle.
The Bottom Line:
Once I've reviewed the big picture, I then turn to 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.
The Bottom Line:
Next up are the momentum indicators, which are designed to tell us whether there is any "oomph" behind the current trend.
The Bottom Line:
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.
The Bottom Line:
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.
The Bottom Line:
I don't know what my future holds, but I do know who holds my future. -Tim Tebow
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All three of our strategies are run in a single Marketfy model - the model is currently labeled as the LEADERS model. The goal is to make the service simpler to follow by putting everything in one place.
Today's Portfolio Review:
2018 YTD Performance Update:
Daily Decision Portfolio: +10.5%
S&P 500: +8.5%
Current Rating Explained
This is our rating for the day. The Current Rating tells you what action we would take if we did not currently hold the position. A "Buy" rating means we would be willing to purchase the position at current prices. A "Strong Buy" suggests this would be our first choice to buy. A "Hold" rating indicates we would not make new purchases at current levels. And a "Sell" rating indicates we will likely exit the position in the near-term.
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Positions often change during the trading session. Remember that we will send a Trade Alert via SMS Text Message and/or Email BEFORE we ever make a move in the models.
At the time of publication, the editors hold long positions in the following securities mentioned: SPY, IJR, QQQ, XLK, XLY, XLV, AAPL, MSFT, GOOGL, FB, AMZN, CNC, ICUI, TRU, VFC - Note that positions may change at any time.
Wishing You All The Best in Your Investing Endeavors!
The Front Range Trading Team
NOT INVESTMENT ADVICE. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.