The State of the Markets:
From my seat, the most important question on this fine Monday morning is if stocks are currently in the "retest" stage of a waterfall decline, which means that we are likely closer to the end of the correction than the beginning - or - if we are still in stage one, aka the initial decline. (To review, I detailed the various stages that tend to occur during waterfall decline last week in a missive titled, Checking The Playbook.)
In case it isn't obvious, there is really no way of knowing what's next in Ms. Market's game and I learned a LONG time ago that it is a fool's errand to try and predict what the market will do in the near-term. However, given that we know what type of environment we are currently faced with (a corrective phase), there are some clues that we can look at including the current price action and the state of the indicators.
From a short-term price perspective, the stock market starts the week in a very precarious position. Cutting to the chase, the S&P 500 finished the week with two consecutive closes right at its 200-day moving average. This, in and of itself is important because this seemingly important line of demarcation usually brings out the fast money masters of the universe and their trading computers. In other words, typically when the market approaches an important technical level, traders get busy. But this time, the venerable large cap index managed to close right on the line two days in a row. Interesting.
While I haven't been a fan of using a 200-day moving average as a "signal" since the 1980's, the popular press and a great many analysts see the 200-day as a line in the sand between a bullish and bearish cycle. The good news is the Dow Jones Industrial Average remains above its 200-day. So, one can argue the bulls are still in charge. The bad news is the NASDAQ closed Friday below its 200-day. So, accordingly, this would argue we've got a bear on our hands.
Oh, and then just to keep things interesting, the small-cap and mid-cap indices are both WELL below their long-term moving averages. So, let's review. The Dow is above it's bull/bear line. The NASDAQ, mid-caps, and small-caps are below. And the S&P is literally straddling the line. Hmmm...
Since the price action isn't helpful, let's turn to the indicators. Since it's Monday, I've got a pretty detailed review of the indicator boards covering trend, momentum, sentiment, and external factors such as monetary, earnings, valuation, etc., below. The bottom line is, well, things are a bit confusing here.
For example, the trend and momentum boards sport a fairly bright shade of red currently while the early warning indicators are screaming green. Yet, the longer-term external factors board continues to suggest that this isn't exactly a low-risk environment. Which leaves me with what I call my "Primary Cycle" models. These are five of my favorite, longer-term market models that are designed to tell me which team is in control of the big-picture cycle.
As I detail in the summary of the indicator boards below, the Primary Cycle Indicator board is in pretty good shape. In fact, two of the five models have actually improved in the last couple weeks. The key here is that four of the five models remain on buy signals, three are currently positive, and two are neutral. Yet at the same time, the absolute levels of the models that sport positive ratings aren't exactly robust. So, again, while I can argue that the bulls remain in charge, the opponents appear to be "in the game" at the present time.
From a chart perspective, I think the current situation can be summed up nicely by looking at a weekly chart of the S&P going back to the end of 2011. The blue line is a weighted smoothing of the S&P 500 that has been slid forward a bit.
S&P 500 - Weekly
View Larger Chart
The important thing to note is that the market tends to "test" this line occasionally during bull phases. I've circled these bullish tests in yellow.
As you can see, there were three such "tests" of the bulls' resolve during the 2012 through mid-2015 bull run and so far, there have been two successful "tests" since the current cyclical bull began in February 2016.
The key then is whether or not the current "test" of the trend succeeds or fails. For me, a sustained break (meaning more than a day or two) of this trend down to 2700ish on a weekly closing chart would indicate that the bears should be taken seriously. And a sustained close below 2600 on the weekly chart would mean a bear market is playing out.
Until then, my take is that we're seeing a corrective phase, which so far at least, is pretty normal from a big-picture perspective. However, it will be important to stay alert here and monitor both the near-term price action and the state of the models closely.
Moving On... Now let's turn to the weekly review of my favorite indicators and market models...
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 "environmental 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:
Quality means doing it right when no one is looking. - Henry Ford
Here is the current positioning of the portfolio:
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.
Positions Can Change
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: SSO, QLD, XLK, XLY, XLV, AAPL, MSFT, AMZN, CNC, VFC, BA, WM, TGT - Note that positions may change at any time.
About the Portfolio:
The latest upgrade to the Daily Decision service went live on Monday, July 9. The new, state-of-the-art portfolio employs a modern, hedge fund style approach incorporating multiple methodologies, multiple strategies, and multiple time-frames. The portfolio is comprised of three parts:
The Aggressive Risk-Managed Growth portion is made up of five trading strategies and accounts for 50% of the portfolio. The Market Leadership portion makes up 20% of the portfolio. And the Top Guns Stocks portion (10 of our favorite stocks) will make up the final 30% of the portfolio.
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.
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.