Good Monday morning and welcome back to what appears to be a celebration of tax reform on Wall Street. But before we get ahead of ourselves in terms of how far the bulls are going to run today, 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: MY TAKE…

The most recent burst to the upside, which began on November 21, has definitely been impressive. However, the key question at this point is if the move represents the onset of a fresh leg higher in the cyclical bull market that began in February 2016 – or – a “blow off” phase, which is where price peaks tend to occur. Personally, I’d feel better about the current move if a new “breadth thrust” signal were to occur. But since the move is still quite new, we will have to wait a week or so to see if the bulls can succeed on this score. It is also worth noting that the rate of ascent is quite steep here, which brings the sustainability of the move into question. In addition, the surge in prices is causing valuation indicators to move the wrong way – I.E. the “P” in the p/e ratio is moving up faster than the “e” (earnings). However, the absolute bottom line is this is a bull market until proven otherwise. And while we can argue that this bull is showing signs of aging, the bulls continue to deserve the benefit of the doubt.

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:

• Despite the intraday scare on Friday, the short-term Trend Model starts the week in positive territory. 
• Both the short- and intermediate-term Channel Breakout Systems remain positive this week. A break below 2557 would be problematic for these indicators. 
• The intermediate-term Trend Model continues to side with the bulls. 
• The long-term Trend Model sports a bright shade of green again this week. 
• The Cycle Composite points higher again this week. 
• The Trading Mode models continue to confirm the market is in a trending mode.
• The only negative that can be identified from a trend perspective is that the rate of ascent has become extreme and is unlikely to continue.

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 of our Trend and Breadth Confirm Models remain positive to start the week. This is a sign that the market’s momentum is “in gear.” 
• The Industry Health Model upticked last week but still has been unable to crack into the outright positive zone. 
• The short-term Volume Relationship model has improved and is now positive. 
• The intermediate-term Volume Relationship remains positive. However, it is worth noting that peak momentum from this model was reached earlier in the year. 
• Not surprisingly, the Price Thrust Indicator remains positive to start the week. 
• The Volume Thrust Indicator remains high neutral. The reason is this indicator uses volume on the NASDAQ, which has lagged during the most recent run higher. 
• The Breadth Thrust Indicator is in good shape.
• In sum, market momentum is “pretty good” but not as strong as is usually seen at the beginning of bull market moves.

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.

View Early Warning Indicator Board Online

Executive Summary:

• From a near-term perspective, stocks are in an overbought condition. 
• From an intermediate-term view, stocks are overbought. However, since the market has been unable to become oversold from an intermediate-term perspective since spring, we view the current condition as “good overbought.” 
• The Mean Reversion Model continues to struggle with the lack of volatility in the market and remains neutral. 
• The short-term VIX indicator flashed a sell signal last week. However, the last 3 short-term sell signals have not been fruitful. 
• Our longer-term VIX Indicator remains on a buy signal. 
• From a short-term perspective, the market sentiment model is back in the red zone. 
• The intermediate-term Sentiment Model also slipped back to negative last week. 
• Longer-term Sentiment readings haven’t budged. 
• While “early warning” signals have been all but useless for the majority of the year, there can be no denying that the table is clearly set for a pullback.

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.

View External Factors Indicator Board Online

Executive Summary:

• Absolute Monetary conditions haven’t changed and remain neutral. 
• The Relative Monetary Model reading pulled back a bit last week but remains in the positive zone. 
• Our Economic Model continues to suggest a strong economic growth environment. 
• The Inflation Model reading remains in “low inflationary pressures” zone. This has historically been positive for stocks. 
• The Absolute Valuation Model remains quite negative and is moving in the wrong direction with the recent surge in prices. 
• Our Relative Valuation Model remains neutral but the model reading is now the lowest seen since 2010.

THE STATE OF THE BIG-PICTURE MARKET MODELS

Finally, let’s review my favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.

View My Favorite Market Models Online

Executive Summary:

• The Leading Indicators model, which was our best performing timing model during the last cycle, remains on a buy signal. However, the model reading is neutral to start the week. 
• We have recently upgraded our “State of the tape” model to include an additional 5 indicator readings. The current reading of the new model is positive. 
• The Risk/Reward model continues to be troubled by the state of market sentiment, market valuations, and monetary conditions. This explains the neutral reading. 
• 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 improved to positive last week – but only by the slimmest of margins. And since the model reading is currently “on the line” we would prefer to see some confirmation before embracing the new reading.

SAMPLE RISK EXPOSURE SYSTEM

Below is an EXAMPLE of how some of above indicators might be used in order to determine exposure to market risk. The approach used here is a “Model of Models” comprised of 10 independent Models. Each model included gives separate buy and sell signals, which affects a percentage of the model’s overall exposure to the market.

Trend models control a total 40% of our exposure. The 3 Momentum Models and 3 Environment Models each control 10% of the portfolio’s exposure to market risk. The model’s “Exposure to Market Risk” reading (at the bottom of the Model) acts as an EXAMPLE of a longer-term guide to exposure to market risk.

In looking at the “bottom line” of this model, my take is that readings over 75% are “positive,” readings between 50% and 75% are “moderately positive,” and readings below 50% should be viewed as a warning that all is not right with the indicator world.

View Sample Exposure Model Online

The model above is for illustrative and informational purposes only and does not in any way represent any investment recommendation. The model is merely a sample of how indicators can be grouped to create a guide to market exposure based on the inputs from multiple indicators/models.