The State of the Markets:
To review, my first report each week is intended to take a big-picture, macro view of the overall market environment. The idea is to start the week with what we hope will be a solid understanding of what "is" happening in the market (as opposed to what you think "should" be taking place).
The primary reason I continue to do this exercise week after week, month after month, year after year is simple. If I can continuously identify what is actually going on in Ms. Market's game (and I can keep my ego checked at the door), then I shouldn't be surprised when the market environment changes. Remember, the business of investing isn't about "being right." No, it's about "getting it mostly right, most of the time."
The key here is that nobody should give a hoot about what I "think" is going to happen next. Heck, I shouldn't even care about trying to determine what stocks or bonds will do next. In my view, the game is about making sure my portfolios are positioned appropriately for the current environment.
So, the natural question as we enter the fourth trading week of the year is, how do we best define the current macro environment?
In attempting to answer this question, it is very easy to fall into the trap of making predictions. And this is the reason that I rely on the indicator boards displayed in this report each week. So, let's run through them and see what we come up with from an overall "message" standpoint.
Starting with the Primary Cycle board, which is designed to identify the dominant trend (i.e. bull vs. bear), my favorite big-picture models are in pretty good shape. And since there is no red on the board, I think we can call this a bull market. (Cue the "Captain Obvious" catcalls!)
Next up is the trend of the market. I look at this from several angles but the result is clear. The boxes are all green. And green is good, right?
Moving to the market internals (aka market momentum), I think a quick "ditto" will suffice here.
Now that we know what the trend is doing (moving from the lower left to the upper right) and if there is any "oomph" behind it (there is, check), I like to look at the "state of the trade" from a shorter-term perspective. Here I'm looking for signs that traders will begin to "go the other way" in the near-term. From my seat, I think this board suggests that the "table is set" for a pullback - assuming the bears can ever find a reason to be, of course! (And yes, feel free to insert an eye roll here.)
Then there is the External Factor board. This is where the analysis goes macro and can get very interesting. However, before we proceed here, it is vital to understand that the "message" from this board is oftentimes VERY early.
Currently, the External Factor board sports two yellow, two green, and two red boxes. As such, one could argue that the external factors are neutral. Yet I will point to the historical average return when the models are in their current modes as Exhibit A in the argument that risk is elevated here.
So, what is the overall macro message? For me, I see the following: a bull market that is aging, rising rates, overly optimistic sentiment, a strong economy, and extremely high valuations.
Thus, I will define the macro environment as a bull market with elevated risk levels.
The next question is, how does one play Ms. Market's game in this environment? The answer, of course, is up to each investor. As a risk manager responsible for other people's money, my approach is to continue to ride the bull train, but to do so with a reduced risk approach.
In other words, we want to stay in stocks as long as the bulls are in control of the game (keep an eye on the primary cycle board) because bull markets can last longer than anyone can imagine. Yet, given the "elevated risk" environment, I'm of the mind that this is no time to be a hero.
Two monologues do not make a dialogue. -Jeff Daly
Wishing you green screens and all the best for a great day,
Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none.
Note that positions may change at any time.
Today's Model Review:
LEADERS Model: The LEADERS currently holds 20% positions in the Technology, Industrials, Health Care, and Materials sectors - and 20% in Cash.
CORE Model (Risk Managed Exposure): Today's CORE model's exposure target: 120%
To review, the goal of this model is to stay in tune with the overall risk/reward environment. Therefore, we make adjustments only when there is a meaningful and sustained divergence between the target model reading and our current positions.
TRADING Model: We currently hold trades in the Russell 2000, India Small Caps, Eurozone, a dividend-payer ETF, and the emerging markets.
2018 YTD Performance Update:
DD LEADERS: +5.9%
DD CORE: +5.6%
DD TRADING: +4.3%
S&P 500: +5.1%
|Daily Decision Trading Service
Current Portfolio Summary
|The LEADERS Model|
|% of |
|Technology Select Sector SPDR||XLK||20%||12.1.16||$46.64||Buy|
|Industrial Select Sector SPDR||XLI||20%||8.14.17||$68.58||Strong Buy|
|Health Care Select Sector SPDR||XLV||20%||11.27.17||$81.79||Hold|
|Materials Select Sector SPDR||XLB||20%||1.16.18||$63.02||Buy|
|The CORE EXPOSURE Model|
|% of |
|ProShares UltraPro S&P (3X)||UPRO||39.70%
(Equiv 120% Long)
|The TRADING Model|
|% of |
|iShares Eurozone ETF||EZU||20%||5.11.17||$40.25||Hold|
|First Trust Value Line Dividend Fund||FVD||20%||5.11.17||$28.88||Hold|
|iShares Emerging Markets ETF||EEM||20%||6.112.17||$41.57||Hold|
|VanEck Vectors India Small-Cap Index ETF||SCIF||20%||7.18.17||$58.00||Strong Buy|
|iShares Russell 2000 ETF||IWM||20%||10.19.17||$146.09||Buy|
% of Model Explained
The number shown in this column represents the percentage of the the model this position represents.
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.
About the Daily Decision Models:
The Daily Decision is designed to be a simple, easy-to-follow e-letter service showcasing 3 different model portfolios. The LEADERS model is the flagship, growth oriented strategy that focuses on "where the action is" in terms of market leadership. The CORE model is a longer-term, risk-managed approach to keeping exposure to market risk in line with prevailing conditions. And as the name implies, the TRADING model is intended to be a tactical, opportunistic trading strategy.
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.