January 9, 2023
Good morning,
Friday’s market performance was impressive for both stocks and bonds, with most major equity indices moving up by more than +2% and bond yields declining by 16 bps or more across the entire treasury curve (full breadth of maturities). While the headline number of Friday’s December Employment Data was higher than expected and discouraging, the internal numbers reflected a weaker employment picture for the month than was expected. Voila! Investors interpreted the figures as data that would give the Fed some room to slow their tightening groove. Futures this morning are up another 50 bps (+.50%) and are picking up where Friday left off.
In the past when I have become frustrated with what appears to be a mixed market message, it has typically meant that the market is trending in different directions depending on the period of time being examined, from the very long term to the intermediate term to the short term. Ned Davis, the hall of fame, semi-retired individual, who also happens to have started an award-winning independent market research organization by the same name published his analysis of today’s market trends – very long-term to short-term – over the weekend.
From a long-term perspective (~100yrs), the trend evidence is quite bullish. Since 1925, including reinvested dividends, there have been no 20- or 30-year periods where stocks were not higher. It is an impressive record. However, looking at a linear regression analysis (a simple trendline) — it shows that the current market sits well above (overbought) the up-trendline. It is in the top quintile of readings historically. Along with a lot of longer-term valuation analysis, this is a caveat, plus the fact that slower growth or recession is likely in 2023. So, it may take time for the longer-term trend to reassert itself.
The intermediate-term (months) trend is mixed. I currently see a continuation of the trading range we have been in for the last six months. I would note that our Leading Indicator Model has given a buy signal using the trend of leading stock market indicators. But our true internal trend indicators have not confirmed. Similarly, we have had some breadth thrust buy signals, but given the changes in the market environment, we feel we need confirmation to verify these signals. So far the confirmation has just not come. One can see this as well from the High-Low Logic Index. Breadth is not healthy yet.
For the short-term (weeks), I am hopeful. The Daily Momentum Model just flashed a buy signal Friday. With tax loss selling out of the way, some excessive pessimism, and the indicator improvement, I am more hopeful in the short term.
Mixed market signals have a tendency to untether investor emotions (including my own). This is not the first time, and I hope not the last, that market analysis from Ned has a calming effect.
Be well,
Mike