S&P 500: Onward And Upward
Cam Hui | Aug 18, 2014 01:01AM ET
Weekly Trend Model signal
Trend Model signal: Risk-off
Direction of last change: Positive
The real-time (not back-tested) signals of the Trend Model are shown in the chart below:
Last week, I showed this chart and pointed out that combination of the VIX term structure exiting inversion and TRIN falling from an 2.0 oversold condition was a powerful signal for an oversold rally (see Barron's , Stephen Auth of Federated Investors summed up the bulls' view this way:
As a way to describe the economy, Goldilocks was formulated back in the 1990s, when the Fed was relatively well behaved and the economy was expanding. Today, I call it "Goldilocks cubed" because we have what actually may be an accelerating economy, with the Fed and Treasury rates well-behaved and perceptions about risk declining. Market valuations depend on growth, bond rates, and perceptions of risk, and all three of those are going in the direction that actually expands the price/earnings multiple. At the same time, earnings are expanding, and that's a recipe for another leg up in the market. In terms of economic expansion, we have been stuck in this 2% growth range since 2008-09. But we think something has happened and that animal spirits have returned. We've had these sky-is-falling moments, and every time we get through one of them, more and more people come out of their caves and say, "Maybe the sky is not really going to fall."
In other words, the stock market is in a sweet spot right now. Economic and EPS growth look good, the interest rate environment is benign and risk appetite is healthy.
While my views are tilted bullishly, that does not mean that there is nothing but clear sailing ahead for stocks. The direction of change of the Trend Model is positive, which is bullish, but the absolute level of the reading remains in "risk off" territory, which brings up the possibility that the current rally is a counter-trend rally in a downtrend. I will detail some of my concerns for US equities in a later post this week and tweet any updates as I see them at @humblestudent.
Disclosure: Long TNA, SOXL
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