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Category: Chart of the Week

The NDR Composite Model for U.S. Stocks Moves Into Bearish Territory

The Ned Davis Research Composite Model for the U.S. Stock Market is based on an equal weighting of 50% of U.S. stock market internal and 50% external indicators. The NDR model has proven to be an important tool for identifying periods of outperformance and underperformance for the stock market. While the top chart plots the S&P 500 Index, the bottom chart plots the NDR composite score, which has moved down below 55. That represents bearish conditions and negative returns for the market. Composite readings above 70 represent bullish conditions and readings between 55 and 70 represent neutral conditions.

AS NDR explains: “By combining multiple indicators which historically have been shown to add value in broad market investment decisions, we can objectively assess the weight of the evidence and generate a summary broad market recommendation.”

It is important to note, as shown in the two boxes below the chart, that historically there have major negative market returns when the NDR Composite has been  below 55. The boxes also illustrate the accuracy of the model in bullish and neutral conditions.

The NDR Composite Model for U.S. Stocks Moves Into Bearish Territory
The NDR Composite Model for U.S. Stocks Moves Into Bearish Territory

Here’s the composition of the internal and external indicators.

Internal Composite Indicators are tape-based (i.e., price-driven) indicators and include:

• Big Mo Multi-Cap Tape (DAVIS250A)
• Moving Average Slope (S61)
• Deviation from Trend Slope (S62)
• Deviation from Trend Reversals (S221)
• Momentum Reversals (S222)
• Net New 30-Day High Reversals (S223)

External Composite Indicators are non-price indicators and include:

• S&P 500 Earnings Yield (S672)
• S&P 500 Earnings Per Share (S673)
• Industrial Production (S1042)
• 2-Year Treasury Note Yield (S877)
• Moody’s Baa Bond Yield (S878)
• NDR Daily Trading Sentiment Composite (DAVIS265)
• AAII Bulls/(Bulls+Bears) (S505)
• Investors Intelligence Bulls/(Bulls+Bears) + Monetary (S502)
• Implied/Historical Volatility (S234)
• Low/High Beta (S591)

A Mesmerizing Chart

By John Del Vecchio

In the spirit of a picture is worth a thousand words, this week we leave you with a fascinating chart showing the changes in the yield curve from 1990-2018.
It’s truly mesmerizing.

Click on the image to view the animated data visualization chart.

A Mesmerizing Chart
A Mesmerizing Chart

Recently, the yield curve has flattened out as interest rates have risen but the curve has shifted more dramatically due to changes in short-term bonds. Of course, rates increased from an artificially low starting point. While an inverted curve has correctly forecasted prior recessions, plenty of fiscal stimulus has been pumped into the economy in the form of tax cuts. Consumer confidence has also surged. But, so have debt levels. Real incomes are stagnant. The Federal Reserve is shrinking its balance sheet.
So, while the circumstances today do not resemble the past, it probably won’t be different this time. Just look at the stock market. Small cap stocks are in a bear market. Hardly anyone noticed. Rougher times are likely ahead.

Liquidation of the Fed’s Balance Sheet

By: Brad Lamensdorf

The Federal Reserve’s balance sheet has begun to show the effects of the Quantitative Easing unwind.  To date, approximately $375 billion has been removed from the Federal Reserve Bank assets.  It should be noted that this reduction is a small fraction of the liquidity that was pumped into the financial system since the global financial crisis.  The removal of Fed liquidity is one key reason the credit and equity markets have become unsettled over the past two months.  The ongoing liquidation of the Fed’s balance sheet will continue to pressure equites.

Déjà vu All Over Again

By Brad Lamensdorf and John Del Vecchio

It’s Déjà vu all over again!
Levered loans are back! Ever since the global financial meltdown, levered loans have been on the rise. Loan issuance is now near the highs of the last peak.
Before the market imploded.

This is a serious warning sign not to be ignored. Why? Because leveraged loans are a type of loan extended to companies or individuals that already have considerable debt. Or, these borrowers have a poor credit history.
Leveraged loans carry a higher risk to the investor. As an indicator, this chart also should help visualize that we are in a very heated environment and that has allowed debt to pile up. The tipping point is unknown. But, the other side will be particularly ugly.

In a word…default. Lots of them.

Recent data released also showed that 80% of borrowers who refinanced in the third quarter chose the cash out option and was the highest since the start of 2007.

So, more and more people are pulling cash out of their house to fund their lifestyle. In a normalized environment, economic activity wouldn’t benefit from this artificial demand created by increased cash outs.

When this comes to an end, and it will, we will see a slow-down. Defaults will also rise because people are way out over their skis.

We saw this movie before 10 or 12 years ago. It’s a horror movie. It doesn’t end well.

Wall Street’s Helping Hand

By John Del Vecchio

I take Wall Street with a grain of salt.

After all, whether it’s research or advice, those folks are all about making money… for themselves.

They’re not looking out for the little guy. By the time the little guy knows the ship hit the iceberg and is sinking, Wall Street has padded its pockets. Joe Six-pack is scrambling for a life-vest.

And nobody does the time for their white-collar crimes.

However, once in a while, from that abyss comes a little gem that sheds interesting perspective on the market. That’s what I discovered in a recent release from Goldman Sachs…

And it’s a bright, red warning sign…

Take a look at this chart:

Wall Street’s Helping Hand
Wall Street’s Helping Hand










This aggregation of several indicators – including valuation, inflation, and the yield curve – shows that we’re in the danger zone. But we’re not in just any danger zone: We’re in a generational danger zone.

The market hasn’t been this risky on these measures since the late 1960s.

The beauty of this indicator is that it’s objective. There’s no fuzzy math.

We can make plenty of qualitative statements to justify why the line on the chart is where it is and that this time around it won’t amount to a hill of beans. Name the narrative: “Tax cuts”… “Buybacks”… “Divided government”… “Gridlock”… “War”… “Peace”…

Yada, yada, yada…

The fact is that risk is high. In the past, that’s meant zero returns going forward. Until the market corrects. Scary.

It is particularly scary this time around, because we’re dealing with a historical bull market. That means that the coming bear market – and there will be a bear market again – is likely to overshoot on the downside, too. There’s lots of excesses to work off.

So, what to do?

For one, pay attention. It’s been very easy to buy an index and make money in the market over the last 10 years. Even if you had your head in the clouds but suffered a momentary lapse of reason and bought an index fund, you’ve done well.

But more and more stocks are falling by the wayside – among them a few monster names that hold the market up these days. Indeed, even Amazon.com (Nasdaq: AMZN) and Netflix (Nasdaq: NFLX) got smoked in October.

That could be just a start.

Recent volatility is a warning sign.

There are more days in a bear market when the market is up 2% than in a bull market. Why?

Well, my own theory is that more people try to call “bottoms” than “tops.” It’s easier to buy the dip rather than add money into a blue sky high.

But the market has a perverse way of luring you in at just the wrong moment – usually after a few 2% “up” days – only to reverse course and pick your pocket.

So, it’s time to pay attention – real, close attention. Tighten your stops. And think long and hard about where and when to commit new capital.

Zero percent returns – which is what history tells us follows with markets at these type of levels – don’t sound attractive to me.

  • As originally published in The Rich Investor

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