Introduction

 

Patience is a virtue not oft exhibited by market participants.

Our models continue to show the following:

We are in a NEUTRAL market environment

A neutral market environment implies little or no investing edge.  By our analysis, the market could go up or it could go down.  While this is not very profound, this really is the case.  Over the past 2 years, such neutral market environments saw the markets rise rather profoundly usually goosed higher by some Federal Reserve asset purchase program or just plain old jawboning.  But from 192 to 2012,  there were very mixed results offering investors little investment edge.

Our equity model produced a sell signal on February 7, 2014

Our fundamental equity model, which relies upon market sentiment, produced a sell signal nearly 2 months ago.  The SP500 is up a couple of percent in this time, but the Russell 2000 and NASDAQ100 are nearly flat.  More importantly, the model’s current sell signal has yet to be followed by a buy signal.  This is the concept of the price cycle that helps define the path of prices as they go from high to low and back to high again.  What would a buy signal look like?  Investors turning very bearish on equities.  How does that happen?  The best, most efficient way, is to have lower prices.  In the absence of a buy signal, the market should just flounder.

Look at it from this perspective.  A bull market that fails to clear out the weak hands (i.e., sell off) on a periodic basis is really a bull market built on a weak foundation.  Over the past 2 years, market participants have been unable to tolerate a sell off greater than a few percent without some kind market intervention stymieing the down side action.

The technicals are supportive but cracks are showing

If you look at the market technicals, there are clearly some kinks in the armor. While the SP500 remains above support levels, more speculative indices, like the Russell 2000 and NASDAQ100, are showing early signs of breaking down as prices close below negative divergence bars, which are minor levels of support.  See this week’s Equity Chart Book for a review of market technicals. In any case, positive technicals (although showing signs of weakness) and non supportive fundamentals spells a NEUTRAL market environment.