Day Hagan Research Update

DAY HAGAN RESEARCH UPDATE

DON'T FIGHT TREND AND MOMENTUM

SUMMARY

Tape remains bullish, sentiment stays optimistic and valuations remain stretched. Weight-of-the-evidence stays neutral at best.

WRITTEN BY

Neil Leeson

POSTED

April 26, 2017

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This week the markets seem to be benefiting from a relief rally brought on by elections in France and the prospects for a "tremendous" tax plan in the U.S. Not to mention the President backing down on his stance for immediate funding for the border wall with Mexico. The buzzword of the month has been "geopolitical risk," and the lack thereof (at least for this week) has sent global market indexes higher.

Indicator evidence for domestic and global markets and growth really haven't changed much for over a year now. Our weight-of-the-evidence approach, like many other investment professionals, suggests maintaining elevated allocation to equities; tape/trend indicators are bullish to neutral; monetary conditions remain favorable; economic growth is steady (albeit slow); minimal inflationary pressures are a positive; and historical valuation measures are stretched. Multifactor models and reasoning have really been in a conundrum. Our bias towards price and momentum indicators has kept us in this market, despite non-price based indicators being significantly more bearish. It is clear that domestic and international markets are supported by expectations (political, growth, monetary policy) and a good dose of hope. Nonetheless, we are not prepared to fight the tape at this time, but remain very mindful of the risks that are out there.

As we mentioned in last week's post, we really need to see a significant pickup in domestic growth to support domestic stocks and the American consumer. Historically, markets have typically been a leading indicator of the economy, but for several years now, the market has been leading and the economy continues to follow from well behind. It has not been a tight formation. As shown on the chart below, while the results of the French election may have alleviated some geopolitical risk and paved the way for better economic growth, Eurozone GDP continues to muddle along well below trend growth. So like the U.S., it is really time for both regions to "show us the money!"

 

Real Eurozone GDP Growth Gain/Annum When:
% Over/Under Trend: Gain/Annum % of time
Above 0 1.2 49.4
* Below 0 1.7 50.6

 

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

In the absence of economic growth (here and abroad) above the trend line, it will be very difficult for equities to sustain their elevated levels. Nonetheless, we continue to put the greatest weight on what is happening (trend and momentum) and not what should be happening.

The following charts remain our primary focus while evaluating the "tape."

Big Mo Tape measures the trend strength in domestic industry groups. This indicator remains in the neutral zone with over 71% of tape indicators for industry groups bullish. A drop below 56% would warrant a more cautious approach.

Composite direction is FALLING.

Direction is determined by whether Big Mo is higher or lower than it was six weeks ago.

Returns Regardless of Direction
S&P 500 Index Performance
Chart View:
1979-12-28 to 2017-04-21
Big Mo Tape is Rising
S&P Index Performance
Chart View:
1979-12-28 to 2017-04-21
Big Mo Tape is Falling
S&P 500 Index Performance
Chart View:
1979-12-28 to 2017-04-21
Big Mo Tape is % Gain/ Annum % of Time Big Mo Tape is % Gain/ Annum % of Time Big Mo Tape is % Gain/ Annum % of Time
Above 79.0 29.18 29.22 Above 79.0 34.35 17.68 Above 79.0 19.77 10.52
56.0 - 79.0 9.28 47.36 56.0 - 79.0 11.58 18.90 56.0 - 79.0 7.70 27.23
Below 56.0 -13.64 23.41 Below 56.0 4.21 8.60 Below 56.0 -25.47 14.32
Buy/Hold = 8.60% Gain/Annum Buy/Hold = 8.60% Gain/Annum Buy/Hold = 8.60% Gain/Annum

 

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

The indicator below measures the breadth of participation in this market. We'd like to see it move back above 90% now that it has fallen below 75%.

 

Stats show % change in S&P 500 N-Days After Event
Event Date % Stocks Above MA 10 Days 21 Days 42 Days 63 Days 84 Days 126 Days 253 Days
1970-09-09 91.11 0.0 3.8 1.7 8.1 11.4 19.9 21.8
1971-01-06 92.23 1.5 4.6 7.6 9.9 11.8 8.3 11.6
1972-01-05 94.29 0.8 1.5 5.5 5.8 3.1 4.9 16.3
1975-01-29 95.17 3.4 5.6 7.0 13.0 18.0 15.0 29.6
1976-01-07 92.30 4.6 6.9 6.6 10.0 7.7 10.5 11.8
1980-05-28 91.95 3.5 3.7 8.4 11.4 14.9 24.3 18.3
1982-09-14 90.38 0.1 11.1 15.2 13.7 19.2 22.5 33.9
1985-01-29 90.43 0.8 1.1 0.8 0.4 4.8 6.0 16.8
1991-02-06 90.38 1.9 4.7 4.3 5.7 6.0 9.1 15.6
2003-05-05 90.71 -0.6 6.4 6.4 6.1 10.8 13.4 21.0
2009-05-04 90.85 0.3 2.7 -1.2 10.5 10.0 14.2 28.5
2009-09-16 90.70 -1.1 2.6 2.3 3.7 6.3 9.1 5.3
2010-04-05 91.15 0.8 -1.2 -7.1 -13.9 -5.6 -3.5 12.2
2010-10-13 91.59 0.4 3.0 5.3 9.2 12.8 11.6 2.2
2011-10-27 91.89 -3.5 -7.2 -2.7 2.2 6.3 8.8 9.9
2012-02-03 91.54 1.2 -0.1 4.0 1.8 -4.4 3.4 12.2
2013-01-04 90.45 1.3 3.1 5.3 6.6 10.9 11.9 25.3
2016-03-30 90.69 0.9 0.6 1.7 -1.3 5.1 4.7 14.7

 

Combined Statistics For All Dates
Summary Item 10 Days 21 Days 42 Days 63 Days 84 Days 126 Days 253 Days
Mean 0.91 2.94 3.95 5.70 8.27 10.79 17.06
Median 0.82 3.03 4.81 6.33 8.84 9.80 15.92
Number Up 15 15 15 16 16 17 18
Number Down 3 3 3 2 2 1 0
All Periods Mean 0.31 0.65 1.30 1.95 2.60 3.97 8.07

 

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

The intermediate-term trend in global markets did weaken over the past few weeks. The following indicator needs to improve from here, which would suggest that global market trends are supportative and in sync. We will note that the longer-term tape measures (markets above their respective 200-day moving averages) is still very strong at 87%.

Index and Percentages Above Based on 38 to 49 Markets until 6/01/2009, then 46 Markets

NDR All-Cap Equity Series Performance
Full History:
1980-09-30 to 2017-04-21
% of Markets Above Smoothing is % Gain/ Annum % of Time
Above 71.0 18.79 40.78
41.0 - 71.0 3.93 32.92
Below 41.0 -0.97 26.30
Buy/Hold = 8.36% Gain/Annum

 

Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

And finally, from a global perspective, we continue to favor those markets and regions that continue to exhibit strength as measured by rising short-, intermediate-, and long-term moving averages.

In sum, the trend and momentum indicators for domestic and international equity indexes remain very positive overall, supporting our overweight allocation to equities. However, that support may fade if economic growth cannot move above trend measure, improving substantially from current historically low levels.

Have a wonderful week,

Neil Leeson
Day Hagan Investment Committee Consultant
Day Hagan Asset Management

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