However “real” the news may be perceived, rarely is news “breaking.” However, in light of all the annoying, repetitive press these days, I thought I’d share some good news that – as a matter of fact – is somewhat ground-breaking.
Something happened this month that hasn’t occurred since November of 2009. A relatively accurate, very-long-term stock market indicator flipped positive after spending the last 23 months on a sell signal.
The indicator in question is called the Price Momentum Oscillator (PMO). It was developed by Carl Swenlin, a legend in the technical analysis and trend following arena. In order to avoid getting to nerdy, I’ll just say that the tool basically measures momentum over time and provides clues as to whether that momentum is positive or negative.
It can be used over any time frame – short, intermediate, or long-term. The shorter the time frame, the more signals you get, but when looking at a monthly (long-term) time-frame, the signals (positive or negative) are few and far between.
Below is a chart that shows you how infrequent these signals occur. This chart goes back 20 years and you can see that there have only been four accurate, positive signals (in 1997, 2003, 2009, and today). The only “false” signal occurred during the quick market correction that took place in 1998, after which a positive signal was triggered, but would’ve resulted in a losing trade (if this indicator was used all by itself).
I’ve drawn blue arrows in the chart above for easy viewing of the positive signals. You can also observe the negative signals, annotated with the downward facing red arrows (including the April, 2015 sell signal, which was one of the many reasons we decided to steer clear of stocks as the months marched on throughout 2015-16).
So, the point of all this is to say that, prior to this month, there have only been four total positive signals in 20 years, three of which provided us with a very strong piece of evidence that suggested the long-term momentum of the market would be up.
Naturally, there is always a chance this could end up being a false signal – and that this “breaking news” could wilt away if the market decides to take a dive over the course of the next several months.
With all that said, since I take a “weight of the evidence” approach to investing, I use many more indicators and tools other than the PMO explained above. For now, the market is short-term overbought (exhausted), but intermediate and long-term trends are looking good. Until that changes, we’ll continue managing our clients’ portfolios in a manner that corresponds with this positive thesis.
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