This Week’s Blogger: Scott D. Heins, CFP®, IAG Chief Investment Officer
Around August 27 a small clump of clouds floated harmlessly off of the west coast of Africa. Calling those clouds a modest thunderstorm would have been an exaggeration.
Less than a week later this small clump of clouds had grown into a Category 5 monster hurricane that unleashed its destructive wrath on people living on Caribbean islands and eventually Florida.
Very few African cloud clumps actually develop into monster hurricanes, just like very few “bad news” stories cause significant storms in the financial markets.
It takes exactly the wrong conditions for a hurricane to grow to a Category 5 – moist air, warm ocean water, weak wind shear, and the wrong prevailing winds. The last major financial market storm in 2008 took exactly the wrong conditions to develop – excessive greed, false assumptions, low interest rates, and poorly designed government policies.
If there is even one comforting aspect to Category 5 hurricanes it is that we know they are coming days, if not weeks, in advance. Forecasters use technology to put together possible trajectories identifying areas that could be impacted so that residents have time to evacuate or prepare.
In financial market storms there are no concise cones, no up-to-the-minute radar reports, and no predictability. The storm rages in traders’ minds every second of every trading day and it is impossible to predict how they will think or act in the days or weeks ahead.
When we look at the financial market sky right now we can see some clumps of clouds, but no major storms. There are reasons to be concerned about auto loan defaults, student loan debt, the Fed’s plan to reduce its balance sheet, and geopolitical uncertainties. But we simply don’t know when or if these clouds will turn to storms in the coming weeks.
Right now traders are seeing fairly sunny skies as reflected by the market’s Upbeat mood as gauged by IAG’s Market Mood Meter©. Trend strength is at 83% (40 points out of 48), Momentum strength is at 50% (24 out of 48 points), and volatility expectations have fallen over the last three days.
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Market Mood Meter© Trend strength is determined using S&P 500 Index daily moving averages (DMAs) (8-21, 13-34, 21-55, 34-89, 55-144 and 89-233) to determine whether the short-term DMA value is higher than the longer-term DMA value. A daily moving average is the average price of the index over the indicated number of days. Trend is either Positive (8 points) if the short-term DMA is higher, Negative (0 points) if the short-term DMA is lower or Transitioning (4 points). A trend is Transitioning if the difference between the shorter DMA and longer DMA is between -.34% and +.34% of the shorter DMA. Maximum is 48 points when all trends are Positive.
Market Mood Meter© Momentum strength is determined using the same S&P 500 Index DMAs to determine whether trends are getting stronger or weaker calculated by dividing the difference between the shorter DMA and longer DMA by the shorter DMA. Momentum must be directional – rising or falling -- for 5 consecutive trading days to be Gaining (8 points) or Losing (0 points), otherwise momentum is considered Transitioning (4 points). Maximum is 48 points when all momentum is Positive.