Nothing New

Nothing new.  In yesterday’s session, stocks closed mixed to modestly down on a lack of any new stimulants from the Fed or trade negotiations between the US and China.  Equities spent the day searching for reasons to resume their recent rise and with very little to go on, they bounced between black and red ultimately closing down.


1) No news from the Fed Chairman is good news.  The Fed Chief spoke and was grilled by Senators on Capital Hill yesterday and he very carefully stayed within the boundaries, cautious not to tread into foreign territory.  The Fed has been so aggressively dovish in their messaging recently, Jay Powell needed to be really mindful not to send even any subtle signals that would be construed as his having a change of heart.  As the dovish Fed policy is well baked into the market at this point, investors were more focused on finding negatives than positives in the Chairman’s language and he stuck to the script. Inflation is under control and global economic “cross currents” are developing so the Fed can afford to be patient in their rate hiking.

2)  The housing sector is weakening.  Yesterday’s US Census Bureau’s housing starts number showed an -11.2% month over month decline, which was far lower than expectations.  Yesterday, Home Depot announced its earnings before the bell and while they beat Wall Street estimates on earnings, the company gave weak forward guidance for 2019 citing slower growth in the housing market, which is essentially consistent with many of the recent economic releases.  Housing is seen as a potential canary in the coal mine due to its sensitivity to interest rates and consumer confidence.  Beyond the early warning signs, the housing sector is a big driver of employment and a secular slowdown in that market could have negative impacts on the overall economy.

3)  Consumer confidence rebounded last month, which was most likely attributed to the ending of the Government shutdown.  Yesterday’s Consumer Confidence indicator came in at a higher than expected 131.4 versus last month’s 120.2.  The number takes into account views on both current conditions and future expectations and while feelings about current conditions remain consistently strong, it was the jump in future expectation which contributed to the big move, coming in at 103.4 versus last month’s 87.3.  Read my note on consumer confidence here: .

The market has become somewhat reliant on, if not addicted to, the good news and positive vibes which have helped it extend the aggressive gains that occurred in the wake of the Fed policy shift.  With the S&P500 up by +11.45% year to date, stocks have made some impressive gains and it would be quite natural for the rally to take a pause before following through and continuing to rise, and they did just that in the prior two sessions.  The S&P500 has bumped up against some key resistance levels around 2800 and fell by -0.08% in yesterday’s session.  Similarly, the other major indices are at key resistance levels with the Dow Jones Industrial Average trading off by -0.13%, the Russell 2000 falling by -0.71%, and the NASDAQ 100 climbing by +0.11%.  Bonds advanced yesterday leaving the 10 year treasury yielding 2.64% and the 2/10 yield curve remains around 15 basis points.  Trend and momentum are always important factors, both giving traders clues about where a market has been and where it may be headed.  When searching for clues about what may be next for equities as earnings season winds down, traders will surely turn to momentum for some answers, and as it is geek-out Wednesday perhaps today would be a good day to explore momentum further.


Momentum is perhaps one of the most simple, yet effective measures of the strength of a trend. Momentum measures the velocity of a change in price and can be applied to any type of investment instrument or index (I will switch around within the discussion).  Stocks that are going up faster have more momentum than those that are moving up more slowly.  Using momentum to compare different investment vehicles or indices is a good way to gauge investor interest and helps us better understand the herd mentality that frequently drives markets.  For example, if the Dow Jones industrial average begins to move in a positive direction, one can compare the momentums of all of the index’s component stocks to see which ones have moved up more rapidly thus contributing more to the index’s move.  The stocks moving up more rapidly are most likely reflecting an investor rush to jump onto the bandwagon of the fast moving stocks thus accentuating the already positive move.  Similarly, one can compare the momentums of different sectors to get a feel for which ones are garnering the most investor interest. There are many methods for calculating momentum but perhaps the most common one is simple momentum, which is calculated as follows:

M = ( P – Pn ) / Pn


M = simple momentum

P = today’s closing price

n = number of days in the study, so if n = 60, Pn is the closing price from 60 days ago (60 is one of the most common time frames).

So, for example to calculate the momentum of the Dow Jones Industrial Average:

P = 26057

n = 60 days

Pn = 24748

M = ( 26057 – 24748 ) / 24748 = +.052

You will immediately recognize this as a rate of change (or % change) equation.  Because it is normalized, it can be used to compare different securities trading at different price levels, even factoring in different volatilities.  OK, makes sense, so how do we use it and how can it be visualized?  The first and most common way to use momentum is to use what is referred to as absolute simple momentum in which we would plot a running calculation of price momentum to observe its behavior over time.  Please refer to the chart 6 in my attached daily chartbook which details the Dow Jones Industrial Average.  The orange line in the bottom panel of the chart is the 60 day absolute simple momentum.  You can see that as the Dow hit its most recent all time high last October, momentum had reached a peak, meaning it was going up at an increasing rate, probably reflecting the herd rushing in.  Conversely, once the market began to fall, momentum quickly fell below zero and hit a low point as investors panicked and sold into the lows of December 24th.  The blue line in the lower panel shows a linear regression of the momentum which is an indicator of the momentum’s recent trend, which in this case is positive.  Positive trend momentum is a positive signal for the index.  On its own, absolute momentum gives traders a good snapshot of what may be happening in a market or investment and it is often combined with other indicators for market timing.  In fact, one of the most common tools used by professional systematic traders is combining momentum with moving average to determine buy and sell signals.  When a stock or index has negative momentum and is below its 200 day simple moving average, a stock trader may sell out of a long position.  After all, why would one want to buy a stock that has a negative trend which is going down at an increasing rate?  Another use case for momentum is referred to as relative simple momentum in which momentums are used to compare different markets, sectors, or securities to each other.  The ones with the highest positive momentums would be those garnering the most positive investor attention warranting further scruitiny.  An example of how relative momentum is used in practice involves a trader buying the 3 sectors that display the highest positive momentum then recalculating and adjusting on a monthly basis.  This method ensures that the trader is always long the sectors that are moving up the fastest.  Of course, this an oversimplified example of the system and offers no guarantee of success.  The most practical use of these methodologies is as a research tool to determine which sectors and investments are worth taking a closer look at.  With 11 major sectors and around 20,000 listed stocks, investors use methods like relative momentum to find opportunities.


This morning we will get another key housing number in Pending Home Sales which is expected to show a month over month growth of +1.0% compared to last month’s decline of -2.2%.  We will also get Factory Orders from the US Census Bureau which tracks new orders received by manufacturers.  That number is expected to have grown by +0.6% versus last months -0.6%.  This morning, we heard from Lowe’s which beat by +1.4%, Horizon Pharmaceuticals which also beat by +23.6%, and Chesapeake Energy which missed by -11.1%, amongst others.  After the bell earnings include Square, HP, Fitbit, and L Brands.  Today, Chairman Powell heads to capital hill to testify before the House Finance committee. His testimony is likely to be similar to yesterday’s.  We may also get a glimpse of the Cohen testimony today, which should provide for some entertainment.

daily chartbook 2019-02-27


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