MDM - Brief

Published : September 25 2014 at 13:24 ET

Note that price/volume is the guide in all signal changes. The moves of the central bankers or economic reports such as durable goods report do not determine the model's signals. That information is provided as a backdrop for what is going on in the markets overall.

The number of distribution days on the NASDAQ and S&P 500 have piled up, and there are technical reasons why these averages look weak, but yesterday's action among leading stocks in a variety of strong industry groups was positive. In addition, the S&P 500 bounced off its 50dma on higher volume and the NASDAQ has fallen to the top of its prior base which are logical areas of support, thus the move to a BUY signal.

The NASDAQ and S&P 500 are currently more than 2% off their respective peaks. Volume compared to yesterday is about breakeven on the S&P 500 and higher on the tech-heavy NASDAQ at the time of this writing due in part to tech stock AAPL gapping lower today, which in turn puts pressure on other tech stocks. 

The QE environment has artificially manufactured the loose uptrend you see since January 2013 when QE went on full bore across many central banks. The S&P 500 has bounced off its 50dma a number of times since then but has also undercut its 50dma by a couple to a few percent at times with as much as a -4.1% undercut in February 2014 when the S&P 500 had its largest drawdown of -6.1%. So should selling pressure increase, the MDM will most likely switch to CASH until the market finds its floor. Then its reversion to the mean strategy which is a short term tool in this QE environment gives MDM the potential to more quickly switch out of its SELL or CASH signal to get back on board the uptrend after a correction. It also gives the MDM the potential to move more quickly to CASH or to SELL in the event the market looks weak after hitting new highs.


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