Our Models Are Screaming Investor Indecision – That’s Also A Signal
The US stock market is as indecisive as we can remember seeing it. This means the collective wisdom of the market doesn’t know what to do here. That happens sometimes. And, as frustrating as this may be, these relatively rare extended periods of investor indecision typically lead into the next sustained, investable market trend.
The reasons for indecision are all over the financial news. Some respected experts vehemently believe the Fed is done tightening, that economic conditions are pretty good overall, and are expecting decent 1st Quarter earnings. They believe this is a buying opportunity. Other experts believe more inflation and a recession are looming. They believe this is a time to protect capital. Meanwhile, there are serious concerns that a few recently failed banks are just the tip of the iceberg of an emerging systemic banking problem — and Congress is once again playing “chicken” with the debt ceiling and thus the credit risk of our Treasury securities. Investor anxiety creates indecision and tight trading ranges, and that compressed energy eventually becomes the launching pad for the next investable trend.
All this recent indecision and hand-wringing can also clearly be seen on the price charts — and in our quantitative models. The S&P 500 has been drifting sideways since December in a tight range between 4200 and 3800. This is because investors are afraid to “step outside these lines” to make a bet on market direction.
Meanwhile, our SEAF Model atypically underperformed the S&P 500 in the 1st Quarter after significantly outperforming the benchmark index in eight of the previous ten quarters. This indecision according to SEAF can be seen in both the length of the individual SEAF signals and the rapidly changing nature of the signals. This means something. In 2022, the average length of a SEAF buy/overweight signal was approximately 6 to 7 weeks. During the first quarter of this year, however, the average signal length was just 2 to 3 weeks. Moreover, the changes from SEAF signal to SEAF signal during Q1 were atypically very erratic — often shifting from an offensive, “risk on” sector like Technology to a defensive “risk off” one like Utilities 2 weeks later.
For example, look at the four “favored” SEAF signals for this past week: two are offensive (Technology and Communication Services), and two are defensive (Consumer Staples and Utilities). This is highly unusual and underscores the very atypical environment the market is in right now.
Also note that through last week, Technology (XLK) was the best sector in terms of asset inflows over the previous week, was the second worst sector over the previous month, and was the best sector over the previous quarter. This indicates extreme indecision on how to invest in what is perhaps the most influential sector in terms of market leadership.
This atypical split down-the-middle dichotomy in market expectations can also be seen in our CARP (Cross Asset) Model. For months, relative outperformance has been equally split between outperformance by “risk on” segments of the market like Growth and Technology, and “risk off” segments like Low Volatility and Large Cap stocks. This is more evidence of indecision.
Finally, we have recently even started seeing directional indecision in our Tactical models, the Asbury 6 and Correction Protection Model (CPM). As the quarterly trading range in the S&P 500 contracts while day-to-day market volatility increases, these models produce more frequent, erratic, and unprofitable signals.
How To Factor This Into Our Investment Decisions
Our models are built to both highlight opportunity and avoid risk in a normal market environment. Their historical performance over time indicates their success at doing this. Since December, however, this has not been a normal market environment. Our models have clearly indicated this, and we have repeatedly underscored it in our research reports.
So how do we use this information in our investing? We believe our models cut through the market’s “noise” and give us a data-driven assessment of “what the money thinks”. The movement of money drives the markets — not men in suits on financial television. Right now, our models clearly indicate that the market doesn’t know. Amid these conditions, we suggest either 1) trading Asbury Research models with significantly smaller positions and the understanding that there may be whipsaws in the signals until the next sustainable trend begins or 2) waiting until our models become more definitive and one-sided on upcoming market direction.