Research

Valens Market Phase Cycle Monitor & Corporate Credit Macro View for September 2018

Market Phase Cycle™ Investing Strategy

Higher highs and higher lows, fundamentally and technically


Market technicians have many metrics they look at when observing the charts. One trusty tool that many come back to is looking for charts with consistent higher highs and higher lows in stock price. This indicates positive momentum and is a favorable set-up.

We are in a market environment that has seen that trend of higher highs and higher lows since June, a positive indicator as we are making new highs in the market. This trend does not occur in a vacuum. The reason we have seen this chart pattern is because the fundamentals are pointing to much the same.

US corporate ROA’ peaked in 2000 at 8%, before falling off with the dot-com crash. Subsequently, ROA’ rose to 10% levels in 2005-2007, before the great recession. Coming out of the great recession, ROA’ topped out at 11%, before energy issues caused a pullback. Each cycle, ROA’ has had higher highs (and higher lows).

In 2018, ROA’ is projected to break 12%, and move to 13% in 2019. Fundamentals are making new higher highs. At the same time, management teams are showing more confidence in accelerating investment in their businesses, which will amplify that ROA’ expansion. This strong fundamental backdrop warrants the strong market dynamic we’re currently seeing, and warrants continued fundamental upside.

When will the “higher lows” come into play for this corporate cycle? Not to sound like a broken record, but economic, and corporate cyclical declines are consistently triggered by credit issues, of which there are none in the foreseeable horizon. This long corporate credit and fundamental horizon gives us confidence that the technical backdrop will remain favorable. Take advantage of those higher lows, because higher highs will continue to follow.