The darker meaning of the HIndenburg Omen

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Neutral (Last changed from “bullish” on 03-Dec-2024)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

An unusual omen

I recently highlighted the trigger of the ominously named Hindenburg Omen, which describes the condition of a highly bifurcated market undergoing a downside break (see A Hindenburg Omen in an Oversold Market). While Hindenburg Omens often resolve in corrective market action, the current episode occurred against the backdrop of an extremely oversold market with readings reminiscent of the Christmas Eve Panic of 2018, the COVD Crash of 2020, and the October bottom of 2022.

 

The full post can be found here.

Asset return expectations under an alien invasion

Publication note:  There will be no mid-week update next week. The regular publication schedule will resume next weekend.

 

Is ET here?

The holidays are a great time to decompress and think about big picture topics. This year, I focus on the limitations of modeling techniques for long-term asset returns and the risk of discontinuous exogenous events. In case you missed it, there have been numerous stories emerging in the press about unknown flying objects in the New Jersey area (see this NY Times account as one of many examples). The sightings expanded to other parts of the U.S., and they have been spotted in other countries as far away as Iran, Chile, Japan, and the Philippines. 

 

While I am a subscriber to Occam’s Razor, which can be paraphrased as the simplest explanation is the most satisfactory, and these UFOs are of terrestrial origin, it’s a worthwhile exercise to consider asset return expectations under the scenario of an extra-terrestrial alien invasion. 

The full post can be found here.

A Hindenburg Omen in an oversold market

Mid-week market update: What happens when an ominously sounding Hindenburg Omen occurs when the market is oversold? David Keller described the three components of the Hindenburg Omen in an article:

1. The market has to be in an established uptrend;
2. Market breadth becomes highly bifurcated, as measured by the expansion of new highs and new lows; and
3. A downside break in price momentum.

Keller characterized the accuracy of this signal as "ten of the last three market corrections". A single signal hasn't been very useful, but a cluster of signals puts me on notice of a significant risk of a correction. The accompanying chart shows the history of Hindenburg Omens (pink=corrections, grey=false positives). Does the latest episode qualify as a cluster?

 

The full post can be found here.

Could a hawkish rate cut rattle markets?

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Neutral (Last changed from “bullish” on 03-Dec-2024)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

Stubborn inflation

Investors heard some good news and bad news from the inflation reports last week. The good news is monetary policy is still too tight. The Fed Funds rate (black line) is too high compared to core inflation metrics and need to fall. The bad news is inflation progress to the Fed’s 2% appears to be stalling. Inflation is facing a last-mile problem of getting to 2%. 

This environment is setting up conditions for a hawkish rate cut at the December FOMC meeting. While the Fed is widely expected to cut rates by a quarter-point, it is also likely to signal a slower pace of future cuts.

 

The full post can be found here.

The public embraces the Trump honeymoon

The latest University of Michigan sentiment survey is out, consumer sentiment surged in the wake of Trump’s victory.

The full post can be found here.

Here comes the end-of-year positioning season

Mid-week market update: We are entering the time of year when investors and traders position themselves for the end of the year. These conditions have made it more challenging for anyone trying to trade based on conventional technical analysis.

 

The most obvious is tax loss selling, when investors harvest losses to offset their (likely) considerable gains of 2024. Another is hedge funds shutting down their books in order to avoid the thin and potentially volatile market environment during the last two weeks of December.

We likely saw some hedge fund profit taking this week when Bespoke observed that winners were being sold and losers were being bought. This is consistent with market-neutral or long-short funds squaring their books for the year.

The full post can be found here.

Bitcoin 100K: Buy or fade the animal spirits?

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

Crypto leads the stampede

Now that Bitcoin has exceeded the psychologically important 100,000 mark, it is becoming evident that the FOMO risk-on stampede is in full force. The risk-on mood can also be seen in the relative performance of speculative growth stocks, as measured by the Ark Investment ETF (ARKK), which has shown a roughly correlation with Bitcoin. In addition, ARKK has staged an upside breakout from a multi-month base.

 
Is it too late for traders to hitch a ride on the risk-on train or should they fade the rally? Here are the bull and bear cases.

The full post can be found here.

Investing during an era of American Exceptionalism

As 2024 draws to a close, it is becoming clear that the U.S. equities have led the way for most of the year. The accompanying chart shows the relative returns of equities by major region against the MSCI All-C ountry World Index (ACWI). The U.S. has been the only safe-haven of growth as the economies of other regions sputtered.

 
This was the year of TINA (There Is No Alternative) for American equities. Can it continue into 2025?

The full post can be found here.

Seasonal weakness ahead?

Mid-week market update: Jeffrey Hirsch of Almanac Trader recently indicated that the first part of December sees a period of seasonal weakness, followed by small cap leadership into year-end.

I regard seasonality as informing me about the climate, while the weather can vary day-to-day. Here is my assessment of the weather ahead.

The full post can be found here.

Stock market clues from the bond market

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

  

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

Clues from the bond market

The S&P 500 made a marginal all-time high last week and pulled back. However, investors may find insights about the near-term outlook for equities from the bond market.

The accompanying chart shows how the VIX Index (middle panel, red dotted line, inverted scale) and MOVE Index (middle panel, black line, inverted scale), which is the VIX of the Treasury market, have mostly normalized their episode of pre-election anxiety. However, MOVE hasn’t fully normalized compared to VIX. We interpret this to mean that there is more room for Treasury yields to fall (bottom panel), which would be supportive of equity valuation.
 

The combination of sentiment returning to pre-election levels and the S&P 500 remaining in a well-defined uptrend leads us to believe that stock prices can continue to rise into year-end.

 

The full post can be found here.

2025 outlook: Cautious but not bearish

This is the season when investment strategists publish their outlooks and forecasts for the coming year. This year, the message from investment banks is mostly the same: “We are bullish for stocks in 2025, but there are these policy risks of the new Trump Administration.”

This time last year, I expected returns of about 12% for the S&P 500, which is the average return during an election year. The S&P 500 has more than doubled that figure on a YTD basis. This year, I am expecting equity returns to be flat or in the low single-digits. I am cautious for 2025, but not bearish. 

The main headwind facing stocks is valuation. The S&P 500 is trading at a forward P/E of 22, which is highly elevated by historical standards and ahead of the P/E valuation when Trump first took office in 2017. This doesn’t mean that the stock market can’t rise, but earnings growth will have to be the driver of price growth. Investors shouldn’t expect P/E expansion to boost stock prices. The combination of elevated valuation and no recession on the horizon that craters earnings expectations translates into a roughly flat stock market in 2025.

The full post can be found here.

All-time highs are bullish

Mid-week market update: It is said that there is nothing more bullish than a stock or a market making a new high. The S&P 500 made a marginal all-time high yesterday and pulled back today. Yesterday's high was more convincing as both the Dow and equal-weighted S&P 500 decisively broke out to all-time highs. This is an indication of strong breadth and bullish price momentum.

 

 

 The bull post can be found here.

An insightful interview with Scott Bessent

RenMac hosted an interview with Scott Bessent, who is Trump's announced nominee for Treasury Secretary, in early 2021. While Bessent did not talk about policy or politics, I found it highly insightful as he described his career path and his investment process.

 

The interview is useful to listen to in its entirety, but here are some highlights.

 

The full post can be found here.

All hail the bullish reversal

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 11-Oct-2024)*
• Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

The bulls seize control

The S&P 500 printed a bullish reversal last week. It began with a decline that was halted at the 20 dma and that’s just above a large price gap, followed by an outside reversal day when it exhibited a bullish engulfing pattern. The bullish reversal was confirmed when the index rose and filled a price gap that was acting as resistance. 

The market action was a test for both bulls and bears. Gap fills, and how quickly they are filled, are a sign of the strength of the underlying trend. The filled upper gap is a signal that the bulls are seizing control of the tape once again.

 

The full post can be found here.

2025 outlook: Cautious, but not bearish

This is the season when investment strategists publish their outlooks and forecasts for the coming year. This year, the message from investment banks is mostly the same: “We are bullish for stocks in 2025, but there are these policy risks of the new Trump Administration.”

This time last year, I expected returns of about 12% for the S&P 500, which is the average return during an election year. The S&P 500 has more than doubled that figure on a YTD basis. This year, I am expecting equity returns to be flat or in the low single-digits. I am cautious for 2025, but not bearish.

 

The main headwind facing stocks is valuation. The S&P 500 is trading at a forward P/E of 22, which is highly elevated by historical standards and ahead of the P/E valuation when Trump first took office in 2017. This doesn’t mean that the stock market can’t rise, but earnings growth will have to be the driver of price growth. Investors shouldn’t expect P/E expansion to boost stock prices. The combination of elevated valuation and no recession on the horizon that craters earnings expectations translates into a roughly flat stock market in 2025.

The full post can be found here.

Deciphering Trumponomics 2.0

The year is nearly over and the U.S. will see Donald Trump in the White House in 2025. Ryan Detrick’s analysis of historical equity returns found that stocks historically do better in the first two years of a president who was re-elected versus a new president in office. The key question is whether Trump 2.0 represents a re-election or a new term.

I unpack that question by focusing on the economic effects of Trump’s key initiatives, namely the TCJA tax cut extension, tariffs and immigration.

The full post can be found here.

Waiting for the gap fill

Mid-week market update: The decline in the S&P 500 seems to have been arrested at its 20 dma (blue line). The next question is which price gap gets filled first. A fill of the upside gap (in grey) would be positive for the bull case, while a fill of the downside gap (in pink) would indicate that the bears have seized control of the tape.

 

 

As investors await the market's verdict, here are some clues on how the future may develop.

The full post can be found here.

2025 high conviction idea: Gold

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 11-Oct-2024)*
• Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

Why gold will beat stocks

Looking ahead to 2025, I am reiterating my bullish call on gold from a long-term viewpoint. The recent pullback represents a buying opportunity in the metal from an asset allocation perspective.

Going back to 1980, we can see several distinct gold bull-bear cycles. Gold topped out at 850 in early 1980 and began a bear market that bottomed in 1985. It traded sideways and made a second bottom in 1999 and broke out to new recovery highs in 2004 and topped in 2011. It subsequently broke out again at 2,100 in early 2024. More importantly, it is tracing out saucer-shaped multi-year bases against different regional equity indices. The gold/Dow ratio is the weakest owing to the strength of U.S. stocks, but it is nevertheless distinctive. The Gold/EAFE ratio (all ratios are in USD) is about to stage a relative breakout, and the gold/EM ratio has marginally broken out of a 12-year base.

These technical patterns argue for a bullish commitment to gold for 2025 and beyond for all investors in all major currencies from an asset allocation perspective.

 The full post can be found here.

Can Trump Make Equities Great Again?

U.S. equity prices rose strongly in the wake of Trump’s victory. As the accompanying shows, both the S&P 500 and NASDAQ 100 surged on a relative basis, while other regions tanked.

 

Donald Trump promised to Make America Great Again. While he may have accomplished that task in the short run for U.S. stocks, can he do the same for all equities?
 

The full post can be found here.

How far can the post-election rally run?

Mid-week market update: The latest BoA Global Manager Survey shows that institutions have stampeded into U.S. equities in the wake of Trump's victory. The apparent crowded long position is concerning from a contrarian viewpoint.

I had suggested on the weekend that it was time for the S&P 500 to pause and take a breather. The market duly consolidated and trade sideways this week. How far can the post-election rally run?

The full post can be found here.