Wednesday, August 12, 2020

Greedy enough?

Mid-week market update: As the market tests resistance at the old highs, is sentiment greedy enough? The Fear and Greed Index stands at 73, and recently peaked at 75. While readings at these levels can indicate high risk environments, they have also been inexact market timing signals.


The full post can be found here.

Monday, August 10, 2020

Earnings Monitor: Slower growth ahead

Q2 earnings season is nearly done. So far 89% of the market has reported. FactSet reported the EPS beat rate fell to 83% from 84% the previous week. The sales beat rate was fell to 64% from 69% the previous week. Both the EPS and sales beat rates are ahead of their 5-year averages.

The bottom-up consensus forward 12-month estimate continued to rise strongly at 1.62% last week after 1.03% the previous week The market is trading at a forward P/E of 22.3, which is well ahead of historical norms.


As 89% of the index has reported, this will be the final Earnings Monitor of Q2 earnings season.

The full post can be found here.

Sunday, August 9, 2020

A global and cross-asset market review

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 which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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 those email alerts are 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: Sell equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


An uneasy feeling
I wrote a week ago that I had an uneasy feeling about the stock market's intermediate term outlook. This was owing to a combination of global market weakness, and cross-asset warning signals. Last week, US equities continued to grind upwards. Let's review how those signals evolved.

Starting with the US, the SPX broke up through a rising trend line to a new recovery high. Internals were mixed. While Advance-Decline Lines staged upside breakouts to all-time highs, the ratio of high beta to low volatility stocks, which is a risk appetite indicator was range-bound and did not confirm the market's strength. Neither the the NYSE Advance-Decline Volume (bottom panel).



The full post can be found here.

Saturday, August 8, 2020

Sector and factor review: Not your father's cycle

It's time for one of my periodic reviews of the market from a factor and sector perspective. These reviews are useful inasmuch as they can reveal insights about the character of a market.

Let's begin with how different regions are performing relative to the MSCI All-Country World Index (ACWI). The top panel shows the S&P 500 rolling over relative to global stocks. Even the NASDAQ 100, which had been the market leaders, may be losing relative momentum and starting to trade sideways. The middle panel shows the relative performance of two major developed market regions. Japan is underperforming, and Europe is not showing signs of market leadership as it is trading sideways on a relative return basis. The bottom panel shows the relative performance of emerging market equities. Both EM and EM xChina are starting to bottom and exhibit relative strength, which is a possible sign of a global cyclical rebound, as EM equities tend to be high beta and highly cyclically sensitive.



The full post can be found here.

Wednesday, August 5, 2020

Waiting for the July Jobs Report

Mid-week market update: The July Employment Report has the potential to be a game changer in how the market perceives the recovery. Estimates of job gains are all over the place, and the median stands at 1.5 million.


High frequency economic data has been weakening, and I am inclined to taken the "under" consensus on the print. This could be a big negative surprise for the market and spark a risk-off episode.

The full post can be found here.

Monday, August 3, 2020

Earnings Monitor: Big Tech surprises

Q2 earnings season is now past the halfway mark. So far 63% of the market has reported. FactSet reported the EPS beat rate rose to 84% from 81% the previous week. The sales beat rate was fell to 69% from 71% the previous week. Both the EPS and sales beat rates are ahead of their 5-year averages.

The bottom-up consensus forward 12-month estimate rose 1.03% last week after a strong 1.05% the previous week The market is trading at a forward P/E of 22.0, which is well ahead of historical norms.


The full post can be found here.

Sunday, August 2, 2020

An uneasy feeling

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 which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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 those email alerts are 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: Sell equities*
  • Trend Model signal: Neutral*
  • Trading model: Neutral*
* 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 and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Good news, bad news
I have some good news, and some bad news for equity bulls. The month is complete and the month-end data is in. The good news is the broadly based Wilshire 5000 strengthened sufficiently to flash a monthly MACD buy signal. In the past, similar buy signals have been followed by multi-month bull phases.


The bad news is the buy signal coincided with a negative RSI divergence just as the index made a closing high. This represents a warning for investors to exit a bull trend after a monthly MACD buy signal. The last sell signal occurred in August 2018, and the market topped out two months later (see Market top ahead? My inner investor turns cautious).

A sell signal just as the system flashes a buy signal? Should investors view this as bullish or bearish?

The full post can be found here.

Saturday, August 1, 2020

Fiscal cliff = Double-Dip

The coronavirus has imposed both a supply shock and a demand shock to the global economy. The supply shock was in the form of disruption to supply chains as factories were shuttered. The supply shock has largely been corrected.

The demand shock was in the form of a loss of demand as lockdown and stay-at-home orders cratered demand. Governments around the world acted to cushion some of the demand shock by way of fiscal support. In the US, a significant part of the fiscal cushion is expiring, which is the risk of a double-dip slowdown.

One puzzle of the stock market rally since the March lows is how stocks can strengthen in the face of the worst economic slowdown since the Great Depression. Sure, central bankers took steps to mitigate the worst of the damage. While they can print money, they cannot print sales or customers for businesses, nor can they print equity.

While some of the risk-on tone could be attributable to central bank action, the real reason for the market's strength is fiscal policy. While the stock market isn't the economy, and the economy isn't the stock market, the two are nevertheless connected. I pointed out last week (see Analyzing the bull case) that US fiscal support had strengthened household incomes to pre-pandemic levels. Retail sales were therefore recovering strongly as a consequence.


All that is about to end as the $600 per week supplemental unemployment insurance payments expire at the end of July. Congress has failed to act to extend the benefits, and the economy is going over a cliff. Brace for the double-dip recession.

The full post can be found here.

Wednesday, July 29, 2020

What gold tells us about Fed policy expectations

Mid-week market update: It can be difficult to discern the market's short-term outlook on an FOMC meeting day, but the Fed has spoken, and the market reaction has important signals for equity investors from an inter-market, or cross-asset, analytical basis.

The first important signal comes from gold prices. Gold staged an upside breakout to a fresh high from a multi-year base that stretches back to 2011. Point and figure charting shows upside targets in a range of 2440 to 2670, depending how the box size and reversal parameters are set.


The full post can be found here.

Monday, July 27, 2020

Earnings Monitor: A qualified upbeat tone

Q2 earnings season is now in full swing. So far 26% of the market has reported. FactSet reported the EPS beat rate rose to 81% from 73%, last week which was well above the 5-year average. The sales beat rate was fell to 71% from 78% last week, but it remains ahead of the 5-year average of 60%.

The bottom-up consensus forward 12-month estimate rose 1.05% last week The market is trading at a forward P/E of 22.2, which is well ahead of historical norms.


The full post can be found here.

Sunday, July 26, 2020

Warnings, warnings everywhere, but bears should not drink...

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 which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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 those email alerts are 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: Sell equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Sentimental warnings
There are two kinds of sentiment models. Some sentiment readings come from investor surveys, and others are derived from investor positioning. I prefer the latter because it shows how people are behaving with their money instead of just expressing opinions.

Intermediate term option sentiment models are flashing warnings everywhere. It is a sign of froth in this market when individual stock volumes have exceeded the volumes of the underlying stocks.



The full post can be found here.

Saturday, July 25, 2020

Analyzing the bull case

Regular readers will know that I have been cautious about the equity markets over the past few months. Good investors cannot be overly dogmatic, and in that spirit, I contemplate what the bull case may be,

From a strictly technical perspective, price momentum has been strong. The Wilshire 5000 is on the verge of flash a monthly MACD buy signal, depending on what level the index closes at month-end. Past signals have usually seen the market rise strongly afterwards.



Let's put on our rose-colored glasses, and consider all the elements of the bull case.

The full post can be found here.

Wednesday, July 22, 2020

A market in transition

Mid-week market update:I observed in the past that the market had undergone a regime shift, and most of the gains were occurring overnight, while prices were lagging during daylight hours (see My inner trader returns to the drawing board). This is an indication of a jittery market sensitive to headlines that were released after the market close. In the past, past breaks of the overnight to daylight return ratio marked a change in market direction.

As the chart below shows, the overnight to daylight ratio is testing a key rising trend line and it may be on the verge of breaking down through the uptrend. While I am not ready to definitively declare a break, there are signs of unusual market behavior that suggest a phase shift is under way.



The full post can be found here.

Monday, July 20, 2020

Earnings Monitor: Waiting for Congress

We are starting our coverage of the Q2 earnings season. Let's begin with the big picture. FactSet reported that, with 9% of the companies reported, the EPS beat rate was 73%, which was slightly above the 5-year average. The sales beat rate was 78%, which was well above the 5-year average of 60%.

The bottom-up consensus forward 12-month estimate rose 0.51% last week The market is trading at a forward P/E of 22.3, which is well ahead of historical norms.


The full post can be found here.

Sunday, July 19, 2020

Pockets of opportunity in an uncertain 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 which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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 those email alerts are 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: Sell equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Still range-bound
The market ended the week at the top of a tight range between 3000 and 3240. For the bulls, they can point to:
  • The market shrugging off bad news about the rising US infection rate and death rate.
  • Hopeful news on vaccine development, despite some of my doubts (see A Covid recovery?).
  • Constructive signs from breadth indicators and cyclical stocks.
The bears can point to:
  • Nagging cautionary flags from inter-market, or cross-asset, analysis, such as the persistent downward pressure shown by the 10-year Treasury yield, which continues to test the 0.60% support level even as stocks test upside resistance.
  • Faltering momentum from Chinese stocks (see Double bubble, double trouble?).
  • Elevated bullishness on sentiment models, which is contrarian bearish.



There is no point in wringing my hands about the range-bound market. The market will gives us some clue on direction once it stages a breakout, either on the upside or downside. Instead, I outline some of the pockets of opportunity, and other corners of the market to avoid.

The full post can be found here.

Saturday, July 18, 2020

Can a bull market begin without the banks?

Earnings season has kicked off with reports from the major banks. The market reaction has been mixed so far. From a big picture perspective, history shows that whenever the relative performance of banking stocks have breached a major support level, such events have usually signaled periods of financial stress and bear markets.



This time, the Covid Crash saw the market fall and recover in the space of a few short months. This begs two important questions for investors.

First, the financial sector is the third largest weight in the index, behind technology and healthcare. Can a bull market begin without the participation of a major sector like this?

Brian Gilmartin pointed out that the sector represents about 10% of index weight, but 17% earnings weight, indicating that financial stocks are value stocks. What does the lagging performance of these stocks mean for the growth/value dynamic?

The full post can be found here.

Wednesday, July 15, 2020

A COVID recovery?

Mid-week market update: The market has taken on a risk-on tone as news of a promising Moderna vaccine trial hit the tape. While the relative performance of healthcare stocks haven't done much for several weeks, they did catch a recent bid.



As well, cyclical stocks have also perked up as they responded to the hopes of a post-pandemic world.




Is this the start of a COVID recovery? I analyze the issues surrounding vaccine development and provide a framework for evaluation.

The full post can be found here.

Monday, July 13, 2020

Another equity valuation warning

As Elon Musk passes Warren Buffett in net worth, it is time to sound one more warning about the market's valuation. FactSet reported that the stock market is trading at a forward 12-month P/E of 22.0, which is well above its 5 and 10 year averages.


Here is why these circumstances are highly unusual.

The full post can be found here.

Sunday, July 12, 2020

Risk levels mildly elevated, but no signs of panic

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 which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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 those email alerts are 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: Sell equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


A holding pattern
After several weeks of back-and-forth, the stock market remains in a range-bound holding pattern. A breakout or breakdown may be depending on upcoming news in the form of Q2 earnings season, and the resolution of negotiations in Congress over a second round of fiscal stimulus.



How will the headlines develop over the next couple of months? Will the narrative be an out-of-control pandemic, no or inadequate fiscal stimulus, an economic disaster, and skyrocketing bankruptcies; or will it be a vaccine by late 2020, renewed fiscal stimulus, and an economic revival in 2021? Long-dated implied option volatility and the SKEW Index, which measures the price of tail-risk hedge, are telling the story of mildly elevated risk, but there are no signs of outright panic,

The full post can be found here.

Saturday, July 11, 2020

Double bubble, double trouble?

When a stock market shifts from a bull to a bear market, leadership usually changes. Bear markets are often periods of catharsis. The old leaders get tired, and they have been bid up to excessive valuations. A reality check sets in and they fall. As the old leaders fail, new market leaders emerge to guide a new bull upward.

It is therefore with great interest that we have been monitoring the Big Three leadership themes in the US market, namely US over non-US, growth over value, and large caps over small caps. Of the three, growth continues to be extremely strong, US stocks have temporarily plateaued and they may be turning down, and small caps are resuming their underperformance after a brief three-month turnaround.


From a global perspective, the leadership mantle of US stocks is faltering. The following chart shows the returns of different regions relative to MSCI All-Country World Index (ACWI). All returns are in USD so currency effects are already included in performance. Within the US equity market, the S&P 500 is rolling over on a relative basis, but the NASDAQ 100 continues to soar. A look at the developed markets (middle panel) shows no sustainable trends. Japan has weakened after a short-lived rally, and Europe's relative performance has chopped around for the past few months. It is the emerging markets (bottom panel) that has shown the greatest promise in leadership. While it is true that EM equities have soared in relative performance, EM xChina stocks are tracing out a constructive but unexciting saucer bottoming pattern. By inference, it is China that has become the global market leader.



If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?

Is this just a double bubble, and does that imply double trouble ahead?

The full post can be found here.