What if the Magnificent Seven are done?

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 26-Jul-2024)*
• Trading model: Bearish (Last changed from “neutral” on 06-Sep-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. 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.

 

A Hindenburg warning

What if the Magnificent Seven are done with their bull phase? As megacap growth stocks comprise roughly 40% of S&P 500 index weight, the math becomes increasingly challenging. The rest of the market will have to do the heavy lifting in order for the S&P 500 to advance.

The odds of that scenario becoming reality is rising. The market just flashed a Hindenburg Omen warning. In plain English, the ominously named Hindenburg Omen occurs when a highly bifurcated market loses momentum and starts to turn down. While one Hindenburg signal can be safely ignored, a cluster should make investors sit up and take notice. In the last 10 years, there have been 13 such clusters. Nine (pink bars) have resolved bearishly, while four (grey bars) were benign. As the accompanying chart shows, the market has flashed another cluster of Hindenburg Omen signals for five consecutive weeks.

 

 

The odds aren’t in the bulls’ favour, particularly when the bifurcation is evident between megcap growth, which comprise about 40% of S&P 500 weight, and the rest of the index. Even if the S&P 493 is strong, it’s difficult to make the math work if the Magnificent Seven significantly weakens.

The full post can be found here.

The slow march to fiscal dominance

Mario Draghi is known as the ECB President who said that he would do “whatever it takes” to save the euro. Now, his report on European Union competitiveness is designed to save the EU, and it’s caused quite a stir. Draghi identified the issues of EU competitiveness as poor productivity, caused by fragmentation of industrial policy along national lines, and a lack of co-ordination and focus across policy lines, such as fiscal, trade and foreign policies. 

As a solution, Draghi is calling for a re-focus of industrial policy and a minimum annual investment of “€750 to €800 billion…based on the latest Commission estimates, corresponding to 4.4-4.7% of EU GDP in 2023. For comparison, investment under the Marshall Plan between 1948–51 was equivalent to 1–2% of EU GDP”. The investment would have to be financed mainly by euro area debt.

 

If implemented, the Draghi Plan will put the eurozone on the road to fiscal dominance. Currently, euro area debt averages 88.6% of GDP, which is just short of the 90% guideline specified by Reinhart & Rogoff when a sovereign becomes at risk of significant and prolonged reductions in economic growth. By comparison, the U.S. debt to GDP ratio stands at 121%. However, eurozone countries have arguably less fiscal room as member states can’t print their own currency and must rely on the European Central Bank.

This will cement developed economies’ path to fiscal dominance. Investors will need to prepare accordingly.

 

The full post can be found here.

Why the correction may not be over

Mid-week market update: As the S&P 500 struggles and regained its 50 dma, the corrective phase may not be over.

 

 

Here are the challenges the bulls face.

 

The full post can be found here.

Trading the seasonal weakness

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 26-Jul-2024)*
• Trading model: Neutral (Last changed from “bullish” on 20-Aug-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. 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.

 

A pre-election roadmap

I pointed out before that the stock market is approaching a period of seasonal weakness and the pullback is appearing roughly on cue. September is historically weak but the bearish impulse usually occurs in the second half of the month, but I regard seasonality as a climate forecast while market analysis is more indicative of the daily weather.

 
Here is my rough roadmap for the period before the U.S. election.

The full post can be found here.

Sector leadership review: Bear market vibes?

Now that the 2s10s yield curve has un-inverted, a review of sector leadership is showing bearish vibes. In particular, the relative performance of defensive sectors is turning up.

 

I conducted an extensive sector and factor rotation review to determine the extent of the damage.
 

The full post can be found here.

So much for the prelude (to a correction)

Mid-week market update: When I wrote on the weekend that the stock market was undergoing a prelude to a correction, I never dreamed that the S&P 500 would skid -2.1% on the first trading day in September to test its 50 dma.

 

 

What happened?

 

The full post can be found here.

Prelude to a correction

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 26-Jul-2024)*
• Trading model: Neutral (Last changed from “bullish” on 20-Aug-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. 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.

 

Glass half  full?

Is the glass half full or half empty? Is breadth back?

The S&P 500 continues to test a key resistance level. While the equal-weighted S&P 500 rose to an all-time high, the small-cap Russell 2000 is struggling below its all-time high.

 

I believe the stock market is stalling and investors are seeing the prelude to a correction.

The full post can be found here.

LBO insights: Why these deep value stocks have become even cheaper

Mark Hulbert recently published an ominous warning at MarketWatch about excessive valuation in the U.S. equity market. Most valuation ratios are in the top 90% since 2000 and “as overvalued as it was at the market top on Jan. 3, 2022”.

How worried should you be?

 

The full post can be found here.

Risk budgeting ahead of NVIDIA's earnings report

Mid-week market update: Several readers asked me for comments going into NVIDIA's earnings report Wednesday night, so I thought I would publish my mid-week update a little earlier than usual.

 

Bottom line, I have no idea about NVIDIA's fundamentals. You can study the chart pattern, but event-driven market moves are "roll the dice" moments. Instead of trying to focus on what how stock and the market will move after the earnings report, my inclination is to focus on portfolio risk during these binary events. How is your portfolio positioned relative to your risk budget?

Even though I can offer no insights on market direction, here are some thoughts on risk from the option market.

The full post can be found here.

Bullish momentum vs. bearish seasonality

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 26-Jul-2024)*
• Trading model: Bullish (Last changed from “neutral” on 25-Jul-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. 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.

 

Negative seasonality ahead

Now that the rally off the early August low appears to be stalling, what are the odds of a re-test of the August lows?

The accompanying chart from Jeffrey Hirsch of Almanac Trader shows that the stock market pattern in 2024 has closely followed the historical election year seasonal pattern. We are about to enter a period of negative seasonality until late October. Is this a sign the S&P 500 could weaken back to its early August low?

Here are the bull and bear cases.

The full post can be found here.

Gold: Fakeout or generational buying opportunity?

I highlighted the accompanying chart before. Gold staged an upside breakout at 2100 out of a cup and handle pattern. It recently rose above 2500 to an all-time high. In addition, the cup and handle breakout of 2024 is highly reminiscent of a similar breakout in 2005. Not only did the gold price stage upside breakouts, but also the gold/S&P 500 ratio made a rounded saucer shaped bottom (bottom panel) that resolved in over a decade of positive relative performance.

In December 2023, I studied the factors driving gold strength and concluded that they “should be bullish for the price of risky assets” (see The Market Meaning of a Gold Breakout). In June 2024, I focused on the inflationary pressures behind fiscal dominance and looked forward to the November election. I concluded that gold prices should benefit regardless of who wins the White House, but a Trump win would be especially inflationary (see Why the November Election Matters to Gold).

Now that gold has reached another all-time high at 2500, will history repeat itself? Is this another generational buying opportunity or a bull trap fakeout?
 

The full post can be found here.

An almost Zweig Breadth Thrust buy signal

Mid-week market update: The market almost flashed a Zweig Breadth Thrust buy signal this week, though there is some dispute over the calculations. As a reminder, a ZBT buy signal is triggered when the market rises from oversold to overbought within 10 trading days. According to StockCharts, the market never reached the oversold condition on August 2, the day of the market panic, but did become overbought on Monday, which was exactly 10 trading days later.

 

However, Ryan Detrick observed that there is a considerable difference in advancing and declining stocks on August 2 between StockCharts and NDR. According to NDR, the ZBT buy signal was triggered on Monday. Ed Clissold of NDR admitted that data issues may cloud the picture. The use of all securities traded, common stock only, or a "transaction only" dataset could account for the difference.

In the interests of conservatism, I will call it a near miss, but the market action can still be characterized a a breadth thrust, just not a ZBT. Generally speaking, breadth thrusts are characterized by strong price momentum that persist for months. Though the market often pauses to take a breather after the initial buy signal. The accompanying chart shows eight instances when both the ZBT Indicator and the NYSE McClellan Oscillator were overbought. Six (pink) of the eight saw the market pause afterwards.

 

In the absence of major macro news, this week's stock market action can be described dominated by technicals and waiting for Fed Chair Powell's Jackson Hole speech scheduled Friday.

The full post can be found here.

4 reasons why you should be tactically bullish

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 26-Jul-2024)*
• Trading model: Bullish (Last changed from “neutral” on 25-Jul-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. 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.

 

A “good overbought” advance?

The rebound off the August 5 panic bottom has shown an astounding level of price momentum. The S&P 500 printed a William O’Neil Follow Through Day, which is an indication of strong positive price momentum with a 1.7% advance on higher volume than the previous day. It went on to break out through its 50 dma and a falling trend line by gapping up through those levels. The next test to exceed the bearish engulfing pattern on August 1.

The market appears to be on its way to start a “good overbought” advance. Here are some other reasons why this rally could continue.

The full post can be found here.

Back to the soft landing

The latest BoA Global Manager Survey is a dramatic illustration of market anxiety. In July, 18% of respondents believed that a U.S. recession was the biggest tail risk. That figure surged to 39% in the August survey, which was taken August 2–8 right at the height of the market panic.
 

 

During the market panic, the market went from pricing in a soft landing to rising odds of a hard landing. About two weeks later, the consensus has shifted back to a soft landing, which should be friendly to risk assets.

Here is my macro assessment of the U.S. economy in the aftermath of the growth scare.

 

The full post can be found here.

The bulls are gaining back control of the tape

Mid-week market update: I wrote on the weekend that investors should watch for signs of an O'Neill follow through day for bullish confirmation of the rebound.

A follow through day can occur as soon as day 4 (last Friday) of a rally. It’s defined as the index rising 1% or more on higher volume than the previous day. The most powerful follow through days occur between day 4 and day 7 of the rebound.

We got the follow through day on day 6 yesterday when the S&P 500 rose 1.6% on higher volume. This is an indication that the bulls are seizing control of the tape. Even as the S&P 500 tests overhead resistance at the 50 dma, the follow through day raises the odds that the market will break up.

The full post can be found here.

What will lead the anticipated market rebound?

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 26-Jul-2024)*
• Trading model: Bullish (Last changed from “neutral” on 25-Jul-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. 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.

 

Poised for a rebound

Numerous historical studies of volatility spikes have concluded that such episodes are good buying opportunities for stocks.

The accompanying chart shows just one example of what happens when the VIX Index surges above 45 and recycles below 30. The market has been higher every single time. The only question is whether the market re-tests its old lows.

 

If stock prices are poised for a rebound, the next question is the nature of the leadership of the ensuing rally.

 

The full post can be found here.

Assessing the damage: Not just the carry trade

 

After strengthening rapidly, the Japanese Yen (bottom panel) has stabilized has stabilized in the 140-150 range. The 10-year Treasury-JGB spread also stabilized and found support. So did the Nikkei Average after suffering the greatest one-day decline since the Crash of 1987. The Bank of Japan sounded a dovish tone when deputy governor Shinichi Uchida said that the Bank would “refrain from hiking interest rates when the markets are unstable”. In addition, Bloomberg reported that “JPMorgan says three quarters of global carry trades now unwound”.
 

 

Is it all over? It’s time to assess the damage from the latest fright by diagnosing what sparked the sell-off.
Even though many market observers focused on the currency carry trade as the source of the mini-panic, I argue that the carry trade unwind was only a symptom of what’s plaguing the markets.

 

The full post can be found here.

Back to the soft landing

The latest BoA Global Manager Survey is a dramatic illustration of market anxiety. In July, 18% of respondents believed that a U.S. recession was the biggest tail risk. That figure surged to 39% in the August survey, which was taken August 2–8 right at the height of the market panic.

 
During the market panic, the market went from pricing in a soft landing to rising odds of a hard landing. About two weeks later, the consensus has shifted back to a soft landing, which should be friendly to risk assets.

Here is my macro assessment of the U.S. economy in the aftermath of the growth scare.

The full post can be found here.

Why the market panic may not be over

Mid-week market update: Is the worst of the Japanese risk-off episode over? The Nikkei formed a bullish harami pattern when it recovered on Tuesday, but the recovery candle formed an "inside day" compared to Monday's massive downdraft. As well, BOJ deputy governor Governor Shinichi Uchida calmed markets and struck a dovish tone when he said that the Bank would "refrain from hiking interest rates when the markets are unstable".

 

While I am hopeful that the worse of the panic is over, I have some nagging doubts. Here's why.

The full post can be found here.

Navigating the Seppeku Panic of 2024

Over the weekend, I wrote that risk appetite is at the mercy of the carry trade (see The carry trade as risk driver). I did not expect that the Yen would continue to skid badly and the Nikkei would crater by -12.4%, which is its worse one-day decline since the Crash of 1987. While correlation isn't causation, and the price scales are different, the Nikkei has shown a close correlation to the NASDAQ 100 in the last year.

 

The carnage in Japan was so bad that it prompted some people in my social media feed to distastefully quip about seppeku, or Japanese ritual suicide. While it's impossible to know in real-time when the panic ends, here are some clues on how to navigate the Seppeku Panic of 2024.

The full post can be found here.