Sunday, March 29, 2020

The dawn of a new bull?

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: Bearish*
  • 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.


A new bull?
A week ago, I was impatiently waiting for a bear market relief rally (see This is insane! Where's the bear market rally?).  The market gods heard my pleas, and the market surged 20.3% from intraday trough to peak last week, which is enough to pass the definition of a new bull market.


Does that mean we just entered a new bull market after exiting the fastest bear market in my lifetime? Let's consider the issues from a variety of perspectives.

The full post can be found here.

Saturday, March 28, 2020

Handicapping the odds of a V-shaped recovery

Last week's stock market rally appears to be based on the hopes of a V-shaped economic recovery, powered by the combination of all-in monetary stimulus, and fiscal stimulus, as evidenced by a $2 trillion bill passed in Congress. Street consensus is now a V-shaped rebound, with a trough in Q2. This Goldman Sachs forecast is just one of many examples.


How realistic is the prospect of a V-shaped recovery? The economy is clearly either in a recession, or entering recession. LPL Financial found that recessionary bear markets last an average of 18 months compared to non-recessionary bears, which last only 7 months. That finding is inconsistent with the current Street expectation of a brief and sharp slowdown.


What are the odds of a V-shaped recovery?

The full post can be found here.

Wednesday, March 25, 2020

The makings of a primary low

Mid-week market update: Did the Economist do it again with another contrarian magazine cover indicator? At the top of the market, their issue cover was entitled "Big tech's $2trn bull run". Last weekend, their cover featured a "closed" sign on the earth.



The market staged an upside breakout through a falling trend line yesterday, and the upside held today. Notwithstanding the Bernie Sanders induced last hour weakness, it managed to put together two green days in a row, which has not happened since February 11-12. This market action has all the makings of a primary low.



The contrarian in me is worried. I am part of the consensus that this is a bear market rally, whose scenario calls for a retest of the lows, which may not necessarily be successful. What could possibly go wrong?

The full post can be found here.

Monday, March 23, 2020

Where to hide in this bear market

There is little doubt that we are in a recession induced bear market. Goldman Sachs published their GDP forecast late last week of a V-shaped slowdown and recovery.


For some context, New Deal democrat raised an important point about a framework for thinking about the recession by flipping the well-known "flatten the curve" chart upside down:


The problem with this from a strictly *economic* point of view is that, so long as we don't know who is infectious, everybody needs to stay in self-quarantine. This will be catastrophic economically if it must continue for 12 to 18 months.
The inverted curve shows the stylized effects of economic growth based on a government's choice of public health policy. Do nothing and allow the virus to run wild, and you get a short, sharp slowdown at great human and electoral cost (pink curve). Flatten the curve, and you get a lower death count but longer recession (grey curve), with the hope that a vaccine can be found in the future to cut off the right tail. For an idea of how the Trump White House is grappling with this dilemma, see the WSJ's "As Economic Toll Mounts, Nation Ponders the Trade-offs", and Bloomberg's "Trump Weighs Easing Stay-at-Home Advice to Curb Economic Rout".

Even the experts are only guessing. FiveThirtyEight conducted a survey of infectious diseases experts, and the poll showed wildly varying opinions. Since we know neither the depth nor the length of the slowdown, it's very difficult to estimate the nature of the recession, and the equity bear market. In that case, where can investors hide?

The full post can be found here.

Sunday, March 22, 2020

This is insane! Where's the bear market rally?

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: Bearish*
  • 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.


Where's the rally?
For several weeks, I have been saying that a bear market rally could happen at any time, but the market keeps weakening. One of the challenges for the bulls is to put together two positive days, which they have failed to do. Another is to stage an upside breakout through the declining trend line.


The market closed Friday in the red. One constructive sign that can be found in the above hourly chart is the index closed while testing a support level. Should it stage an upside rally from here, the logical first resistance level is the first Fibonacci retracement at about 2700, with additional resistance at the 50% retracement objective of about 2840.

This is insane! Where's the bear market rally?

The full post can be found here.

Saturday, March 21, 2020

Where's the bottom?

There is little question that the stock market is wildly oversold. My intermediate term bottom spotting model has been flashing a buy signal for over a week. This signal is based on the combination of an oversold signal on the Zweig Breadth Thrust Indicators, and the NYSE McClellan Summation Index (NYSI) turning negative. In the past, this model has shown an uncanny ability to spot an intermediate bottom, but stock prices have continued to fall despite the buy signal.



Where's the bottom?

The full post can be found here.

Wednesday, March 18, 2020

The 9/11 template

In my last post (see 2020 bounce = 1987, or 1929), I had been searching for a template for the current bear market. I had suggested in the past that the roots of this bear has thematic similarities to 2008 (see A Lehman Crisis of a different sort). Today, health authorities are urging the use of social distancing to mitigate COVID-19, while financial institutions practiced similar social distancing at the time of the Lehman Crisis, which ended by seizing up the global financial system.

As the growth of COVID-19 cases continues outside of China, one other template comes to mind. 9/11.


The full post can be found here.

So bad, that it's good?

Mid-week market update: This bear market has astonishing in its ferocity, but we may be reaching the it's so bad things are good point. Here are some "green shoots" that are starting to show up.

Baron Rothchild was famously quoted as saying, "The time to buy is when blood is running in the streets, even when the blood is your own." We seem to be at that point of blind panic. Realized maket volatility is now on par with the Crash of 1929 and the Crash of 1987.


Is sentiment bearish enough for you?

The full post can be found here.

Sunday, March 15, 2020

2020 bounce = 1987, or 1929?

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: Bearish*
  • Trading model: Bullish*
* 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.


The long awaited bounce?
Is this the long await bounce for the stock market? The SPX traced out a strong bullish reaction to Thursday's ugly action while exhibiting positive RSI divergence. If this is the long awaited bounce, the most logical resistance level is the 50% retracement, which is also the site of the 200 day moving average.


This retreat into bear market territory, as defined by a -20% decline, was the fastest in market history, even compared to the Crashes of 1987 and 1929. Bear in mind that if this was the capitulation low, the market bounced at the initial low in 1929, and in 1987. Each had very different results. Both were market crashes, one went on to mark the start of the Great Depression, the other was just a blip in a continuing economic expansion.



The full post can be found here.

Saturday, March 14, 2020

My recession call, explained

In the past week, I have had several discussions with investors about my recession call (see OK, I'm calling it). Since the publication of that note, Bloomberg Economics' US recession probability estimate spiked recently up to 55%.


The odds of a 2020 recession at betting sites are even higher.



To reiterate, I would like to clarify the reasoning behind my recession call, which is based on a triple threat:
  • The emergence of COVID-19 in China has created a supply shock that disrupted supply chains all over the world.
  • The Saudi-Russia oil price war, which has devastated the oil patch in the US.
  • The COVID-19 pandemic, which is expected to result in both a supply shock and demand shock in the US.
The full post can be found here.

Wednesday, March 11, 2020

Testing the lows

Mid-week market update: My last post (see OK, I'm calling it) in which I called a recession received a lot of attention. As recessions tend to be bull market killers, the challenge for investors and traders is to manage their investments during a recessionary bear market.

In the short run, the SPX is testing the lows set on Monday, while constructively flashing positive RSI divergences. As well, the VIX Index recycled below its upper Bollinger Band Tuesday, which is a tactical buy signal, and it stayed there today despite the support test.



The full post can be found here.

Monday, March 9, 2020

OK, I'm calling it...

While I may be jumping the gun on my model readings, I'm calling a recession.

Remember when oil prices tanked in the second half of 2014? The economy experienced a shallow industrial recession in 2015.



While history doesn't repeat but rhymes, the price war that erupted over the weekend between Russia and OPEC is another threat to the growth outlook. Combined with the already fragile state of the economy from the coronavirus induced supply chain slowdown, it is difficult to see how the US economy can avoid a recession. George Pearkes at Bespoke came to a similar conclusion (via Business Insider).

The full post can be found here.

Sunday, March 8, 2020

A stock market roller coaster

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: Buy equities*
  • Trend Model signal: Bearish*
  • Trading model: Bullish*
* 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.


Here we go again?
For two consecutive Fridays, the market has rallied into the close to exhibit hammer-like reversal candles. The first candle reversal was confirmed by a massive 4.3% surge on the following Monday, will the same happen this coming Monday?


While I am cautiously bullish at a tactical level, it could also be argued that the market has not sufficiently tested the February lows. Should stock prices retreat to test those lows early next week, the bulls can take some comfort that any test would likely be accompanied by positive 5 and 14 day RSI divergences. On the other hand, the bears are likely to defend the highs set in the rally last week, which could make trading the market an interesting challenge.

Investors and traders should brace for more thrills from the market roller coast.

The full post can be found here.

Saturday, March 7, 2020

Has the bull caught the coronavirus?

Is the bull on his last legs? It is starting to look that way. I alerted readers to an unconfirmed bullish monthly MACD buy signal in late July (see A (deceptive) long term buy signal). The buy signal was confirmed in late October by both the Wilshire 5000 and non-US markets (see Buy the breakout, recession risk limited). In the past, monthly MACD buy signals have usually been very effective and long lasting. The recent market downdraft has brought the indicator to the verge of a sell signal, indicating dying price momentum and the possible end of the bull phase. If the market were to end the month at these levels, the sell signal would be confirmed.



A similar bearish condition can be found in the MSCI World xUS Index.



Is the bull dying? Has it caught the coronavirus?

The full post can be found here.

Wednesday, March 4, 2020

Waiting for the re-test

Mid-week market update: The hourly SPX chart shows that the index rallied strongly on Monday. The rally filled two downside gaps and it is testing the 50% retracement level..



While many of the short-term models are screaming "buy", there are contrary indicators and models that suggest caution. Even though my inner trader has largely been tactically correct in his trading calls, his head is hurting from the wild swings and market volatility.

The full post can be found here.

Monday, March 2, 2020

A Chinese glass half full, or half empty?

The data points closely watched this past weekend were the releases of China's Purchasing Manager Index (PMI) readings. On Saturday, China reported that its February manufacturing PMI had missed expectations and skidded to 35.7, and services PMI also missed and printed at 29.6. Both readings were all-time lows.


The Caixin private sector PMI also fell to an all-time low on Monday.


Was these misses surprises? Yes and no. They were surprises inasmuch as the market partly expected the authorities to manipulate the numbers and report a less severe downturn. They were no surprise as the Chinese economy was obviously very weak in the wake of the COVID-19 coronavirus epidemic gripping the country.

The full post can be found here.

Sunday, March 1, 2020

Panic City!

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: Buy 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.


Fun with mystery charts
This time last week, I was cautiously bearish (see Correction ahead?), but I never imagined that stock prices would crater as far as they did. My social media feed is full of narratives of how unprecedented and insane the market decline has been. One such example is the comparison of the "coronavirus crash" to other major market events in the last 100 years.


This week, rather than just dwell on how extreme last week's market action was, I would instead like to put on a technical analyst hat and consider the following three mystery daily charts. Which would you buy, or sell? Which is your favorite? Did you wish you had bought one or all of time in the past two weeks?



The analysis is far more revealing about market internals and likely future action than more hand wringing about how oversold and washed out the stock market has become.

Answer is below the fold. The full post can be found here.

Saturday, February 29, 2020

A Lehman Crisis of a different sort

Remember the Lehman Crisis? The failure of Lehman Brothers marked the start of the Great Financial Crisis that destabilized and almost brought down the global financial system.

What we are seeing is a Lehman Crisis of a different sort. The Lehman Crisis of 2008 was characterized by financial institutions unwilling to lend to each other and banking system liquidity seized up.

Today’s version of the Lehman Crisis is characterized by countries and regions in lockdowns, and the propensity of individuals or groups to increase their social distance, either owing to quarantine, or by fear. This is leading to both supply and demand shocks. It is a supply shock because production and transportation are seizing up, which is leading to a collapse in global trade. Even before the onset of the COVID-19 outbreak, global trade had been weak. It is about to become even weaker.



It is also a demand shock because when social distance rises, it leads to a collapse in the demand for goods and services. As an example, France’s Finance Minister Bruno Le Maire told CNBC at the G-20 meeting that tourism had fallen 30-40%.

The full post can be found here.

Wednesday, February 26, 2020

In search of a market bottom

Mid-week market update: After two consecutive days where the market was down over 3%, I am seeing numerous statistical studies that suggest either an imminent oversold bounce, or a sentiment washout. One example is this analysis from Nomura, as published by Marketwatch.


Has the sell-off bottomed?

Subscribers received an email alert last night outlining the short-term outlook, and I would also like to introduce my "Ultimate Intermediate Bottom Spotting Model", which showed an uncanny accuracy rate of 86% in the last 15 years.

The full post can be found here.

Monday, February 24, 2020

A panic bottom?

I should thank my lucky starts. i turned bearish last Wednesday (see Why this time is (sort of) different) and tactically shorted the market just as equities topped out, followed by today's -3% downdraft.


As today proceeded, I fielded several inquiries from readers with versions of the same question, "Nice call last week. Is it time to buy, or are you covering your short?"

The full post can be found here.