Monday, August 13, 2018

How far can stock prices fall in a bear market?

One of the most frequently asked questions from last week's post (see Major market top ahead: My inner investor turns cautious) was my downside objective for stock prices. While technical analysis could highlight a possible trigger for a bear phase, it is less reliable for quantifying downside risk.

Assuming the trigger for a bear market is a recession, one way to guesstimate downside risk is to examine how the historical record of stock prices behaved in past recessions. Beginning in 1981-82, that bear market was particularly nasty because it lasted over a year, and it was triggered by the Volcker tight money era. The 1990 bear market and recession, which was ostensibly triggered by the Iraqi invasion of Kuwait, was mild. The Tech Wreck in the aftermath of the NASDAQ Bubble in 2001-02 was also painful, but was preceded by an unprecedented surge in stock prices. The bear market of 2008 was short and sharp, but stock prices fell roughly 50%. In conclusion, the historical record indicates that downside risk is in the 20-50% range.


But that's not the whole story.

The full post can be found at our new site here.

Sunday, August 12, 2018

Two gifts from the market gods

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 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 the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

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: 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.


More market warnings ahead
I received a lot of feedback from my post last week (see Major market top ahead: My inner investor turns cautious), mostly because it represented a major change in investment outlook. I would like to clarify a point that the post did not represent a sell signal for stocks, but the setup for a sell signal.

In the short run, the market gods have given investors two gifts. First, the evolution of the Turkish Tantrum provides investors a glimpse at what a real EM blow-up might look like in the future, especially if China were to undergo a debt crisis.

In addition, the path of least resistance for stock prices is still up for the next few weeks. Any rally therefore represents a second gift from the market gods. Investors can take the opportunity to lighten up their equity holdings in anticipation of long-term market weakness.

There have been plenty of warnings that US equities are topping out, starting with how monetary policy is affecting both Wall Street and Main Street. The latest Turkish inspired sell-off just provides another point of bearish pressure.

Even before Friday`s market blow-up, the fault lines were starkly revealed when the Deputy Prime Minister of Turkey tweeted a complaint about Fed policy.


In light of Friday's above consensus core CPI print, the Fed is likely to stay on their preset course of a quarter point rate hike every three months. Already, the Turkish lira crisis has sparked an upside breakout of the USD Index. If the breakout holds, it will spell trouble in other quarters. In addition to the pressure on other vulnerable EM currencies, a rising USD depresses the Chinese Yuan (CNY) and raise the specter of a currency war.


The full post can be found at our new site here.

Wednesday, August 8, 2018

Traders: Market stalling, but buy the dip

Mid-week market update: My inner trader remains constructive in his bullish view for stocks, but the recent advance appears to have gotten ahead of itself. My trading models indicate a 2-4 day period of weakness, followed by continued strength into all-time highs.

In the short-term, the market is flashing cautionary signals for traders. The SPX is exhibiting negative RSI divergences as it broke out to new recovery highs. As well, the VIX Index breached its lower Bollinger Band for two consecutive days, indicating an overbought market. Historically, such conditions have led to market weakness lasting 2-4 trading days. If history is any guide, a short-term trading bottom is most likely to occur either Friday or Monday.


The full post can be found at our new site here.

Monday, August 6, 2018

A bullish setup for gold

As the stock market enters the late stages of its bull run (see my last post Market top ahead? My inner investor turns cautious), inflation hedge vehicles typically rally as inflationary pressures rise. We are starting to see a similar effect in gold prices.

As the chart below shows, the recent weakness in gold prices can largely be attributed to USD strength (green line, inverted). One constructive element for the gold price outlook is the positive RSI divergence as the price tests support.



The full post can be found at our new site here.

Sunday, August 5, 2018

Market top ahead? My inner investor turns cautious

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 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 the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • 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.


Cautionary sign ahead
My formerly bullish inner investor is turning cautious. This major change of opinion is not without precedence. The chart below is a record of my investment calls, and it shows that I have been neither a permabull or permabear. I was correctly bullish when the stock market dipped in 2015, and I turned cautious in the first half of 2015, and in early 2018.


I am now seeing the early technical signs of a developing cyclical top for the bull market that began in 2009. While this is not a call to sell everything as a bear market can take some time to develop, my inner investor is taking steps to rein in his risk exposure in preparation for a market top in the next few months.

The full post can be found at our new site here.

Tuesday, July 31, 2018

From FOMO to Tech Panic to...

Mid-week market update: I am writing the mid-week update a day early for two reasons. First, tomorrow is FOMC day and anything can happen. As well, I am getting on an airplane and I will be in the air when the market closes.

It is astonishing how nervous the market has become after Facebook's disappointing earnings report. Callum Thomas performs an unscientific Twitter poll on weekends, and the bears have come out of the woodwork. Even if you are bearish, you have to ask yourself how much downside risk could there be at current levels? These conditions are indicative of the jittery nature of this market. A brief and minor pullback was enough to move sentiment to a crowded short reading.



In the short run, the ability of the SPX to hold above its breakout level, and the NDX to hold above its 50 day moving average points to an oversold rally here.



The full post can be found at our new site here.

Sunday, July 29, 2018

The universe is unfolding as it should

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 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 the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • 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 Last Hurrah rally continues
I apologize for the relatively brief update as I am writing this on an unsteady internet connection. The "last hurrah" scenario that I recently outlined (see How the equity bulls and bears may both be right) is playing out more or less as expected.

The 4.1% Q2 GDP report is keeping the Fed on track for two more rate hikes this year. At the current pace of rate hikes, my long leading indicators will flash a recessionary warning late this year, indicating a slowdown in late 2019. Since stock prices tend to look ahead about a year in advance, that puts the the timing of an equity market top in Q4 2018. However, the timing of a recession, and a market top, could get pulled forward should a full trade war erupt.

In the short run, coincident and short leading indicators are strongly bullish. These conditions suggest that stock prices will make a "last hurrah" rally. Here are my trading bull/bear tripwires. The SPX has formed a bullish cup and handle breakout with an upside target in the 2925-2960 range. Stay bullish if the index holds above its breakout level of 2795-2800.


The full post can be found at our new site here.

Thursday, July 26, 2018

The inevitability of rising trade tensions under a Republican White House

There has been a lot of hand wringing about the rising level of protectionism in the US and around the world. Let's take an alternative view to perform our analysis. Imagine an alternative universe, where Donald Trump did not secure the GOP nomination in 2016, but another Republican went on to win the election. I am going to make the bold assertion that trade tensions would have risen in any case.


There are two reasons for my conclusion. First, globalization has stalled, and the low hanging fruit from globalization and globalized supply chains has mostly been harvested. In addition, a Republican President would have enacted a tax cut, and the resulting fiscal stimulus would have created a positive growth differential with the rest of the world and pushed up the USD. The combination of shrinking benefits from globalization and a rising exchange rate would inevitably heighten trade tensions.

The full post can be found at our new site here.

Monday, July 23, 2018

Charted: How worried should you be about a trade war?

Understandably, there has been a lot of market angst over a looming trade war. Indeed, the University of Michigan Business Confidence Index shows a rising level of anxiety.


How worried should you be?

The full post is available at our new site here.

Sunday, July 22, 2018

How the equity bulls and bears may both be right

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 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 the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • 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 Zen of Bull and Bear
The latest BAML Fund Manager Survey shows that institutional managers have turned decidedly cautious on the outlook for the global economy. Profit expectations are tanking, positioning has turned more defensive, as global equity weights are being trimmed, and bond weights are rising, though managers remain underweight the asset class.


At the same time, the SPX has staged an upside breakout from a cup and handle formation, with an upside target of 2925-2960. The bullish surge is supported by a recovery in both European and China-related markets.



Who is right, the bulls or the bears? How about both? The difference may be just a question of different time horizons.

The full post can be found at our new site here.

Wednesday, July 18, 2018

Upside breakout, FOMO rally next?

Mid-week market update: It's finally happened. The SPX staged a convincing upside breakout from its cup and handle formation. Depending on how you draw the lower line, the upside target is in the 2925-2960 range. The first test will be resistance of the January highs.



Upside breakouts are bullish. What more do you need to know?

The full post can be found at our new site here.

Monday, July 16, 2018

Tariffs to the left, tariffs to the right...Contrarians buy China!

The news about the Sino-American trade war seems to get worse every day. Callum Thomas pointed out that corporate managements are increasingly raising concerns about rising tariffs.


Chinese stocks have cratered, along with the stock indices of China's largest Asian trading partners. However, a couple of contrarian buy signals are appearing. First, trade tensions are now showing up in the one place that you might expect, FX volatility.



As well, Chinese and other Asian markets are washed-out and poised for relief rallies, which would also be supportive of higher global equity prices.

The full post can be found at our new site here.

Sunday, July 15, 2018

The surprising conclusion from sector rotation analysis

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 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 the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • 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.


What sector will lead?
The bulls appear to have taken control of the tape. The SPX is exhibiting a bullish cup and saucer formation. If it achieves a decisive breakout at 2800, the upside target is about 2950*. In all likelihood, the upside breakout will occur, as there is strong breadth support as small cap, midcap, and NASDAQ indices all achieved all-time highs last week.


As US stock prices are poised for fresh highs, one of the key questions is the nature of the leadership that investors should expect. A standard approach of using Relative Rotation Graph charting yielded some answers, but a further factor-based analysis indicated a surprising level of risk exposure.

The full post can be found at our new site here.



I had previously published an upside target of 3050 in a past versions of the cup and handle analysis. The 3050 figure was a arithmetic error. My apologies for the mistake.

Thursday, July 12, 2018

Don't mistake this site for a chat room

I had a number of questions and comments from my last post (see Wall Street: Where the Wild Things are) when I wrote that my trading account, while still bullish, had taken "partial profits earlier this week as part of his risk control discipline when readings became short-term overbought". The comments ranged from "where can I find a record of where your decisions to take partial profits" (answer: you can't) to "why did you not tell us when you made that trade?"/


Why this is not investment advice
I would like to address the issue of my disclosure policy in connection with my holdings and accounts. The disclaimer page of Humble Student of the Markets state:
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
What does this mean, beyond the usual legalese? Why is the content "not investment advice"?

What many investors don't realize that the process of constructing a portfolio involves three major decisions:
  1. What do you buy and sell?
  2. How much do you buy and sell?
  3. How do you diversify your investments?
Much of the content on this site revolves around question 1. I know nothing about you. I don't know what your return objectives are. I don't know your tax situation, or even your tax jurisdiction. I don't even know how much risk you can tolerate. With respect to the first question, I therefore don't know if any investment or instrument discussed is appropriate for you. Since I know nothing about you, I would not even try to answer the last two questions.

That's why nothing on this site is investment advice.

If I was your fund manager, we would have discussed your investment situation, and I would know enough about you to create an Investment Policy Statement (IPS). We don't have that kind of relationship.

That's why nothing on this site is investment advice.

If I were the manager of a fund that you bought into, there would be disclosure documents about the sorts of investment instruments that the fund can buy, and the risk levels that the fund is expected to undertake. We don't have that kind of relationship either.

That's why nothing on this site is investment advice.


Disclosure of conflict
At the same time, I write about my investment views on the site, and I will express bullish or bearish opinions on the market, sectors, or specific instruments. I believed that it was appropriate to disclose any possible conflicts that I may have because of my own investment positions.

That's where the "trading alerts" come in.

Whenever I initiate a new trading position, subscribers get an email alert of those changes for conflict disclosure purposes. However, subscribers will not receive notification of changes in position sizing because any conflict has already been disclosed.

Here is the part that created the misunderstanding. I know nothing about you. I don't know if my trading positions are appropriate for you. My tax situation is not your tax situation. My pain threshold is different from your pain threshold. In the absence of any such discussions, changes in my own position sizing is not necessarily relevant to your situation, and therefore it would be misleading for me to disclose those trades.


Not a chat room
There are a number of other websites that offer real-time chat room services. This is not one of them. There are a number of key differences between Humble Student of the Markets and a chat room.

First, the holding time horizon of "my inner trader", which represents my trading account, is longer than most chat room day trading or swing trading services. I publish and update the idealized track record returns of my inner trader on a weekly basis based on trades using signals from the subscriber trader alerts. The average holding period is 18.0 trading days.

I disclose the track record of "my inner trader", which is contrary to the practice of many other trading services.


As the average holding period of these trades is relative long, there is little urgency to making the trades on the day of the signal. In fact, my analysis shows that the returns from waiting 1, 3, and 5 days after the signal are better than the base case where the trades are executed on the day of the signal.


For another perspective, here are the relative returns of a hypothetical account that traded five days after the signal day. My conclusion from this analysis indicates that my trade timing isn't perfect, and it is arguably early.


One last point about chat rooms. The going rate for a chat room subscription, where you get access to real-time signals, is about USD 200 per month, or over USD 2000 per year. That pricing structure is an order of magnitude higher from Humble Student of the Markets (see our pricing page).

In conclusion, readers who are looking for high frequency trading advice should look elsewhere (one useful site to take a look at is LaDuc Trading, where Samantha LaDuc takes the bold step of actually disclosing her trading record). At Humble Student of the Markets, my primary objective is to write about investments. A secondary objective is trading, but even then, the time horizon of my trades is longer than many day and swing trading services.

Wednesday, July 11, 2018

Wall Street: Where the Wild Things Are

Mid-week market update: There is a children's book called Where The Wild Things Are by Maurice Sendak that stands as a metaphor for the stock market's action. Here is a summary from Wikipedia:
This story of only 338 words focuses on a young boy named Max who, after dressing in his wolf costume, wreaks such havoc through his household that he is sent to bed without his supper. Max's bedroom undergoes a mysterious transformation into a jungle environment, and he winds up sailing to an island inhabited by malicious beasts known as the "Wild Things." After successfully intimidating the creatures, Max is hailed as the king of the Wild Things and enjoys a playful romp with his subjects. However, he starts to feel lonely and decides to return home, to the Wild Things' dismay. Upon returning to his bedroom, Max discovers a hot supper waiting for him.
A number of films have been made from the story, including a full length feature movie. Here is a animated short from Youtube (click link if the video is not available).


As the SPX corrected after testing a key resistance level at about 2800, Where the Wild Things Are is an apt metaphor for the market and its animal spirits. The question for the investors is what part of the story we are at. Are we at the stage where Max is romping with the Wild Things, or is Max about to leave the island, where the Wild Things threw their final tantrum by roaring their terrible roars, and showed their terrible teeth (FANGs)?

The full post can be found at our new site here.

Sunday, July 8, 2018

Trade War Apocalypse, or Sell the rumor, Buy the news?

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 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 the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

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.


Bull or Bear?
The first real shots in the Sino-American Trade War were fired last week when the US imposed a series of tariffs on $34b of Chinese goods at 12:01 ET on July 6, 2018, and the Chinese retaliated with tariffs of their own. For investors, the current environment presents a dilemma.

On one hand, the prospect of a protectionist curtain descending around the world is bearish for growth, and for equity prices. On the other hand, the near-term outlook for economic growth and earnings are bright. In the absence of trade tensions, US stock prices should be breaking out to new highs.

The conundrum can be illustrated by the readings of the Fear and Greed Index, which is stuck in neutral and showing no signs of momentum nor direction. Is a Trade War Apocalypse just around the corner, which will collapse the index to new lows; or is this a case of sell the rumor, and buy the news? Arguably, the market's rangebound behavior in 2018 is attributable to the earnings growth vs. trade jitters dilemma.


We examine the bull and bear cases.

The full post can be found at our new site here.

Wednesday, July 4, 2018

An oversold bounce, but how far?

Mid-week market update: I would first like to convey to all of my American friends my best wishes for a Happy 4th of July. Enjoy you day off, as more fireworks may be on the way.

The stock market appears to be starting an oversold bounce. Callum Thomas has been conducting an weekly (unscientific) Twitter poll since July 2016. Sentiment seems to be sufficiently washed out for an oversold rally.


Similarly, breadth readings from Index Indicators also show that the market is ready for a bounce.


The big question is, "How far can stock prices rise?"

The full post can be found at our new site here.

Monday, July 2, 2018

What you may not know about the Smart Money Index

This is one in an occasional series of articles highlighting hidden investing factors. For the previous article in the series, please see What you may not know about small cap stocks.

There has been some buzz in social media about the following chart that correlates the Fed's balance sheet with the Smart Money Index (SMI). Readers can draw their own conclusions, but the initial take has bearish implications.


What's behind the SMI, and is it bearish for stock prices?

The full post can be found at our new site here.

Sunday, July 1, 2018

A looming global recession, or a buying opportunity?

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 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 the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

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.


Non-US weakness = ?
The markets have taken a risk-off tone recently, which raises the perception of a global slowdown. The protectionist measures announced by the Trump administration have not helped matters, and it appears the global economy is becoming increasingly fragile.

Three weeks ago, I asked if global markets could rise if it depended on purely US leadership (see Can America still lead the world?). Since then, US stocks have staged an upside relative breakout against the MSCI All-Country World Index (ACWI). The performance of non-US equities in both the developed countries (EAFE) and emerging market countries (EM) appear challenging.



The following chart from Topdown Charts shows that global breadth is deteriorating. The number of countries whose stock indices are above their 200 day moving averages (dma) has plunged precipitously.


These readings either represent a terrific buying opportunity, or an ominous signal of an impending global recession. The bear case is supported by the deterioration in global economic surprise indices (ESI), which measure whether economic releases are beating or missing expectations. As the following chart shows, global ESIs have been falling. Moreover, the bottom panel shows that the percentage of countries with ESI greater than 0, indicating a balance between positive and negative surprises, are at recessionary lows.


The probability of a global recession is rising rapidly, according to Ned Davis Research.


Is this the beginning of the end? Is the world about to crash into a global slowdown? To answer those questions, I consider the outlook for the three major trading blocs, the US, China, and Europe. During the course of my analysis, I discovered a bullish catalyst hiding in plain sight.

The full post can be found at our new site here.

Thursday, June 28, 2018

A trader's guide to spotting market bottoms

Now that the SPX flirted with the combination of the 2700 level and its lower Bollinger Band (BB), it's time to see if the market is ready to bottom on a short-term and intermediate basis.


Let`s analyze outlook from the perspective of breadth, momentum, and sentiment.

The full post can be found at our new site here.