Imminent war with Iran?

The headlines look ominous. The US has dispatched a carrier task force to the Persian Gulf, and a second one is due to arrive soon. The State Department ordered the evacuation of all non-essential personnel from Iraq:

The U.S. State Department has ordered the departure of non-essential U.S. Government employees from Iraq, both at the U.S. Embassy in Baghdad and the U.S. Consulate in Erbil. Normal visa services at both posts will be temporarily suspended. The U.S. government has limited ability to provide emergency services to U.S. citizens in Iraq.

We had a threatening Presidential tweet over the weekend.

Reuters reported that Exxon Mobil is evacuating foreign staff from an Iraqi oilfield near Basra:

Exxon Mobil has evacuated all of its foreign staff, around 60 people, from Iraq’s West Qurna 1 oilfield and is flying them out to Dubai, a senior Iraqi official and three other sources told Reuters on Saturday.

Though it was said to be a purely precautionary measure:

Production at the oilfield was not affected by the evacuation and work is continuing normally, overseen by Iraqi engineers, said the chief of Iraq’s state-owned South Oil Company which owns the oil field, Ihsan Abdul Jabbar. He added that production remains at 440,000 barrels per day (bpd).

Is the US about to attack Iran? Should you buy tail-risk insurance?

The full post can be found here.

Tariff Man vs. Dow Man

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 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: Bullish*
• 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.



Trump's two personas
Trump's two personas are on a collision course with each other. On one hand, he likes to style himself as Tariff Man, because he believes the US has had a raw deal from its trading partners. The list of offenders starts with China, but it is numerous. Tariffs are the best tool to address that imbalance. On the other hand, Trump the Dow Man loves a booming stock market, which he tracks obsessively, and views it as a form of validation of the success of his administration.

As trade jitters rose, the stock market has become nervous and sold off. Markets hate trade wars, and they hate uncertainty. While Tariff Man and Dow Man can coexist when trade tensions are low, we will reach some tipping point where Trump has to choose.

Jason Furman raised a number of insightful points in a recent Twitter thread.

It would be rational to escalate the trade war with China if the short-run cost for the U.S. economy are outweighed by the long-run benefits of a more favorable trade agreement.

This is not a priori bad economics, it is a numerical cost-benefit question.

I have seen many quantification of the SR [short run] cost (usually something like 0.5pp hit to GDP growth if the tariffs are expanded and sustained).

But I have seen no quantification of the benefit of plausible or best-case Chinese concessions relative to what they have already conceded.

The LR [long run] benefits conditional on a favorable resolution is just one input into a view on the strategy, you would also need to know how the trade war changes the probability of a favorable resolution. But we should be able to take a stab at quantifying the LR benefits.

In theory equity markets are doing this sort of present value calculation—we lose upfront but this strategy raises the chances we get more IP protections, soybean sales, etc. And they seem to be saying that the potential LR benefits don’t outweigh the SR costs.

This is consistent with my hunch that there would be only a very small macro difference for the U.S. economy between China’s last offer and our latest demand. But I wish I had more than a hunch. Anyone seen anything better?

In other words, would the price of a trade war be worthwhile? We have a reasonable idea of what the costs are, but has anyone calculated the net benefits under varying assumptions and scenarios? In particular, has anyone in the Trump administration done a cost-benefit analysis?

If not, will Trump the Tariff Man or Trump the Dow Man gain the upper hand in the crunch? What are the bull and bear cases?

The full post can be found here.

Bottoming

Mid-week market update: There are numerous signs that the US equity market is making a short-term tradable bottom. Firstly, the market is washed out and oversold. While oversold markets can become more oversold, we saw some bullish triggers in the form of positive divergences on the hourly SPX chart.

Even as the index fell, both the 5 and 14 hour RSI made higher lows and higher highs. In addition, the VIX Index failed to make a higher high even as prices declined. Possible upside targets are the three gaps left open in the last few days.

The full post can be found here.

Assessing the trade stalemate scenario

I wrote yesterday (see Why investors should look through trade tensions):

Calculated in economic terms, China would “lose” a trade war, but when calculated in political cost, America would lose as Trump does not have the same pain threshold as Xi.

Based on that analysis, I concluded that it was in the interests of both sides to conclude a trade deal, or at least a truce, before the pain became too great. In addition, the shallow nature of last week's downdraft led me to believe that the market consensus was the latest trade impasse is temporary, and an agreement would be forthcoming in the near future.

I then conducted an informal and unscientific Twitter poll on the weekend, and the results astonished me. The poll was done on Saturday and Sunday, and a clear majority believes that it will take 10+ months to conclude a US-China trade deal, or it will never be done.

In view of this poll result, it is time to explore the stalemate scenario. What might happen if negotiations became drawn out, or if the trade war escalates?


The full post can be found here.

Why investors should look through the trade tensions

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 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: Bullish*
• 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.



Looking through a trade war
Josh Brown made an astute comment last week that all investors should keep in mind.

Here is why I think investors should look through the effects of any trade tensions.

The full post can be found here.

Some lessons on trading market surprises

Mid-week market update: When the news of the Trump tweets broke, I wrote:

When it comes to unexpected news, my tactical inclination is to stand aside and let the market tell the story, and then reassess once the dust is settled.

In a very short time, the market has gone to a full-blown panic.

The breadth of the decline has been astounding, and it is unusual to see this level of correlation in a sell-off, especially when the SPX is only -2.1% off its all-time highs as of Tuesday's highs. This kind of behavior is evidence of a panicked stampede.

That said, the dust is starting to settle on this trade related downdraft. It is time to assess the situation.

The full post can be found here.

How to navigate Trump's trade gambit

President Trump surprised the market on Sunday with a tweeted threat:

Notwithstanding his misunderstanding that tariffs are not paid by the Chinese, but American importers, this tweet sounds like an effort to put pressure on China, just as Vice Premier Liu He is scheduled to arrive in Washington on Wednesday with a large (100+) trade delegation for detailed discussions. News reports indicate that both sides have given significant ground, and a deal may have been possible by Friday.

In response to Trump's tweeted threat, the WSJ reported that the Chinese may reconsider making their trip to Washington because "China shouldn't negotiate with a gun pointed at its head". CNBC subsequently report indicated that the Chinese are preparing to visit Washington, but with the delegation size will be reduced, the timing of the visit is not known, and it is unclear whether Vice Premium Liu He will be in the group.

A Chinese delegation will come to the U.S. this week for trade talks after President Donald Trump upended negotiations by threatening new tariffs on Sunday, according to sources familiar with the matter.

One of the sources briefed on the status of talks said the Chinese would send a smaller delegation than the 100-person group originally planned. It is unclear whether Vice Premier Liu He would still helm this smaller group, an important detail if the team were traveling to Washington with an eye toward sealing a deal. Two senior administration officials described Liu as "the closer", since he had been given authority to negotiate on President Xi Jinping's behalf.

The team from Beijing was set to start talks with American negotiators on Wednesday as the world's two largest economies push for a trade agreement. It is unclear whether the talks will still start Wednesday.

Another encouraging sign was the report that Chinese media censored Trump's tweets, which could be interpreted as a signal that Beijing did not want to unnecessarily escalate the conflict. The front pages of the two major Chinese news portals had no mention of Trump's threats.

US tariffs are already higher than most developed market economies. If implemented, the new levels would be higher than most EM economies, and have a devastating effect on global trade.

I spent Sunday responding to emails and social media inquiries about how to react to this news. In many ways, it was more exciting than watching the latest episode of the Game of Thrones.

The full post can be found here.

Green shoots, rotten roots?

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 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: Bullish*
• 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.



Are the green shoots turning brown?
Just when you think the global economy is starting to spring green shoots, the skies have darkened and some of those shoots may be turning brown. In the US, ISM Manufacturing fell and missed expectations. And that's not all. Analysis from Nordea Markets concluded that the internals are pointing to further weakness.

In China, both the official PMI, which is tilted towards larger SOEs, and the Caixin PMI, which measures SMEs, fell and missed expectations. These readings have cast doubt on the longevity of Beijing's stimulus driven rebound.

On the other hand, the Non-Farm Payroll report came in ahead of expectations. In Europe, the PMIs for peripheral countries like Italy and Greece are outperforming Germany. In addition, exports from Korea and Taiwan, which are highly globally sensitive, have rebounded indicating recovery.

What's going on? How do we interpret these cross-currents?

The full post can be found here.

A resilient advance

Mid-week market update: It is always a challenge to make a technical market comment on an FOMC announcement day. Market signals are unreliable. The initial market reaction can be deceptive, and any move reversed the next day after some somber second thought. In addition, today is May Day, and a number of foreign markets are closed, which deprive traders of additional signals from overseas.

With those caveats, I can make a general observation that the advance off the Christmas Eve low has been remarkable and resilient. A historical analysis from Steve Deppe shows that years that have begun with four consecutive monthly advances since 1950 have resolved bullishly, with only one single exception (N=14).

Oddstats also pointed out that 2019 was the fifth best start to the year.

If these small samples of history are any guide, the stock market should be considerably higher by year-end, unless you believe this is a repeat of 1971, based on Steve Deppe's analysis, or 1987, based on Oddstats' data.

The full post can be found here.

A stampede you can front run

You may think that institutional money managers run in herds, but that is not necessarily true. Different managers have different mandates that color their views. As well, their geographical base can also create differences in opinions in how their view their world and markets. I analyze institutional sentiment by segmenting them into four distinct groups, each with their own data sources:

• US institutions, whose sentiment can be measured by Barron’s semi-annual Big Money Poll
• Foreign and global institutions, as measured by the BAML Fund Manager Survey (FMS), which is conducted on a monthly basis;
• RIAs, as measured by the NAAIM survey, conducted weekly; and
• Hedge funds, as measured by option data and the CFTC futures Commitment of Traders data, though hedge funds are partly represented in the BAML FMS sample, and other sources.

While "institutions" do not always agree, current conditions are pointing an unusual consensus of opinion, and traders can profit by front running the institutional stampede.

The full post can be found here.

Sell in May? The bull and bear debate

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 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: Bullish*
• 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.



Sell in May and go away?
The stock market has made a strong V-shaped recovery since the Christmas Eve bottom. The SPX, NASDAQ 100, and NASDAQ Composite have all rallied to all-time highs last week. As we approach the seasonally weak six months of the year, should you sell in May and go away?

Here are the bull and bear cases.

The full post can be found here.

Buy or fade the breakout?

Mid-week market update: The market strength this week was no surprise to me based on my seasonal analysis I published on the weekend (see Will a volatility collapse lead to a market collapse?). Last week was option expiry (OpEx) week, and OpEx weeks have historically been bullish for stocks. In particular, Rob Hanna at Quantifiable Edges found that April OpEx week was one of the most bullish ones of the year.

However, last week saw the SPX edge down -0.1%, and my own analysis found that April post-OpEx weeks that saw market declines tended to experience strong rallies (red bars). By contrast, the market had a bearish tilt after strong April OpEx weeks (green bars).

This historical study was conducted from 1990, and the sample size of losing April OpEx weeks was relatively small (N=8). Here is the same analysis for all post-OpEx weeks. The conclusion is the same. Strong OpEx weeks were followed by market weakness, and vice versa, though the magnitude of the effect was not as strong.

Could this week's upside breakouts of the major indices be attributable to an OpEx effect? If so, could the breakout be a fake-out?

The full post can be found here.

A Healthcare rebirth? And broader market implications

It is Easter Monday, a day when Christians focus on the theme of rebirth and resurrection, Healthcare stocks just underwent a near-death experience when the market panicked over the prospect of a Democrat victory in 2020, and the potential negative effects of the implementation of a Medicare-For-All policy.

To be sure, there are costs to be taken out of the system. The US spends more than any other industrialized country on health care, with a lower life expectancy.

Indeed, the political winds are starting to shift. Axios reported that Republicans are becoming more open to the idea of passing a bill that will lower drug prices:

The White House and top lawmakers from both parties think a bill to lower drug prices has a better chance of becoming law before the 2020 election than any other controversial legislation.

Between the lines: Republican politics on drug prices have changed rapidly. The White House has told Democrats it has no red lines on the substance of drug pricing — a position that should leave pharma quaking.

We have seen these kinds of scares before.

The full post can be found here.

Will a volatility collapse lead to a market collapse?

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 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: Bullish*
• 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 calm before the volatility storm?
In the past week, there have been a lot of hand wringing about the collapse in volatility across all asset classes. Equity investors know that the VIX Index has fallen to a 12-handle, and past episodes of low VIX readings have resolved themselves with market corrections.

The MOVE Index, which measures bond market volatility, has also fallen to historic lows.

Low volatility has also migrated to the foreign exchange (FX) market.

As a sign of the times, Bloomberg reported that Europe will soon see a new short-volatility corporate debt ETF.

The 50 million euros ($56 million) product, ticker TVOL, aims to deliver steady gains so long as markets demand a higher cushion for price swings on speculative-grade debt compared with what comes to pass, or the volatility-risk premium.

This dynamic -- selling volatility when it’s high and waiting for it to deflate -- has spurred the post-crisis boom in financial instruments tied to shorting equity swings. Now it offers ETF traders income in the potentially more-stable world of fixed-income options.

“The premium available has been relatively persistent over the last 10 years,” Michael John Lytle, chief executive of Tabula, said in an email. “Most of the time it has also been larger in credit than in equity.”

The Tabula product tracks a JPMorgan Chase index that simulates the returns of selling a so-called options strangle on a pair of credit-default-swap indexes referencing high-yield markets. The underlying index has returned an average 2.9 percent over the past five years but has posted losses over the past 12 months, a period that coincided with the fourth-quarter meltdown in risk assets.

This ETF launch is a classic case of investment bankers feeding the ducks when they're quacking. What could possibly go wrong?

Is this the calm before the volatility storm? What's next? The answer was rather surprising.

The full post can be found here.

Debunking VIXmageddon, and other bear myths

Mid-week market update:  I would like to address a number of bearish themes floating around the internet in the past few weeks, they consist of:

• A low volume stock market rally
• Extreme low volatility (remember the VIXmageddon of early 2018)
• The closing stock buyback window during Earnings Season, which removes buyback support for stocks

None of these factors are likely to sink stock prices. Here are some reasons why.

The full post can be found here.

Can the market advance continue? Watch China!

The US equity market has risen more or less in a straight line since the Zweig Breadth Thrust buy signal of January 7, 2019 (see A rare "what's my credit card limit" buy signal). Technically, breadth thrusts are extremely rarely long-term bullish signals. How far can stock price rise from here?

Chris Ciovacco made a recent video which studied the market behavior of breadth thrusts that came to a bullish conclusion. He defined a breadth thrust as % of stocks above their 200 dma rising from 10% to over 70% in a short period. This has happened only twice in the last 15 years. The first time was the rally off the Lehman Crisis bottom of 2009, and the next time was the eurozone Greek Crisis of 2011.

Ciovacco pointed out that the current breadth thrust occurred more rapidly than either 2009 or 2011, which is a sign of bullish price momentum.

He went on to outline the bullish market performance in the wake of these breadth thrusts (warning, N=2).

Can history repeat itself? Do current fundamentals support further market strength?

Here is an "out of the box" answer to the question of further market strength: Watch China.

The full post can be found here.

How "patient" can the Fed be?

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 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: Bullish*
• 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 are the limits to "patience"?
The credit market may be setting up for an unpleasant surprise. According to the CME's Fedwatch Tool, the market mainly expects no change in the Fed Funds rate for the rest of this year, with the possibility of a cut later in the year. It is not expecting a rate hike. Politico reported that Trump's economic advisor Larry Kudlow went even further: "I don't think rates will rise in the foreseeable future, maybe never again in my lifetime."

The minutes of the March FOMC meeting tells a different story. Since the Fed made the U-turn and adopted the policy of "patience", the Committee is not expecting any changes in rates for the rest of 2019:

A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.

However, some members would not rule out another increase in interest rates this year. The strength in the labor market could raise economic growth in the months ahead, though not as rapidly as last year.

Underlying economic fundamentals continued to support sustained expansion, and most participants indicated that they did not expect the recent weakness in spending to persist beyond the first quarter. Nevertheless, participants generally expected the growth rate of real GDP this year to step down from the pace seen over 2018 to a rate at or modestly above their estimates of longer-run growth.

There was also some uneasiness over the use of the word "patient" as it could be viewed as handcuffing future actions if the time came to raise rates:

Several participants observed that the characterization of the Committee's approach to monetary policy as "patient" would need to be reviewed regularly as the economic outlook and uncertainties surrounding the outlook evolve. A couple of participants noted that the "patient" characterization should not be seen as limiting the Committee's options for making policy adjustments when they are deemed appropriate.

Who is right? The market or the Fed? If the bond yields start to rise, what does that mean for stock prices?

The full post can be found here.

Selections for a new bullish impulse

Mid-week market update: Numerous signs of a new bullish impulse are appearing.

• The American economy has sidestepped a recession;
• Sentiment is not excessively bullish; and
• Price momentum is strong.

It is a truism in investing that you should buy when blood is running in the streets. The latest update of NDR's Global Recession Model shows the probability of a global recession, which is defined as sub-3% growth, at 96.63%.

One application of that rule is to buy risky assets when a recession is evident to the public. It seems that we have reached that point, what should we buy?

The full post can be found here.

Making sense of Trump's pressure on the Fed

I am somewhat at a loss of why Trump is putting so much pressure on the Federal Reserve. In a recent CNBC interview, CEA chair Kevin Hassett projected that growth would rise again to 3% later this year. “Everything we see right now is teeing us up to have a year like last year - Q1 around 1.5% or 2%, then Q2 goes way north, carries you into a 3% year.”

After the BLS reported a strong than expected March Jobs Report last Friday, Donald Trump repeated his assertion that the Fed should shift to an easier monetary policy (via CNBC):

President Donald Trump said Friday the U.S. economy would climb like "a rocket ship" if the Federal Reserve cut interest rates.

Commenting after a strong jobs report for March, Trump said the Fed "really slowed us down" in terms of economic growth, and that "there's no inflation."

"I think they should drop rates and get rid of quantitative tightening," Trump told reporters, referring to the Fed's policy of selling securities to unwind its balance sheet, a stimulus put in place during the financial crisis. "You would see a rocket ship. Despite that we're doing very well."

The full post can be found here.

An unexpected sweet spot for equities

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 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: Bullish*
• 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.



Opportunities from uncertainty
Now that stock prices have recovered to within 2% of their all-time highs, what's next for the stock market? To be sure, stock prices are no longer cheap. FactSet reports that the market is trading at a forward P/E ratio of 16.7, which is just above its 5-year average of 16.3 and well above its 10-year average of 14.7.

Should investors throw in the towel? Not yet. While valuations are not compelling, equities remain in a sweet spot as cautious long-term sentiment readings can drive prices higher.

Strategas published a terrific analysis showing how forward US equity returns have historically been higher when global policy uncertainty is high. While the sample size for this study is small, it is consistent with the contrarian principle of buying when blood is running in the streets.

Indeed, the latest reading of global policy uncertainty shows that it remains at an elevated level.

Despite the elevated valuation, equities find themselves in an unexpected sweet spot. There is still room for stock prices to rise as tensions and risk levels fade.

The full post can be found here.