Questions for Judy Shelton and gold standard supporters

President Trump has nominated Judy Shelton as one of the candidates for the open seats on the Federal Reserve's Board of Governors. While Shelton is a controversial nominee, she is less problematical than the previous two, Herman Cain and Stephen Moore.

While I certainly understand the reasoning behind a gold-backed currency, which is a way to control inflation, I have some difficult questions for Shelton and other supporters of a gold standard.

The full post can be found here.

The path to a European Renaissance

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: 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.



In search of the eurozone buy signal
I had a number of discussions with readers in the wake of last week's publication, Europe: An ugly duckling about to be a swan. The topics revolved mainly around further justification for buying into Europe, when US equities had performed so well in the last 10 years. In short, the questions were:

• What is the valuation for Europe, and
• Finding a bullish catalyst for their relative revival.

As to the first question, I offer the following chart from Robeco Asset Management.

The gulf in valuation, as measured by the Cyclically Adjusted P/E ratio (CAPE), provides some clear reasoning for American investors to diversify outside their home country. As well, European stocks look cheap relative to their own history. But that is not the entire story.

The full post can be found here.

Stay cautious

Mid-week market update: I highlighted a tactical trading sell signal from the VIX Index on the weekend. The VIX had fallen below its lower Bollinger Band,, indicating an overbought market, and mean reverted above the band last Friday.

As a reminder, the historical study of such episodes since 1990 show negative returns bottom out roughly a week after the signal, which would be this coming Friday.

The full post can be found here.

The limits of central bank powers

With interest rates at or close to the zero lower bound, here are a couple of examples of limits to the power of central bankers.

• The Federal Reserve: Will it still cut rates after the strong jobs report?
• The European Central Bank: What are the limits and price of monetary stimulus?

Will the Fed cut rates?
Let us begin with the Fed. After the blow-out Jobs Report, the bond market reacted violently and there were murmurs as to whether the Fed will still cut rates. Let me lay the first concern to rest. Historically, the Fed has telegraphed its interest rate decisions. With the market expectations of at least a quarter-point cut at the next FOMC on July 30-31, the Fed is unlikely to surprise the market.

The full post can be found here.

Europe: An ugly duckling about to be a swan?

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: Neutral*
• Trading model: Neutral*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



Buy the ugly duckling?
In the past few weeks, these pages have been all trade war, all the time. While that was not the original intent of this publication, headlines have conspired to turn the focus on the Sino-American relationship. Now that an uneasy truce is in place, it is time to switch gears and turn the spotlight on other unexplored parts of the market.

Finance literature since the Great Financial Crisis has been filled with the imagery of swans. Black swans. White swans. Grey swans. What is missing is the ugly duckling that grew up to be a swan. More importantly, what if an investor could identify an ugly duckling before it becomes a swan?

I have identified such a candidate. The chart below shows the relative performance of US stocks against the MSCI All-Country World Index (ACWI) in black, and the Euro STOXX 50 against ACWI in green. While there is no question that US stocks have been the winners, eurozone equities are in the process of making a broad saucer based relative bottom, and may be poised for a period of outperformance. The relative bottoming process is especially remarkable in light of the current environment of global trade uncertainty, which may be a signal of investor capitulation and the inability to respond to bad news.

The full post can be found here.

New highs are bullish, but...

Mid-week market update: It is said that there is nothing more bullish a stock or an index can do other than to make new highs. Both the DJIA and the SPX made fresh all-time highs today. While that may appear to be bullish, there are plenty of warning signs beneath the surface that this advance may not be entirely sustainable.

One of the missing ingredients in this rally is momentum. The SPX is exhibiting a negative 5-day RSI divergence, indicating flagging momentum even as the index made new highs. In addition, the VIX Index fell below its lower Bollinger Band, indicating an extremely overbought condition.

The full post can be found here.

Will the Fed still cut after the trade detente?

The results out of the Trump-Xi summit were slightly better than market expectations. Not only do we have a trade truce, a suspension of escalation, but Trump promised that American companies can sell to Huawei.

Now that we have achieved a detente of sorts, the CME's Fedwatch Tool shows the market is still discounting a 100% likelihood of a quarter-point rate cut at the July FOMC meeting, and a 21.4% chance of a half-point cut.

Is this for real? Will the Fed disappoint the markets?

The full post can be found here.

A framework for a Sino-American relationship

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: Neutral*
• Trading model: Neutral*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



A framework for Sino-American relations
The anticipation is over. The Trump-Xi summit is done. Did you think that things would be so easy, and everything could be solved in a single meeting?

The market came into weekend knowing that there was a high degree of uncertainty surrounding the summit, but the consensus was both sides would agree to a trade truce. Mytrade war factor, which measures the relative performance of companies with pure domestic revenues, was complacent about the prospects of a trade war.

The option market behaved in a similar way. The ratio of 9-day implied volatility (VXST) to one-month volatility (VIX) exhibited only mild signs of anxiety, and levels were not high compared to recent history.

The market was indeed fortunate that the outcome was slightly better than market expectations. Not only did both sides agree to a truce while discussions continue, and Trump has lifted a temporary ban on on American companies selling equipment to Huawei.

Notwithstanding the short-term results from the summit, here are some issues that investors and policy makers should think about in terms of the future Sino-American relations.

• If this is a war, what costs is America willing to bear?
• Is this a trade war, or something more?
• How much support can the Fed offer, and what are the implications of the Fed's actions?

The full post can be found here.

What's up with gold?

Mid-week market update: Gold staged an upside breakout from a multi-year base, which got a lot of technicians excited. The point and figure chart upside targets range from about 1630 to the mid-1700s, depending on how the parameters are set.

Before you pile in and buy, let me educate you on the causes of this move, so that you can make a reasoned decision. Think of this as the case of a dog and his tail. Gold is the tail, and it is wagging very rapidly. Figure out why before taking action.

The full post can be found here.

Caution: Market is mis-pricing trade talks risk

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: Neutral*
• Trading model: Neutral*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



Signs of complacency
I have been writing in these pages that the market faced two key sources of near-term volatility. The first was the uncertainty of the FOMC decision. Approaching the meeting, the market was expecting three quarter-point rate cuts by year-end, with the first occurring in July. The Powell Fed delivered a dovish hold. The bond market reacted with a bull steepening, and stock prices soared.

The next key event is the Trump-Xi meeting on the sidelines of the G-20 meeting in Osaka. In the wake of the Fed decision, the ensuing equity market euphoria is seemingly discounting a successful conclusion to the trade talks. Our trade war factor, which is measured by the relative performance of an ETF of Russell 1000 stocks with pure domestic revenues, is indicating a dramatic decline in trade tensions.

While I have no idea how the trade talks will be resolved, some caution is warranted as the market appears to be mis-pricing trade talks risk.

The full post can be found here.

Monetary Policy Catch-22

Mid-week market update: As I expected, the Fed unveiled a dovish hold at its June FOMC meeting, as predicted by Tim Duy:

The Fed is likely to turn more dovish this week and open up the possibility of a rate cut. I think they still need more data to justify a rate cut. Another jobs report alone the lines of the May report would go a long way toward supporting that cut in July.

Out with "patience", and in with "act as appropriate to sustain the expansion"* as the new mantra of monetary policy. The greenback feel, and the bond market reacted with a bull steepening. Interest rates fell across the board, but the yield curve steepened.

However, this sets up a difficult Catch-22 for Fed monetary policy makers.

The full post can be found here.


* Colloquial translation: "An ounce of prevention is worth a pound of cure".

Fun with quant: MS Business Conditions edition

Marketwatch recently reported that Morgan Stanley's Business Conditions Index had deteriorated to levels last seen during the 2007-08 financial crisis. Wow! Is this an alarming signal, or contrarian?

The full post can be found here.

What would happen if the Fed cuts rates?

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: Neutral*
• Trading model: Neutral*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



An FOMC meeting preview
As we look ahead to the FOMC meeting next week, the market has priced in three quarter-point rate cuts for 2019, with the first cut occurring at the July meeting.

A rate cut is not unexpected, as the bond market has pushed the Treasury yield curve down so far that only the 30-year Treasury bond is trading above the current Fed Funds target. It is likely too early for the Fed to cut rates at its June meeting next week, but if the market is discounting a July cut, the Fed is likely to signal either it is either in agreement with that expectation, or correct the market.

Rather than debate whether the Fed should cut rates, I consider the scenario of what might happen if it were to proceed with a July rate cut. What are the consequences for economic growth, and the stock market? After all, the track record of Fed Funds futures in forecasting the actual trajectory of interest rates has been less than stellar.

The full post can be found here.

A dead cat bounce, or something more?

Mid-week market update: I wrote last week that the market gods were favoring the equity bulls, The relief rally would likely last about another week (see How far can this rally run?), but the market is likely to remain range-bound until the trade tensions are resolved.

In conclusion, until these trade tensions are resolved, expect the market to remain range-bound and move in reaction to the latest headlines. This suggests that traders should adopt a position of “buy the dips” and “sell the rips”. If history is any guide, I expect the current rally to peter out some time next week, with the most probable peak occurring about mid-week.

The market has rallied substantially since last Wednesday. It is now mid-week, and the market appears to be stalling at resistance. Is this simply a test and pullback to test resistance, or something worse?

What's next?

The full post can be found here.

How to buy "smart" Value

Value investing has taken it on the chin in the last decade, as the style has badly lagged the market. Callum Thomas documented how value discount has grown over the last decade. The discount has fallen to levels last seen at the height of the NASDAQ Bubble, when internet related stocks came crashing to earth, and value stocks outperformed.

Is it time to buy Value? Here are a couple of suggestions of how to participate in the value style in a way that performed well despite the style headwinds of the last 10 years.

The full post can be found here.

Trump vs. the Fed

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: 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.



Tariff Man and Dow Man gang up on the Fed
David Rosenberg advanced an intriguing theory last week. Could Trump be weakening the economy sufficiently for the Fed to cut rates, and then call off the trade war so that the stock market could soar ahead of the 2020 election?

Viewed in the context of Jerome Powell's remarks at a Fed policy conference last week which acknowledged trade tension risks, that scenario is a possibility.

I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective. My comments today, like this conference, will focus on longer-run issues that will remain even as the issues of the moment evolve.

Will the Fed play ball? The market is now discounting three rate cuts by year-end, with the first one at the July FOMC meeting. This matters to equity investors. A historical study from Barclays showed that the stock market tends to have a strong positive reaction a month after the first rate cut, and returns were even stronger after six months.

The full post can be found here.

How far can this rally run?

Mid-week market update: I had been making the point for the past week that this market is oversold and ripe for a relief rally, and the rally finally occurred. From a technical perspective, the market rallied through a downtrend line, which is a sign that the bulls have seized control of the tape. However, the bulls shouldn't overstay their welcome. Until the trade tension overhang is lifted, this market is likely to remain volatile and range-bound. One characteristic of this uncertainty are the numerous gaps that can be found on the hourly chart.

Nevertheless, how long can this rally last, and how far can it run? I considered a number of historical studies to arrive at some estimates, and here is what I found.

The full post can be found here.

A May Jobs Report preview

Tim Duy thinks that Trump is trying to weaken the economic outlook sufficiently so that the Fed has no choice but to cut rates. The markets adopted a risk-off posture as a consequence of Trump`s announcement that he plans to impose tariffs on Mexico. The entire Treasury yield curve, with the exception of the very long end at 30-years, is at or below the Fed Funds target rate. The market is now anticipating between two and three quarter point rate cuts by the end of 2019.

The story here is that market participants anticipate the Fed will need to cut rates to maintain the expansion. The Fed has so far resisted this story, but the odds favor them moving in this direction. The simple fact is that the Fed reacts systematically to a changing forecast. Financial markets are signaling the the growth forecast will worsen enough, or that the risks to the growth forecast will become sufficiently one-sided, that the Fed will have to act. The Fed isn’t there yet, but they will not be able to resist forever.

Bottom Line: Trump will get the Fed to back his trade wars, but only threatening to damage the U.S. economy first.

Powell acknowledged trade tension effects this morning, and echoed vice chair Richard Clarida that the Fed would cut rates if necessary.

I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.

Last week, Clarida repeated the now familiar Fed official party line that the "economy is in a good place". Bloomberg reported that Clarida left the door open to a rate cut:

“Let me be very clear, that we’re attuned to potential risks to the outlook,” he said Thursday after a speech to the Economics Club of New York. “If we saw a downside risk to the outlook, then that would be a factor that could call for a more accommodative policy. So that’s definitely something in the risk-management area that we would think about.”

U.S. central bankers next meet June 18-19. Clarida, like Chairman Jerome Powell, described a recent dip in inflation as “transitory.”

Clarida said that mounting risks, not just disappointing incoming economic data, could be a trigger for the Fed to cut rates if it felt the need to act preemptively, with inflation already below the central bank’s 2 percent target. The Fed’s preferred price index, minus food and energy, rose 1.6% for the 12 months through March, and analysts expect the same number from the April report due Friday.

The upcoming Jobs Report this Friday will also be an important data point for Fed officials as the pressures builds for rate cuts.

The full post can be found here.

Panic in the air

I just want to publish a quick note. Panic is in the air.

Investors are piling into the safe haven of USTs. The 5-day plunge in 2-year Treasury yield has not been exceeded since the stock market bottom of 2008.

The full post can be found here.

China's new Long March

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: 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 new Long March
The belligerent tone of the rhetoric has been heating up on both sides of the Sino-American trade dispute. Simon Rabinovitch of The Economist recently documented the different phases and rising stridency of the Chinese response in state-controlled media.

Xi Jinping characterized the dispute as another Long March. For the uninitiated, the Long March is as important to the Chinese Communist Party's founding myth as the events at Lexington Green was to America's revolutionary founding myth. Here is the description from Wikipedia:

The Long March (October 1934 – October 1935) was a military retreat undertaken by the Red Army of the Communist Party of China, the forerunner of the People's Liberation Army, to evade the pursuit of the Kuomintang (KMT or Chinese Nationalist Party) army. There was not one Long March, but a series of marches, as various Communist armies in the south escaped to the north and west. The best known is the march from Jiangxi province which began in October 1934. The First Front Army of the Chinese Soviet Republic, led by an inexperienced military commission, was on the brink of annihilation by Generalissimo Chiang Kai-shek's troops in their stronghold in Jiangxi province. The Communists, under the eventual command of Mao Zedong and Zhou Enlai, escaped in a circling retreat to the west and north, which reportedly traversed over 9,000 kilometers (5600 miles) over 370 days.[1] The route passed through some of the most difficult terrain of western China by traveling west, then north, to Shaanxi.

The Long March began Mao Zedong's ascent to power, whose leadership during the retreat gained him the support of the members of the party. The bitter struggles of the Long March, which was completed by only about one-tenth of the force that left Jiangxi, would come to represent a significant episode in the history of the Communist Party of China, and would seal the personal prestige of Mao Zedong and his supporters as the new leaders of the party in the following decades.

The Wikipedia article went on to document that only about 8,000 of 100,000 soldiers survived the Long March to Yunan. Xi`s Long March imagery was a signal that Chins should be willing to endure enormous deprivations in its economic war with the US.

How is China performing on the new Long March? How much deprivation is it suffering, and what weapons do Beijing have to fight this new war?

The full post can be found here.