What Trump never told you about the price of a trade war "win"

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.


War is hell
War is hell, even trade wars. The world is again at risk of lurching into a global trade war. Last Friday, Trump announced the imposition of 25% tariffs on $34 billion in Chinese exports, with another proposed list totaling $16 billion that is subject to public comment and review. China has responded with retaliatory tariffs on $34 billion in American exports, mostly in agricultural commodities and automobiles.

Under these circumstances, it is useful to revisit my analysis written in January of the possible fallout under such a scenario (see Could a Trump trade war spark a bear market?). I had highlighted analysis from the Peterson Institute in 2016 modeling the effects of a full blown and abortive trade war on the US economy. The economy would lapse into a mild recession in the former case, but sidestep a recession in the latter case. However, the results did appear anomalous as I pointed that that the observation of (then) New York Fed President Bill Dudley that the economy fell into recession whenever unemployment rose 0.3% to 0.4%, as it would in the modeled result of the abortive trade war.

President Donald Trump tweeted in the past that "trade wars are good, and easy to win". What if he is right, and trade partners either backed down from retaliatory tariffs, or only imposed limited tariffs?

How would "winning" a trade war look like? Let's put on our rose colored glasses and take a look.

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

Things you don't see at market bottoms: Giddiness revival edition

The last time I published a post in a series of "things you don't see at market bottoms" based on US based investor enthusiasm was in January. That's because market exuberance had significantly moderated since the January top. Guess, what, the giddiness is baack!

As a reminder, it is said that while bottoms are events, but tops are processes. Translated, markets bottom out when panic sets in, and therefore they can be more easily identifiable. By contrast, market tops form when a series of conditions come together, but not necessarily all at the same time. My experience has shown that overly bullish sentiment should be viewed as a condition indicator, and not a market timing tool.

Past editions of this series include:

• Things you don't see at market bottoms, 23-Jun-2017
• Things you don't see at market bottoms, 29-Jun-2017
• Things you don't see at market bottoms, bullish bandwagon edition
• Things you don't see at market bottoms, Retailphoria edition
• Things you don't see at market bottoms, Wild claims edition
• Things you don't see at market bottoms, No fear edition
• Things you don't see at market bottoms, Paris Hilton edition
• Things you don't see at market bottoms, Halloween edition
• Things you don't see at market bottoms, CFD edition
• Things you don't see at market bottoms: Rational exuberance edition
• Things you don't see at market bottoms: Retail stampede edition
• Things you don't see at market bottoms: China edition

I reiterate my belief that this is not the top of the market, but investors should be aware of the risks where sentiment is getting increasingly frothy.

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

How far can this rally run?

Mid-week market update: Since early May, it has been evident that the bulls have regained control of the tape (see The bulls are back in town). Not much can faze this market. Even today's hawkish Fed rate hike left the market down only -0.4% on the day. The question for investors then becomes how far this rally can go.

From a technical perspective, the answer was surprising. Applying point and figure chart on the SPX yielded a target of 2609 using the parameters of daily prices, and the traditional box size and 3 box reversal. Extending the time horizon to weekly prices, the target was 2549, and monthly prices, 2579.

This analysis implies that the market has overshot its target. But varying the parameters using a % box size told a different, and more bullish, story.

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

Can America still lead the world?

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: 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.


A question of leadership
A picture is worth a thousand words. In light of the visible divisions at the G7 meeting, the question of whether America can continue to lead the world sounds out of place.

The question takes on a different context from an equity investor's viewpoint. The chart below shows that US stocks have been the only source of market leadership, which begs the question, "Can global stocks achieve new highs with only US stocks?" The chart below compares US, international developed markets (EAFE), and emerging market (EM) equities to the MSCI All-Country World Index (ACWI). US equities have been tracing out a saucer shaped base on a relative basis. EAFE have been weak in the past year, and they are testing a key relative support level. EM relative performance began to falter in late 2017, and relative strength has been rolling over.

Put it another way, can the other regions recover some of their mojo in order to propel global equities to new all-time highs? To answer that question, we take a tour around the world and analyze the macro and equity market outlooks of the three major trading blocs, the US, Europe, and China.

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

What June swoon?

Mid-week market update: Sell in May? June swoon? Not so far! As the SPX convincingly staged an upside breakout above the 2740 resistance level, the bull case is easy to make. We have seen fresh all-time highs this week from the following:

• NASDAQ Composite
• Russell 2000 small caps
• NYSE Advance-Decline Line
• NASDAQ Advance-Decline Line

I probably forgot a few, but you get the idea. In addition, the metrics of risk appetite, such as the ratio of high beta to low volatility stocks, is exhibiting a positive divergence.

Hold the celebrations! While I have been bullish throughout this corrective episode, I am very aware that the bulls still have some short-term challenges to overcome.

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

2 contrarian trades that will make you uncomfortable

Do you really want to be a contrarian investor? Most of the time, being contrarian means that your investment views are far from the crowd, and you will feel very isolated and uncomfortable.

With that preface in mind, I offer two uncomfortable contrarian trades, based purely on technical analysis.


Fading a NAFTA breakdown
Let's start with the latest developments in Trump's trade policy of imposing aluminum and steel tariffs on major allies. Canada's prime minister Justin Trudeau responded in a Meet the Press interview by characterizing the tariffs, which were imposed on national security grounds, as "frankly insulting".

The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat? Our soldiers who had fought and died together on the beaches of World War II... and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.

The reaction isn't just restricted to Canada. The latest G7 communique of finance ministers and central bankers was, well, more like a communique from the G6 plus one.

Addressing Global Risks and Promoting a More Level International Playing Field
Ministers and Governors had a frank exchange on the benefits of an open rules-based trading system and many highlighted the negative impact of unilateral trade actions by the United States. Ministers and Governors agreed that this discussion should continue at the Leaders’ Summit in Charlevoix, where decisive action is needed. The aim of this should be to restore collaborative partnerships to promote free, fair, predictable and mutually beneficial trade.

Trump hit back with this latest tweet.

How would you feel about fading trade fears, starting with the fears of a NAFTA breakdown?

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

Revealed: The market timers' dirty little secret

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: 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 market timers won't tell you
Market timers have a dirty little secret that they won`t tell you, "Bottoms are easy to call, but tops are hard."

Consider the use of the NAAIM exposure index just as a typical example of a contrarian indicator. In the last 10 years, episodes when the NAAIM fell below its Bollinger Band (blue vertical line) have been good trading buy signals. While oversold markets can become more oversold, buy signals have marked periods of low downside risk. On the other hand, sell signals when NAAIM rose above its upper BB have not worked well.

The perspective is totally different from a business viewpoint. What market timers won't tell you that it's the doom and market crash narratives that get the clicks and the views. Mark Hulbert revealed that "bear markets and heightened volatility are good for business" of newsletter writers. In the two years leading up to the January top, stock prices went straight up:

Who needs a market timer during conditions like those? One leading stock-market timer I monitor told me that during the market’s blow-off stage between last November and the late-January peak, he lost 18% of his subscribers. He added that he’d never before experienced a drop in subscribers of similar magnitude — much less over so short a period.

Glenn Neely, editor of the NeoWave market-timing service, said 2016 and 2017 were some of the most difficult he’s experienced in a 30-year career.

With those factors in mind, I analyze some of the scare stories that have come across my desk in the last few weeks and show why they should not be reasons for panic:

• Eurozone crisis: Italy and Spain
• A looming junk bond Apocalypse
• A crowded long position in the equity bull trade 
• Signs of complacency at the Fed

As the Wall Street adage goes, "Bottoms are events, while tops are processes." Ignore "this will not end well" warnings with no obvious bearish trigger. Don't be fooled by the clickbait stories of doom.

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

The hidden MACD message from the market

Mid-week market update: Callum Thomas conducts a regular weekly (unscientific) Twitter poll of equity market sentiment, and the latest results show that both fundamental and technical bullishness are falling. These readings suggest that bullish momentum is waning.

Indeed, daily MACD has been decelerating and turned negative this week, indicating that the bears are taking control of the tape. However, I would point out that many past episodes of negative MACD in the last year has seen little market downside, so an aggressive bearish trading stance may not be warranted.

That`s not the whole story.

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

Offbeat Thursday and Friday forecasts

Brett Steenberger recently warned that traders about trading on noise, which is advice to which I wholeheartedly agree:

In other words, before we can determine whether or not we have an edge (in systematic or discretionary trading), we need to establish knowledge. A theory explains how and why something occurs. Testing of historical data can help us conduct limited, targeted tests to determine whether our theory holds up in practice. Before we test, we must formulate a plausible hypothesis. There is no theoretical or practical rationale why many strategies in technical analysis, fundamental analysis, or random combinations of quantitative variables should be valid.

With that caveat, I offer two offbeat forecasts for the markets for this coming Thursday and Friday.

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






Time is running out for our Sale in May! The offer is available only to the first 100 to sign up. Please use this link to order.

Could a weak consumer stall the economy?

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: 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.


Rising household stress
The headlines look dire. CNN proclaimed that "40% of Americans can't cover a $400 emergency expense", according to the Fed's annual Report on the Economic Being of US Households. Further research from Google Trends showed that interest in consumer items is tanking.

In addition, searches for bankruptcy and financial reorganization spiked recently, indicating rising stress in the household sector.

Last Friday's release of consumer sentiment missed expectations and readings are continue to deteriorate.

The economy is at or near full employment. Is this as good as it gets? Is this what prosperity looks like? What does this mean for policy makers?

For investors, the key question are:

1. How stressed is the household sector; and
2. Is this precursor to a bull market killing recession?

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






Time is running out for our Sale in May! The offer is available only to the first 100 to sign up. Please use this link to order.

Cue the fiscal and inflation fears

Was the recent big tax cut not enough? CNBC reported that President Trump is proposing further tax cuts before November. He went on to pressure Congress to enact funding for his budget priorities on Twitter.

These actions prompted Steve Collender (aka @thebudgetguy) to declare in a Forbes article that Trump May Be The Most Fiscally Reckless President in American History:

But think about why Trump is asking for rapid action on the 2019 appropriations: He wants even more spending. Even though his policies have spiked the annual budget deficit to a new normal of a $1 trillion (with $2 trillion definitely within view) and interest rates are now starting to go up in large part because of his out-of-sync-with-the-economy stimulative fiscal policy, Trump is demanding that federal spending and the government’s red ink be increased even further.

There was no hint in this or any other subsequent tweet that Trump is going to propose offsetting spending cuts (or, heaven forbid, revenue increases) to compensate for the additional spending he’s demanding.

Trump’s recently-announced rescission package (which is already in a great deal of political trouble with congressional Republicans) doesn’t come close to offsetting the new spending Trump said he wants. It also won’t come close to being an offset even if the first package is followed with that second rescission plan Trump has said is coming, but which so far seems to be totally imaginary.

Here at Humble Student of the Markets, I believe that the determination of the proper path of fiscal policy is above our pay grade. Instead, my focus is on positioning portfolios for any changes in government policy.

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





We would further like to announce our Sale in May. The offer is available only to the first 100 to sign up. Please use this link to order.

Bear markets simply don't start this way

Mid-week market update: There remains a fair amount of stock market skittishness among my readers and on my social media feed. Let me assure everyone that bear markets simply don`t start this way.

SentimenTrader has an intermediate to long-term sentiment model called AIM "which averages the momentum of the four major sentiment surveys". This model is not perfect at calling the exact bottoms or spotting exact turning points. Nevertheless, it has done a good job of defining the risk and reward of owning stocks when readings are at bearish extremes, which is contrarian bullish. The model is currently on a buy signal.

From a top-down macro perspective, Bespoke recently pointed out that the Philly Fed General Conditions Index hasn't been this high for some time. Despite the mutterings of permabears (I'm looking at you Rosie), recessions simply do not start this way.

BTW, the Philly Fed New Orders component surged to an all-time-high, and the last time it rose this much in a single month was October 2005.

These conditions are all pointing to further intermediate term equity strength. Expect a test of the old highs in the major equity indices this summer, and probably new all-time highs.

However, stock prices don't go up in a straight line. The short run equity outlook is a little different.

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





We would further like to announce our Sale in May. The offer is available only to the first 100 to sign up. Please use this link to order.

The struggling Canadian canary

Back in March, I wrote about the new Fragile Five, which were five highly leveraged developed market economies that were undergoing property booms. The five countries are Australia, Canada, New Zealand, Norway, and Sweden.

As a reminder of how insane property prices are in Vancouver, which is one of the epicenters of the real estate boom, I highlighted this little gem that was listed for about USD 1 million.

Here is the same beauty from the back.

For some perspective. This chart depicts the debt bubble in Canada and Australia. If you are worried about runaway debt in China, then you should be equally concerned about the property bubble in the other Fragile Five countries.

So far, this has been a "this will not end well" investment story with no obvious bearish trigger. Now, there seems to be signs of a turning point in the Canadian economy.

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




We would further like to announce our Sale in May. The offer is available only to the first 100 to sign up. Please use this link to order.

Deconstructing the institutional pain trade

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: 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.


Institutions and the pain trade
The BAML Fund Manager Survey (FMS) is one of the most interesting surveys around, as the frequency is regular (monthly), extensive, and it has a long history. For readers who are unfamiliar with the survey, it reflects mainly the views of fund managers with global investment mandates.

Reading between the lines of the latest FMS results, I found that institutional managers are positioned for a late cycle inflation surge, but they are starting to de-risk their portfolios in anticipation of weaker growth. To summarize, institutional managers believe that:

• Growth momentum is slowing, but
• Inflation expectations are rising, but
• The day of reckoning, as defined by either a recession or even a yield curve inversion, is still a long way in the future.

Fund managers have positioned their portfolios:

• In commodities, which I interpret as positioning for a late cycle inflation surge, but
• They are de-risking by selling equities,
• Selling their emerging market (EM) positions, and
• Buying bonds, but
• Portfolio risk appetite remains above average.

The highlights of the consensus portfolio bets amount to long energy, short USD, and short bonds. This analysis is highly speculative, but if I were the market gods and I wanted to inflict the maximum level of pain on market participants, here is what I would do.

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





We would further like to announce our Sale in May. The offer is available only to the first 100 to sign up. Please use this link to order.

Market waves and ripples

Mid-week market update: Charles Dow once characterized the stock market`s price movement as being composed of tides, waves, and ripples. We can see a mini version of this thesis by the market's action in the past week. The major indices had staged an upside breakout through a downtrend and sentiment had turned bullish.

This week, the narrative became more cautious:

• 10-year bond yields had spiked significantly above 3%.
• The US-North Korea summit is at risk of going off the rails.
• The anti-migrant Lega Nord and anti-establishment Five Star Movement are on the verge of forming the next Italian government.
• The Sino-American trade talks are undergoing their own roller coaster. Trump's weekend "rescue ZTE" tweet was followed by a White House clarification that walked back some of rhetoric.

Which is the wave? Which is the ripple?

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



We would further like to announce our Sale in May. The offer is available only to the first 100 to sign up. Please use this link to order.

Tame inflation? Don't get complacent!

The Treasury market rallied last week when the 10-year Treasury yield tested the 3% level and pulled back.

The decline in yields (and bond prices rally) was not a big surprise for a number of reasons:

• 10-year yields (TNX) was exhibiting a negative RSI divergence
• A tamer than expected Consumer Price Index
• Hedge funds were in a crowded short in the 10-year T-Note and T-Bond futures

While the bond market rally is likely to have a bit more leg over the next few weeks, my inclination is to enjoy the party, but don't overstay the festivities.

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




We would further like to announce our Sale in May. The offer is available only to the first 100 to sign up. Please use this link to order.

How I learned to stop worrying and love rising 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 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: 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.


Yellow flags galore, but no red flags
In the wake of last week's publication (see Why I am not ready to call a market top), I had a number of discussions with investors that amounted to, "What about _________ (insert the worry of the day)".

The main themes discussed, in no particular order, were:

• Rising rates and the flattening yield curve;
• Trade war;
• Oil price spike; and
• Fed policy error as they tighten into a decelerating economy.

I conducted an (unscientific) Twitter poll, and respondents were mostly concerned about a Fed policy error, while the oil price spike was the least of their worries.

While I believe that all of these risks are legitimate, they can be characterized as yellow flags, but there are no red flags that signal an imminent recession or equity bear market.

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



We would further like to announce our Sale in May. The offer is available only to the first 100 to sign up. Please use this link to order.

The bulls are back in town

Mid-week market update: In my last mid-week market update (see Still choppy, still consolidating), I highlighted the weekly (unscientific) sentiment survey conducted by Callum Thomas. The poll showed fundamentally oriented investors to be very bullish, while technical survey was bearish. I suggested at the time that one of the signs that the sideways consolidation may end was an agreement between the fundamental and technical survey, indicating either positive or negative momentum.

The latest survey shows that such an event has occurred as technicians have flipped from bearish to bullish.

While this is not an unqualified trading buy signal, there are plenty of indications that the bulls are back in town.

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

Why you shouldn't get wedded to any market indicator

Over the years, I have had a number of discussions with traders who have religiously embraced specific trading systems and investment disciplines. This is a cautionary tale of how systems fail.

Charlie Bilello won the NAAIM Wagner Award for his work on the lumber/gold ratio:

Lumber’s sensitivity to housing, a key source of domestic economic growth in the U.S., makes it a unique commodity as it pertains to macro fundamentals and risk-seeking behavior. On the opposite end of the spectrum is Gold, which is distinctive in that it historically exhibits safe-haven properties during periods of heightened volatility and stock market stress.

When you look at a ratio of Lumber to Gold, it is telling you something about the risk appetite of investors and the relative strength or weakness in economic conditions. When Lumber is leading Gold, volatility in equities tends to fall going forward. When Gold is leading Lumber, the opposite is true, and equity volatility tends to rise.

History shows that the lumber/gold ratio has been an excellent indicator of risk appetite. The bottom panel of the accompanying chart shows the rolling correlation of the lumber/gold ratio (cyclical indicator) to the stock/bond ratio (risk appetite indicator). The lumber/gold ratio is rising, which is a buy signal for risky assets.

Does that mean that you should bullish on stocks? Maybe.

Consider the copper/gold ratio, which is another cyclical indicator based on a similar theme. The copper/gold ratio is telling a story of economic softness.

Should you be buying or selling? Which indicator should you believe?

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

Why I am not ready to call a market top

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: 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.


Market top is still ahead
As stock prices chopped around in an indecisive fashion in past few weeks, the traders in my social media feed have become increasingly nervous and bearish. The bull can point to the SPX repeatedly testing its 200 day moving average (dma), which has held as technical support. However, the market's inability to rally despite what has been good earnings news during a Q1 earnings season with solid results is worrisome.

My review of intermediate and long-term technical market conditions, as well as the macro backdrop reveals that no pre-conditions of a bear market are in sight. While there are concerns that the American economy is undergoing the late cycle phase of an expansion, which is typically followed by a bear phase. I am not ready to make the investment call that stock prices have topped out just yet.

Consider, as an example, the Relative Rotation Graph (RRG) as a way of analyzing changes in sector leadership. RRG charts are a way of depicting the changes in leadership in different groups, such as sectors, countries and regions, and market factors. The charts are organized into four quadrants. An idealized group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

The latest RRG chart depicts a stock market with the emerging leadership of late cycle inflation sectors (gold and oil), which is the result of late cycle inflationary pressures, along with interest sensitive sectors (REITs and utilities) as the result of a dovish Fed.

This combination suggests that the market is setting up for one last inflationary blow-off before the Fed steps on the monetary breaks to cool the economy into a bull market killing recession.

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