Sunday, December 20, 2015

Do you believe in Santa Claus?

Trend Model signal summary

Trend Model signal: Neutral
Trading model: Bullish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. 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 model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.
Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.

Hitting the Exacta

Regular readers know that I have been bullish on stocks for a couple of months now. While I had expected a seasonal Santa Claus rally, Santa hasn't been around and stock prices have been weakening. In one way, Old St. Nick may have left a present for the bulls under the tree as the recent sell-off has left the market oversold. As a result, two of my Trifecta Bottom Model indicators have flashed a buy signal. I call this hitting the Exacta.

My Trifecta Bottom Model (which was described in a past post Sell Rosh Hashanah?) consists of the following three conditions, which must occur closely (within a week) of each other:
  1. VIX term structure (VIX/VXV ratio) inversion
  2. NYSE TRIN more than 2
  3. My favorite intermediate term overbought-oversold model, which is the ratio of % of SPX stocks over their 50 day moving average (dma) / % of SPX stocks over their 150 dma less than 0.5
Each of these conditions, by themselves, are indicators of high levels of market fear. When used in conjunction with each other, they have been uncanny at calling short-term market bottoms. The chart below shows past instances of the market has hit the Trifecta (vertical red lines, triggered all three conditions) or the Exacta (blue vertical lines, two of three) in the last three years. The only failure of this model was the sell-off in August 2015, where an oversold market became more oversold. In all other instances, the market have rallied off these buy signals.

Trifecta Bottom Model

Last week, the market hit the Exacta again as the VIX term structure inverted and TRIN spike to over 2 within a week of each other. The question is whether this is August 2015 all over again, or a run-of-the mill instance of a short-term bottom.

The complete post is at our new site here.

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