Sunday, April 24, 2016

How the S&P 500 could get to 2400 this year

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 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 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. Past trading of this model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.

The (inflation) universe is unfolding
The (inflation) universe seems to be unfolding as it should. Regular readers know that I have been preparing for a resurgence in commodity prices (see The 2016 macro surprise that no one talks about, written in December 2015, RIP Correction. Reflationary resurrection next? written in March 2016 and My roadmap for 2016 and beyond, written a week ago). We finally got broad based confirmation of a recovery in commodity inflation last week.

Commodity and oil prices shrugged off the Doha non-freeze surprise and broke out to new recovery highs, which is bullish as you can tell the tone of a market by how it reacts to what should have been bad news. As the chart below shows, the cyclically sensitive industrial metals staged upside breakouts above its 200 day moving average (dma), as well as new recovery highs. The energy heavy CRB Index did break out to the upside, but it is now testing its 200 dma.

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

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