Sunday, June 12, 2016

Buy the dip!

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 to look for changes in 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 bullish 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. Past trading of the trading 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: 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.

Here comes the June swoon
The market seem to be following the script that I laid out last week (see Get ready for a market of maximum frustration). I wrote that I remained bullish into year-end, but the short-term outlook was corrective. From a very short-term trading perspective, however, the tendency for the market to rise in the face of bad news like the Jobs Report, indicated that stocks needed to move higher before correcting.

The market did climb the proverbial Wall of Worry until mid-week before weakening (see my mid-week comment Adventures in Option-Land). As the market ground higher last week, I could see the bears starting to capitulate and sentiment gauges becoming more bullish, the major indices topped on on Wednesday. The market narrative then changed to focus on the deteriorating macro outlook. Indeed, the Citigroup Economic Surprise Index, which measures whether macro data is beating or missing consensus estimates (gold line in chart), is turning down again.

It's time for stocks to pay the macro piper. However, these indications of weakness are temporary. Once the growth fears clear, stock prices should recover and push to new highs later this year.

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

Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:

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