Sunday, September 4, 2016

Stay bullish for the rest of 2016

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 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. 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: 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.

Stay focused on the big picture
Here at Humble Student of the Markets, I use technical analysis as a way of measuring market psychology. The combination of price, volume, sentiment, and how the market response to news convey important information about the psychology of market participants. At the same time, I use fundamental and macro-economic analysis to derive information about the drivers of stock prices, such as valuation and the momentum of fundamentals. In particular, fundamental and macro analysis yield clues about how the E in the P/E ratio is likely to evolve.

During confusing times like these, it's important to stay focused on the big picture. Cross-currents such as negative macro surprises against a backdrop of improving growth can be confusing for investors. A rigorous analytical framework can be informative about the likely direction of stock prices. Here is the big picture:
  • The equity bull market is still alive for the remainder of the year
  • The economic cycle is maturing fast and the timing of a cyclical market top will depend on Federal Reserve action
  • The next downturn could be very ugly
These conditions are indicate a bullish stance on stocks for the remainder of 2016. After that, my crystal ball gets a little cloudy and I will become more "data dependent".

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

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