The Trump presidency: A glass half-full

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.


A glass half-full, with caveats
Last week, I urged readers to be agnostic about the electoral outcome and to stay focus on the investment climate instead (see Don't be fooled, Election 2016 isn't the Brexit referendum):

It would be too easy to get into an impotent rage should your favored candidate lose, or if policy doesn't go in your desired direction. That kind of thinking clouds judgment and leads to subpar investment results.

Stock prices are a function of earnings, the growth outlook, interest rates, and risk premium. There is much we don't know about policy details under a Trump administration, but the market's judgment of the election oscillated from unbridled panic on to euphoria in less than 24 hours. The fast money crowd jumped into the risk-on momentum trade last week. Based on historical studies, the rally has the legs to go much further. Here is a study from Nautilus Capital, which indicates that the returns after election day is indicative of momentum for the next 3-6 months (n=30):

Ned Davis Research also pointed out that the combination of a Republican president and Republican Congress have enjoyed the second best returns (caution, n=3):

The stock market embraced the reflation investment thesis that I have been writing about for several months, except this time it`s reflation on steroids (also see Super Tuesday special: How President Trump could spark a market blow-off). As there are many blanks that still to get filled in about the new administration, it's important to be aware of the bull case and bear case for stocks.

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