Sunday, December 4, 2016

Trump makes stocks great again (for now)

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: Bearish*
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 mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.

Remember the Audacity of Hope?
Does anyone remember Obama's "Audacity of Hope" campaign that won him the White House? As a reminder, here is a video clip from eight years ago which depicted an Obama supporter who believed that the new administration would pay for her gas and mortgage. Fast forward to today, Obama's legislative legacy is far less impressive than what his enthusiastic supporters expected from St. Barack of Chicago.

While the jury is still out on what the political expectations are for Donald Trump's win, market expectations are getting positively giddy, which may be setting itself up for disappointment. Here is what Ed Hyman of ISI Evercore observed from his survey of institutional clients:

Will the legacy of Trump's "Make America Great Again" be similar to Obama's "Audacity of Hope"? While it's far too early to make any kind of judgment, I made the point last week that the fundamentals for the current market rally have been in place before the election (see The start of a new Trump bull?), the electoral results seemed to have awakened the market`s animal spirits.

There is much to get enthusiastic about. Evidence of a reflationary turnaround had been brewing since the summer. Many of the stated business friendly policies of the Trump administration are also reasons to get bullish on stocks. However, excess bullishness can carry the risk of the bulls' demise. Jeffrey Gundlach recently warned that the rally was losing steam:
The strong U.S. stock market rally, surge in Treasury yields and strength in the U.S. dollar since Trump's surprising Nov. 8 presidential victory look to be "losing steam," Gundlach, who oversees more than $106 billion at the Los Angeles-based investment management firm, said in a telephone interview.

"The bar was so low on Trump to the point people were expecting markets will go down 80 percent and global depression - and now this guy is the Wizard of Oz and so expectations are high," Gundlach said. "There's no magic here."

Gundlach had warned last month that federal programs take time to implement, rising mortgage rates and monthly payments are not positive for the "psyche of the middle class and broadly," and supporters of defeated White House candidate Hillary Clinton are not in a mood to spend money.

"There is going to be a buyer's remorse period," said Gundlach, who voted for Trump and accurately predicted in January the winner of the presidential election.
Has Trump made stocks great again? Should you get cautious? Here is how I would play the market as I peer into 2017.

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

Announcing our Black Friday/Anniversary promotion!
We are making a limited number of discounted annual subscriptions available at a price of US$199.99, which is US$50 off the regular price of US$249.99, for the first year. This offer is open to the first 100 subscribers, or until December 15, 2016, whichever comes first. Click on this link to subscribe and use the code anniversary2016 at checkout to get the discount.

We only have a handful of discounted annuals subscriptions left. Hurry before they're all gone!

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