After the panic bottom in February, it appears that the animal spirits have returned to the market, but which ones?
The full post can be found at our new site here.
Tuesday: Richmond Fed Mfg
3 hours ago
Wednesday, February 28, 2018
The animal spirits are back, but which ones?
Mid-week market update: Just when the V-shaped bottom was becoming evident, something comes along and derails that train. The SPX decisively blasted through its 61.8% retracement resistance levels on Monday, but saw a bearish outside reversal day Tuesday, and the market continued to weaken.
After the panic bottom in February, it appears that the animal spirits have returned to the market, but which ones?
The full post can be found at our new site here.
After the panic bottom in February, it appears that the animal spirits have returned to the market, but which ones?
The full post can be found at our new site here.
Monday, February 26, 2018
What Xi's ascendancy means for China's growth
The announcement was not totally unexpected, according to the BBC, but it did come as a shock. China's Communist Party announced the Central Committee proposed that the term of the President and Vice President may serve beyond their 10-year terms:
China bears pointed to the rising risks in the country's growing debt load, which is already at nosebleed levels.
Virtually everyone on social media embraced this interpretation of Xi as the next emperor, or compared him to Mao Zedong.
How should investors react to this political development?
The full post can be found at our new site here.
The Communist Party of China Central Committee proposed to remove the expression that the President and Vice-President of the People's Republic of China "shall serve no more than two consecutive terms" from the country's Constitution.The announcement prompted both bullish and bearish reactions. China bulls warmed to the prospect of stability and predictability in the Chinese leadership and highlighted this chart. China is likely to continue on its steady growth path.
China bears pointed to the rising risks in the country's growing debt load, which is already at nosebleed levels.
Virtually everyone on social media embraced this interpretation of Xi as the next emperor, or compared him to Mao Zedong.
How should investors react to this political development?
The full post can be found at our new site here.
Sunday, February 25, 2018
No, Mr. Bond, I expect you to die
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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.
Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.
The latest signals of each model are as follows:
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
Focusing on the wrong bond?
"No, Mr. Bond, I expect you to die!"
That was the classic line from the film Goldfinger, which is aptly named considering today's conditions. The market is concerned about rising inflation expectations, which is bullish for inflation hedge vehicles like gold, and bearish for bond prices (click on this link for video if the clip is not visible).
Just as James Bond escaped the perils he faced in many films, bonds may be able to escape their perceived risks. That's because the market may be focused on the wrong bond. The top panel of the following chart shows the yield 10-year Treasury note, which has violated a trend line that stretches back to 1990, and the yield of the 30-year Treasury, which has not.
As market anxiety over inflation has picked up, the spotlight has turned to the 10-year yield. As experienced market analysts know, excess focus on a benchmark could lead to the invalidation of that benchmark.
The full post can be found at our new site here.
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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.
Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.
The latest signals of each model are as follows:
- Ultimate market timing model: Buy equities*
- Trend Model signal: Neutral*
- Trading model: Bullish*
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
Focusing on the wrong bond?
"No, Mr. Bond, I expect you to die!"
That was the classic line from the film Goldfinger, which is aptly named considering today's conditions. The market is concerned about rising inflation expectations, which is bullish for inflation hedge vehicles like gold, and bearish for bond prices (click on this link for video if the clip is not visible).
Just as James Bond escaped the perils he faced in many films, bonds may be able to escape their perceived risks. That's because the market may be focused on the wrong bond. The top panel of the following chart shows the yield 10-year Treasury note, which has violated a trend line that stretches back to 1990, and the yield of the 30-year Treasury, which has not.
As market anxiety over inflation has picked up, the spotlight has turned to the 10-year yield. As experienced market analysts know, excess focus on a benchmark could lead to the invalidation of that benchmark.
The full post can be found at our new site here.
Thursday, February 22, 2018
Opportunity from Brexit turmoil
There has been much hand wringing over the Brexit process. Deutsche Welle reported that Angela Merkel stated that Brexit would leave a very challenging €12 billion hole in the 2021-27 EU budget. Across the English Channel, Politico reported that Brexit Secretary David Davis assured businesses that "the UK will not become a ‘Mad Max-style world borrowed from dystopian fiction’ after it leaves the EU".
Now we find out that the UK has proposed to stretch out the end of the Brexit transit period from December 2020 to *ahem* as long as it takes (see proposal here).
In other words, we have the usual European chaos and the latest act of European Theatre. But in chaos, there may be investment opportunity.
The full post can be found at our new post here.
The U.K. will not undercut EU businesses on workers’ rights and environmental protections, David Davis will pledge on Tuesday.
Speaking to an audience of business leaders in Vienna, the U.K. Brexit secretary will insist that Brexit will not “lead to an Anglo-Saxon race to the bottom,” committing the country to “meeting high standards after we leave the EU.” But he will call for a post-Brexit trade deal in which British regulations are recognized by Brussels as comparable to its own.
Now we find out that the UK has proposed to stretch out the end of the Brexit transit period from December 2020 to *ahem* as long as it takes (see proposal here).
In other words, we have the usual European chaos and the latest act of European Theatre. But in chaos, there may be investment opportunity.
The full post can be found at our new post here.
Wednesday, February 21, 2018
A pause at 61.8%
Mid-week market update: After much indecision, the SPX paused at its 61.8% Fibonacci retracement level.
The 50 day moving average (dma) which could have acted as support did not hold. I had also previously identified a possible Zweig Breadth Thrust buy signal setup. Unless the market really surges in the next two days, the ZBT buy signal is highly unlikely to be triggered.
This market looks like it is setting up to form a W-shaped bottom.
The full post can be found at our new site here.
The 50 day moving average (dma) which could have acted as support did not hold. I had also previously identified a possible Zweig Breadth Thrust buy signal setup. Unless the market really surges in the next two days, the ZBT buy signal is highly unlikely to be triggered.
This market looks like it is setting up to form a W-shaped bottom.
The full post can be found at our new site here.
Sunday, February 18, 2018
Powell Fed: Market wildcard
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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.
Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.
The latest signals of each model are as follows:
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
A change of the guard at the Fed
Is the bond market telling us that it's all over? Stock prices got spooked when the 10-year Treasury yield approached the 3% mark, which was the "line in the sand" drawn by a number of analysts that indicated trouble for equity prices. As the following chart shows, the 10-year yield had violated a trend line that stretched back from 1990. One puzzle is the mixed message shown by the yield curve. Historically, both the 2-10 yield curve, which represents the spread between the 10 and 2 year Treasury yields, and the 10-30 yield curve both inverted at the same time on the last three occasions to warn of looming recessions. This time, the 2-10 yield curve has been volatile and steepened recently, which the 10-30 yield curve stayed on its flattening trend.
What's going on? We can get better answers once we have greater clarity on the future direction of the Powell Fed.
The full post can be found at our new site here.
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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.
Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.
The latest signals of each model are as follows:
- Ultimate market timing model: Buy equities*
- Trend Model signal: Neutral*
- Trading model: Bullish*
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
A change of the guard at the Fed
Is the bond market telling us that it's all over? Stock prices got spooked when the 10-year Treasury yield approached the 3% mark, which was the "line in the sand" drawn by a number of analysts that indicated trouble for equity prices. As the following chart shows, the 10-year yield had violated a trend line that stretched back from 1990. One puzzle is the mixed message shown by the yield curve. Historically, both the 2-10 yield curve, which represents the spread between the 10 and 2 year Treasury yields, and the 10-30 yield curve both inverted at the same time on the last three occasions to warn of looming recessions. This time, the 2-10 yield curve has been volatile and steepened recently, which the 10-30 yield curve stayed on its flattening trend.
What's going on? We can get better answers once we have greater clarity on the future direction of the Powell Fed.
- How will the Powell Fed's reaction function to inflation differ from the Yellen Fed? The risks of a policy mistake are high during the current late cycle expansion phase of the economy. Adhere to overly strict rules-based models of monetary policy, and the Fed risks tightening too much or too quickly and send the economy into a tailspin. Allow the economy to run a little hot with based on the belief of a symmetrical 2% inflation target, inflation could get out of hand. The Fed would consequently have to step in with a series of staccato rate hikes that guarantee a recession.
- What about the third unspoken mandate of financial stability? Will there be a "Powell put" that rescues the stock market should it run into trouble?
The full post can be found at our new site here.
Wednesday, February 14, 2018
How the market could fool us again
Mid-week market update: I can tell that a stock market downdraft is a correction and not the start of a major bear market when the doomsters crawl out of the woodwork after the market has fallen (see Is the 'short volatility' blowup Bear Stearns or Lehman Brothers?) and analysis from SentimenTrader shows that their smart and dumb money sentiment indicators are at an extreme. As a frame of reference, SentimenTrader defines each term in the following way:
Sure, this could be the start of a bear market, but bear markets usually begin with technical deterioration, which are not present today.
The full post can be found at our new site here.
The dumb money indicators are typically made up of retail traders and trend-followers. This is NOT to say that all (or even most) retail mom-and-pop investors, and certainly not most trend-followers, are "dumb". In fact, they are by definition correct during the bulk of a trend.
The smart money indicators are mostly made up of institutional accounts. These traders are often hedging day-to-day moves in the market, and therefore are often trading against the prevailing trend. Again, it is only when these traders move to an extreme that a market is most likely to reverse in their direction.
Sure, this could be the start of a bear market, but bear markets usually begin with technical deterioration, which are not present today.
The full post can be found at our new site here.
Tuesday, February 13, 2018
Did risk-parity funds crash the bond market?
When the markets crash unexpectedly, everyone is on the lookup for culprits. One of the leading theories behind the latest downdraft in stock prices is the rise in bond yields, which spooked the stock market. Derivative analysts have pointed the finger at Risk-Parity funds as the leading actors in the bond market rout. They contend that the combination of leverage use in these funds and forced selling because of changes in market environment have exacerbated the rise in bond yields.
I considered the effects of Risk-Parity funds on the bond market. Using three different analytical techniques, we concluded that Risk-Parity strategies did not exacerbate the downturn in bond prices (picture via Cliff Asness).
The full post can be found at our new site here.
I considered the effects of Risk-Parity funds on the bond market. Using three different analytical techniques, we concluded that Risk-Parity strategies did not exacerbate the downturn in bond prices (picture via Cliff Asness).
The full post can be found at our new site here.
Sunday, February 11, 2018
Five reasons to not to worry (plus 2 concerns)
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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.
Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.
The latest signals of each model are as follows:
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
The Bob Farrell Rule #4 correction
Volatility has certainly returned to the financial markets as the Dow experience two 1,000 point downdrafts in a single week. The long awaited correction arrived as stock prices retreated 10% from an all-time high in just under two weeks. Over at Bloomberg, there were six separate and distinct explanations for the correction. I prefer a far simpler reason. Stock prices went up too far and too fast. Call it the Bob Farrell Rule #4 correction: “When prices go parabolic, they go up much further than you expect, but they don’t correct by going sideways.”
As the market cratered last week, subscriber mood began on an air of cautious optimism, which turned to concern, and finally panic. By the end of the week, I was getting questions like, "I know that the market is oversold, but could it go further like 1987, 1929, or 2008?"
Relax, most of the concerns raised are red herrings. Here are what I am not worried about:
The full post can be found at our new site here.
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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.
Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.
The latest signals of each model are as follows:
- Ultimate market timing model: Buy equities*
- Trend Model signal: Bullish*
- Trading model: Bearish*
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
The Bob Farrell Rule #4 correction
Volatility has certainly returned to the financial markets as the Dow experience two 1,000 point downdrafts in a single week. The long awaited correction arrived as stock prices retreated 10% from an all-time high in just under two weeks. Over at Bloomberg, there were six separate and distinct explanations for the correction. I prefer a far simpler reason. Stock prices went up too far and too fast. Call it the Bob Farrell Rule #4 correction: “When prices go parabolic, they go up much further than you expect, but they don’t correct by going sideways.”
As the market cratered last week, subscriber mood began on an air of cautious optimism, which turned to concern, and finally panic. By the end of the week, I was getting questions like, "I know that the market is oversold, but could it go further like 1987, 1929, or 2008?"
Relax, most of the concerns raised are red herrings. Here are what I am not worried about:
- Equity valuation,
- Macro outlook,
- Equity fundamentals,
- Investor sentiment, and
- Market technical picture, otherwise known as the "animal spirits"..
Here are a couple of areas where I have some concerns:
- The inflation outlook and Federal Reserve policy, and
- Possible changes in White House policy, such as trade and immigration.
Thursday, February 8, 2018
The market effects of Trump's immigration policies
I had been meaning to write about this, but I got distracted by the latest bout of market volatility. With the debt ceiling problem defused, but no sign of a DACA deal, the issue of immigration is a worthwhile issue to consider for investors.
As I analyzed the latest JOLTS report and last week's January Jobs Report, I reflect upon how Trump's immigration policy may affect labor markets, and the secondary effects on monetary policy. The latest JOLTS report shows that hires remain ahead of separations, and the quits rate is rising, which are indicative of a strong labor market.
Immigration is a politicized issue and it is beyond my pay grade to express an opinion on the correct approach. Nevertheless, I can still estimate the likely effects of any policy, and its market effects.
Donald Trump's philosophy to immigration is clear. Build a Wall to keep them out. Deport the illegals, starting with the DREAMers, or DACA eligible individuals residing in the United States.
The full post can be found at our new site here.
As I analyzed the latest JOLTS report and last week's January Jobs Report, I reflect upon how Trump's immigration policy may affect labor markets, and the secondary effects on monetary policy. The latest JOLTS report shows that hires remain ahead of separations, and the quits rate is rising, which are indicative of a strong labor market.
Immigration is a politicized issue and it is beyond my pay grade to express an opinion on the correct approach. Nevertheless, I can still estimate the likely effects of any policy, and its market effects.
Donald Trump's philosophy to immigration is clear. Build a Wall to keep them out. Deport the illegals, starting with the DREAMers, or DACA eligible individuals residing in the United States.
The full post can be found at our new site here.
Tuesday, February 6, 2018
Risk on, or risk off?
Mid-week market update: In view of this week's market volatility, I thought that I would write my mid-week market update one day early. After the close on Monday, my Trifecta Market Spotting Model flashed a buy signal. As shown in the chart below, this model has been uncanny at spotting short-term market bottoms in the past.
Now the Trifecta model has flashed another buy signal as the market faces a possible meltdown from volatility related derivative liquidation. Is it time to take a deep breath and buy?
To be sure, it is hard to believe that a durable bottom has been made. As recently as Sunday, Helene Meisler tweeted the following anecdote of investor complacency.
Could complacency turn to fear that quickly for a washout bottom in just two days?
The full post can be found at our new site here.
Now the Trifecta model has flashed another buy signal as the market faces a possible meltdown from volatility related derivative liquidation. Is it time to take a deep breath and buy?
To be sure, it is hard to believe that a durable bottom has been made. As recently as Sunday, Helene Meisler tweeted the following anecdote of investor complacency.
Could complacency turn to fear that quickly for a washout bottom in just two days?
The full post can be found at our new site here.
Sunday, February 4, 2018
A house on fire?
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 the 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:
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.
Buy the dip, but not yet
We had some minor excitement in our household in the last week. We were at a show when I received a frantic text message that the neighboring building was on fire. Fire fighters were spraying our building as a preventive measure. Mrs. Humble Student of the Market rushed home to rescue the family dog. The house next door was burning to the ground and we were ordered to evacuate. We discovered the next day that our unit suffered water and smoke damage, and it would take several weeks to fix. While the whole episode was disconcerting, it was not a total disaster.
I am now living in a hotel and writing this publication on an older rescued laptop, so please forgive me if I am not up to my usual witty and erudite self.
As the stock market turned south last week, some traders were behaving as if their own houses were on fire, instead of the neighbor's. Morgan Housel recently penned a timely article entitled It's hard to predict how you'll respond to risk:
The full post can be found at our new site here.
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 the 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: Bullish*
- Trading model: Bearish*
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.
Buy the dip, but not yet
We had some minor excitement in our household in the last week. We were at a show when I received a frantic text message that the neighboring building was on fire. Fire fighters were spraying our building as a preventive measure. Mrs. Humble Student of the Market rushed home to rescue the family dog. The house next door was burning to the ground and we were ordered to evacuate. We discovered the next day that our unit suffered water and smoke damage, and it would take several weeks to fix. While the whole episode was disconcerting, it was not a total disaster.
I am now living in a hotel and writing this publication on an older rescued laptop, so please forgive me if I am not up to my usual witty and erudite self.
As the stock market turned south last week, some traders were behaving as if their own houses were on fire, instead of the neighbor's. Morgan Housel recently penned a timely article entitled It's hard to predict how you'll respond to risk:
An underpinning of psychology is that people are poor forecasters of their future selves. There is all kinds of research backing this up. Imagining a goal is easy and fun. Imagining a goal in the context of the realistic life stresses that grow with competitive pursuits is hard to do, and miserable when you can...CNBC had a similar perspective. Investors have been so used to a low volatility environment where stock prices have risen steadily. When the market environment normalizes, it raises the risk of a sharp short-term selloff should long positions in weak hands panic:
The same disconnect happens when you try to forecast how you’ll respond to future risks.
How will I respond to the next investing downturn?
[...]
You will likely be more fearful when your investments are crashing and more greedy when they’re surging than you anticipate.
And most of us won’t believe it until it happens.
Market volatility has been low, meaning that stock prices have been stable for a long time.Should the stock market crater from here, don't panic. This is not the start of a major bear market.
Some investors have interpreted this as a sign of current market risk and that there could be a sudden correction in stock markets, meaning many people could be about to lose vast sums of money.
The full post can be found at our new site here.
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