Technicians nervous, fundamentalist shrug

Mid-week market update: Both my social media feed and the my questions this week have a jittery tone. Will the 200 day moving average (dma) hold as the SPX tests this important support level? What sectors or groups could step up to become the next market leaders if technology stocks falter?

Callum Thomas of Topdown Charts highlighted an important bifurcation in sentiment between the technicians and the fundamental analysts. He has been conducting an (unscientific) Twitter poll on a weekly basis since July 2016, and the latest results show a record level of bearishness among technicians, while fundamental analysts have largely shrugged off the recent round of market weakness.

Who is right?

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

The things you don't see at market bottoms: China edition

It is said that while bottoms are events, but tops are processes. Translated, markets bottom out when panic sets in, and therefore they can be more easily identifiable. By contrast, market tops form when a series of conditions come together, but not necessarily all at the same time. My experience has shown that overly bullish sentiment should be viewed as a condition indicator, and not a market timing tool.

Two months has passed since I last published a post in a series of "things you don't see at market bottoms". That's because market exuberance has significantly moderated. There are, nevertheless, signs of froth in non-US markets. Therefore I am publishing another post in the series. Past editions of this series include:

• Things you don't see at market bottoms, 23-Jun-2017
• Things you don't see at market bottoms, 29-Jun-2017
• Things you don't see at market bottoms, bullish bandwagon edition
• Things you don't see at market bottoms, Retailphoria edition
• Things you don't see at market bottoms, Wild claims edition
• Things you don't see at market bottoms, No fear edition
• Things you don't see at market bottoms, Paris Hilton edition
• Things you don't see at market bottoms, Halloween edition
• Things you don't see at market bottoms, CFD edition
• Things you don't see at market bottoms: Rational exuberance edition
• Things you don't see at market bottoms: Retail stampede edition

I reiterate my belief that this is not the top of the market, but investors should be aware of the risks where sentiment is getting increasingly frothy. Much of the froth can be found across the Pacific in China, starting with the China bears' favorite chart.

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

Trade war, Schmade war!

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:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Bullish*
• 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 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 market triple whammy
Last week, the stock market was hit with a triple whammy of bad news.

• Negative stories about market and momentum leader Facebook (FB);
• A moderately more hawkish message from the Federal Reserve; and
• The prospect of a trade war that could tank the global economy.

As a result, the SPX fell -6.0% for the week. The market is obviously stretched to the downside. The SPX is testing support at its February lows and the 200 day moving average (dma). The VIX Index has risen above its upper Bollinger Band, which is a short-term oversold signal. As well, the CBOE put/call ratio spiked to high levels indicating fear.

Is this enough to signal a short-term bottom? This week, I address the dual macro threats of Fed policy, and the possible effects of a trade war. There are many others who can much analyze FB better than me, and stock specific analysis is outside my scope.

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

Is the NASDAQ trend still your friend?

Mid-week market update: There have been a number of questions of whether the NASDAQ run is over. Marketwatch reported that Jim Paulsen of Leuthold Group highlighted the vulnerable nature of technology stocks. Paulsen pointed to the Tech/Utilities ratio as a way of showing that Tech is nearly as stretch as it was during the height of the NASDAQ bubble.

Chris Kimble also worried about the recent NASDAQ breakout, which was not followed by the major large cap averages, as well as a negative RSI divergence.

In addition, Kimble highlighted the huge weekly inflow into the NASDAQ 100 ETF (NDX), which could be interpreted as contrarian bearish.

If the NASDAQ falters, what would a loss of Tech leadership mean for overall stock prices?

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

FOMC preview: Rising stress edition

The Federal Reserve is widely expected to raise interest rates a quarter-point this week at their FOMC meeting this week. Even though financial conditions remain at benign levels, there are a number of signs that stress levels are rising during the current tightening cycle.

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

When the story changes...

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:

• 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 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 in seasons
Bill McBride of Calculated Risk has had a remarkable record of calling turns in the economy. He correctly warned about the peaking housing bubble before it popped, and he has been consistently bullish since the market bottom in 2009. Recently, he warned that "the story is changing":

But in 2018, the story is changing. We are seeing some economic tailwinds and some headwinds. Although the tax changes are poorly conceived, and mostly benefit high income earners, there should be some short term boost to economic growth. That might lead the Federal Reserve to raise rates a little quicker than anticipated.

He concluded:

I still think the economy will be fine in 2018, but the story is changing.

Bloomberg reported that Morgan Stanley cross-asset strategist Andrew Sheets highlighted a changing environment of weakening Purchasing Manager Indexes (PMIs) and rising inflation. Such regimes shifts have typically led to rising volatility.

Markets have traditionally been well-equipped to handle higher inflation when it comes alongside a pickup in growth, notes Sheets. But it’s the prospect of an inflection point away from the dominant narrative of “synchronized global growth” reflected in rising PMIs, and moribund price pressures that could cause investors angst.

Kevin Muir at Macro Tourist also highlighted NDR analysis that split Fed tightening cycles to fast and slow cycles. If history is any guide, this is the point where stock prices start to flatten out and weaken during a slow tightening cycle.

I agree 100%. Goldilocks is dying, but the probability of a recession in 2018 remains low. Risks and volatility are rising. It is time to review how "the story has changed".

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

A test of bullish resolve

Mid-week market update: Last weekend, I wrote that while I was intermediate term bullish, I expected some equity market weakness early in the week. The hourly RSI-5 had exceeded 90, which is an extremely overbought reading, which was not sustainable. Even during the January melt-up, such episodes resolved themselves with either a pullback or sideways consolidation. The downside risk is the 50 day moving average (dma) and the gap that was created when the market rallied on March 9, 2018.

Now that the market has declined to test the 50 dma, and the gap is filled, what now?

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

The new Fragile Five to avoid

In the wake of my last post about whether USD assets and Treasury paper would remain safe haven and diversifiers in the next global downturn (see Will diversified portfolios be doomed in the next recession), I received a number of questions as to what investors should avoid. There is an obvious answer to that question.

Call them the new Fragile Five.

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

Will diversified portfolios be doomed in the next recession?

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:

• 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 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.


Will Treasuries continue to be diversifiers?
Bloomberg recently reported that Sanford Bernstein declared the 60/40 portfolio to be doomed, because the prices of different asset classes, which were believed to be diversifying, are moving together.

This brings up an interesting point, will bonds do their part to diversify portfolio returns and cushion equity downside risk in the next bear market? In the last crisis, fixed income investments proved to be a poor diversifier as credit spreads blew out, and only Treasuries rallied. In the next bear market, will Treasuries be able to fulfill their role as diversifying investments?

In the wake of widespread worries over the Republicans' latest fiscal experiment with tax cuts during the late phase of an expansion, a number of strategists have voiced concerns about the downward pressure that exploding fiscal deficits would put on the US Dollar. Macquarie pointed out that priming the fiscal pump during a period of low unemployment is highly unusual.

If history is any guide, then the USD is likely to face significant downward pressure in the future as deficits explode upwards.

The FT reported that Vasileiocs Gkionakis of UniCredit came to a similar conclusion.

That got me thinking. A falling USD implies that the market is losing confidence in the value of USD assets. If the greenback is going to be under such pressure, what happens in the next recession?

In the past, USD assets, and Treasury securities in particular, have been the safe haven asset of choice during periods of economic stress. If the USD and USTs lose their safe status, what happens to diversified portfolio returns? Will the decline in their asset values accelerate because bonds, and especially USTs, fall in value along with the price of other risky assets like stocks?

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

The rise of populism and the policy challenge for global elites

This week saw the two examples of the triumph of populism. The Italian election saw the rise the Five Star Movement and Lega Nord, otherwise known as the Northern League. Both are Euroskeptic parties and Lega Nord has an anti-immigrant bias. Meanwhile in Washington, the news of the steel and aluminum tariffs put Trump's America First policies front and center.

These instances of rising populism present a long-term development economic policy challenge for global elites.

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

The long awaited W-shaped recovery?

Mid-week market update: You can tell a lot about the short-term character of a market by the way it reacts to news. When the news of Gary Cohn's resignation hit the tape after the close on Thursday, ES futures cratered down over -1%. By the market closed Wednesday, SPX had traced out a bullish reversal after an early morning selloff and closed flat on the day.

Is that all the bears can do?

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

Beyond the headlines of the February Jobs report

This Friday, the Bureau of Labor Statistics will release the February Employment Report. The consensus headline Non-Farm Payroll (NFP) figure is 200K, and consensus monthly change in Average Hourly Earnings (AHE) is 0.2%.

Johnny Bo Jakobsen observed that forecasts based on ISM employment points to a strengthening job market. Based on this analysis, I am tempted to take the the over on NFP and AHE.

Even as the market focuses intensely on NFP and AHE, there are far more important internals to watch beyond the headlines.

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

Tariff Tantrum, or Trade War Apocalypse?

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:

• 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 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.


Trade chaos, or buying opportunity?
Trump's tariff announcements in steel and aluminum last week were certainly a shock to the market, though they were not totally unexpected. I had written about this in early January when the market was melting up and suggested that 2018 would be the year of "full Trump" and a dramatic change in policy tone after the tax cut victory (see Could a Trump trade war spark a bear market?)

Trump went on to double down on his steel and aluminum tariff announcements with a "trade wars are good, and easy to win" tweet.

In the wake of the announcements, the charts of the market reactions to past major trade actions began circulating on the internet. Here is what happened when George W. Bush imposed tariffs on steel in 2002.

This chart shows the effects of the Smoot-Hawley tariffs during the 1930`s.

Is this fear mongering? It depends on your perspective. Trade wars had a major dampening effect on global growth, but the American economy were either in recession (2002) or in a Depression (1930's) during these two episodes.

Is this a Tariff Tantrum that should be bought, or a Trade War Apocalypse that should be sold?

The full post can be found at our site here.