Sunday, July 29, 2018

The universe is unfolding as it should

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.

The Last Hurrah rally continues
I apologize for the relatively brief update as I am writing this on an unsteady internet connection. The "last hurrah" scenario that I recently outlined (see How the equity bulls and bears may both be right) is playing out more or less as expected.

The 4.1% Q2 GDP report is keeping the Fed on track for two more rate hikes this year. At the current pace of rate hikes, my long leading indicators will flash a recessionary warning late this year, indicating a slowdown in late 2019. Since stock prices tend to look ahead about a year in advance, that puts the the timing of an equity market top in Q4 2018. However, the timing of a recession, and a market top, could get pulled forward should a full trade war erupt.

In the short run, coincident and short leading indicators are strongly bullish. These conditions suggest that stock prices will make a "last hurrah" rally. Here are my trading bull/bear tripwires. The SPX has formed a bullish cup and handle breakout with an upside target in the 2925-2960 range. Stay bullish if the index holds above its breakout level of 2795-2800.

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

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