Wednesday, November 14, 2018

Time to position for a year-end rally?

Mid-week market update: Even as stock prices weakened this week, the market appears to be setting up for a year-end rally. The SPX is exhibiting a number of positive divergences. Both the NYSE and NASDAQ new lows are not spiking even as stock prices have fallen. In addition, the percentage of stocks above their 50 day moving averages (dma) are making a series of higher lows, which are all bullish.



What are the risks and opportunities in positioning for a year-end rally?

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

Monday, November 12, 2018

Assessing the odds of a US-China agreement

In the past week, a number of readers have expressed the conviction that US-China trade tensions are likely to ease in the near future at the upcoming Trump-Xi meeting, which will occur at the sidelines of the G20 meeting November 30-December  Bloomberg reported that American farmers are so hopeful that they are storing significant amounts of their soy crop for future sale. What are the odds that will happen?

Certainly, there are some signs of a thaw. The strength of the USD Index indicates that there is more room for CNYUSD to decline further. But the PBOC dropped a pledge to allow the market to play a larger role in setting the exchange rate in its latest quarterly monetary report, which is a signal that the central bank is prepared to intervene to cushion yuan weakness.


While the steps taken by the PBOC is a useful start, here are the challenges facing an agreement on a trade deal.

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

Sunday, November 11, 2018

Insiders are buying, should you jump into stocks?

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 hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bearish*
  • 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 receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.


Insiders are buying
Regular readers will know that I have been sounding cautionary technical warnings because of a negative monthly RSI divergence and a MACD sell signal for US equities. This combination has been uncanny in the past at warning of major market tops.


On the other hand, the latest report from Open Insider shows that corporate insiders, who are known as "smart investors", have been buying the latest dip. Historically, sales (red line) exceed buys (blue line) by a significant margin. A funny thing happened during the latest correction. Sales dried up, and buys exceeded sales, which is an indication that insiders are showing confidence in the share price outlook of their own companies.


How can we square the circle of these two contradictory signals? Should investors be buying or selling equities?

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

Wednesday, November 7, 2018

Bullish or bearish? What's your time horizon?

Mid-week market update: The midterm election performed roughly as expected. The Democrats regained control of the House, and the Republicans held the Senate and even made some gains. Is this bullish or bearish for equities? It depends on your time frame.

Here is my outlook from a strictly chartist's viewpoint, starting with the long-term to the short-term.

From a very long-term perspective, the negative monthly RSI divergence and MACD sell signal is too worrisome to be ignored. These conditions suggest that the market is making a broad-based top.


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

Monday, November 5, 2018

How fat tails could mean fat profits

The CBOE Short-Term Volatility Index (VXST) measures volatility over a 9-days. In effect, it's the 9-day VIX, which measures 1-month volatility.


VXST closed at 21.17 last week. indicating that the market expects an annualized volatility of 21.17% over the next 9-days. When I translate that to a weekly volatility by taking the 52nd root (52 weeks in a year), it comes to 1.1%. That figure seems low for several reasons. First, the SPX rose 2.4% last week and its low to high range was 5.9%. The midterm elections on Tuesday could pose an unknown event risk. As well, we have an FOMC meeting on Wednesday and Thursday, which could also shake up markets.

The higher than normal probability of disruptive events creates fat tails for market returns. Fat tails could mean fat profits for traders.

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

Sunday, November 4, 2018

Was the market swoon made in China?

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 hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bearish*
  • 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 made in China selloff?
There is a family joke in our household that Santa Claus doesn't live at the North Pole, but in China. That's because everything he bring says "Made in China".

There have been many explanations for the recent market swoon, such as rising rates, earnings disappointment, or earnings growth deceleration from the fading effects of the tax cuts, and so on. John Authers, who is now at Bloomberg, pointed out that the recent sell-off may have been made in China.
Volatility returned to U.S. stocks again Monday afternoon. This is still, I think, largely about forced sellers as speculators such as hedge funds get used to the reality of having to operate with less leverage. But it would be wise to note that there is obviously a Chinese component to this. Since 2016, the more a company was exposed to China, the better it had done. But that has all changed in recent weeks, and those companies are doing worse.

It's starting to look that way. After Trump tweeted about his "good conversation" with Xi Jinping, and Bloomberg reported that he asked his cabinet to draft a possible deal with China (what have they been doing all along?), global markets went full risk-on Thursday night. Stock prices reversed themselves Friday after White House officials denied that there were any cabinet preparations for a trade plan with China. The market partially recovered when Trump contradicted his staff and stated that he thinks the US will reach a trade deal with China.

If the Made in China thesis is correct, investors need to adjust the macro, fundamental, and technical analytical framework from a purely domestic focus to one more global in nature. This week, I explore the underpinnings of this hypothesis, and the steps to take should it be correct.

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