Sunday, December 16, 2018

How this bear market could end

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: Sell 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.

What happens after the sell signal?
Last week's publication generated much discussion (see A bear market is now underway). Some of the questions related to the duration and downside target in a bear market. How far can stocks fall? How long will it last? What might be the trigger for a buy signal?

To reiterate my thesis from last week. Poor technical action and a recession forecast for late 2019 or early 2020 prompted the equity sell signal. The recession forecast stems from the combination of near-recession conditions based on conventional US macro indicators, evidence of global weakness in both Europe and China, and the near certainty of a trade war which would further tank global growth.

What might turn this bear thesis around, or put a halt to the bear market? Here are a couple of possible fundamental triggers:
  • An end to the trade war
  • More stimulus underpinned by the ascendancy of MMT in fiscal policy circles
The full post can be found at our new site here.

No comments: