Sunday, March 24, 2019

How the market could melt-up

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: Neutral*
  • 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.



Melt-up ahead?
While this is not my base case scenario, there is a decent chance that the stock market may melt-up in light of the Fed's extraordinarily dovish statement last week. One parallel to the market hiccup of late 2018 would be 1998, when the Fed stepped in to rescue the financial system in the wake of the Russia Crisis.


A melt-up in the current environment would be supported by the combination of loose monetary policy and easy fiscal policy.

The full post can be found here.

Wednesday, March 20, 2019

Sector selection guide for sentiment, momentum and contrarian investors

Mid-week market update: The instant market reaction on FOMC day can often be deceptive. Instead of a general market comment, I will focus instead on analyzing sectors using sentiment, momentum, and contrarian approaches. As a measure of sentiment, John Butters at FactSet recently analyzed sectors by the number of buy, hold, and sell rankings.


The sector with the most buy ratings is Energy, but I am going to set aside Energy and Materials from this analysis as commitments to those sectors amount to a bet on commodity prices, which has historically been inversely correlated to the USD. As the chart below shows, the USD Index has been range bound since November, and so has the relative performance of Materials. The relative performance of Energy to the market has also been range bound for 2019, despite the rally in oil prices.


The full post can be found here.

Monday, March 18, 2019

FOMC preview: Peak dovishness?

The big market moving event this week on this side of the Atlantic is the FOMC meeting, which concludes on Wednesday with a statement, followed by a press conference by Fed chair Jerome Powell. Ahead of that event, let us consider what market expectations are for Fed policy.

The CME's Fedwatch Tool shows that the market does not expect any rate hikes for the remainder of 2019, and a slight chance of a cut by the December meeting.


What about the size of the balance sheet? Callum Thomas conducted an unscientific Twitter poll last week that asked respondents when they expect the Fed to pause quantitative tightening, or QT. The biggest response was Q2, followed by answers in Q3 and Q4 later this year.


As we approach the FOMC meeting, investors have to be prepared for excessively dovish expectations from Fed policy.

The full post can be found here.

Sunday, March 17, 2019

Recession jitters: The new fashion?

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: Neutral*
  • 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.



More recession jitters
I have been warning about the possibility of weakness in Q2 in these pages. Recently, I am seeing more and more evidence of recession jitters come across my desk. The respected UCLA Anderson Forecast issued a statement last week stating that economic growth is likely to slow in 2019 to 1.7% and to near recessionary conditions in 2020:
In his outlook for the national economy, UCLA Anderson senior economist David Shulman notes that while the global economy started out strong in 2018, signs of its weakening will likely be everywhere by year’s end. “The weakness is being amplified by the protectionist policies being employed by the Trump administration and the uncertainties associated with Brexit,” he writes. “This economic weakness has triggered a major contraction in global interest rates, making it difficult for the Fed to conduct its normalization policy, and has put a lid on long-term interest rates.

“After growing at a 3.1 percent clip on a fourth-quarter-to-fourth-quarter basis in 2018, growth will slow to 1.7 percent in 2019 to a near-recession pace of 1.1 percent in 2020,” Shulman adds. “However, by mid-2021, growth is forecast to be around 2 percent.” Payroll employment growth will decline from its monthly record of 220,000 to about 160,000 per month in 2019 and a negligible 20,000 per month in 2020, with actual declines occurring at the end of that year. In this environment, the unemployment rate will initially decline from 3.9 percent in January to 3.6 percent later in the year and then gradually rise to 4.2 percent in early 2021.
Antonio Fatas, the Portuguese Council Chaired Professor of European Studies and Professor of Economics at INSEAD, rhetorically asked in a blog post if low unemployment is sustainable. In other words, this is as good as it gets for unemployment and the economy? Past turns in the unemployment rate have been followed by recession.


The full post can be found here.

Thursday, March 14, 2019

The secret of crytocurrencies revealed!

For the longest time, I never "got" crytocurrencies. I never bought into the idea of an urgent need for a currency that is outside the control of the "authorities", or how you ascribe value to something that had no cash flow. If it has no cash flow, then how do you calculate a DCF value? Here is the perspective from Morningstar:
As with copper ingots, seashells, peacock feathers, and gold before it, cryptocurrency is a medium of exchange, rather than something that creates wealth on its own. It can be used to purchase cash--but it does not earn it. Try as you wish, your bitcoin receipt won't trigger dividend checks, any more than will a sheaf of peacock feathers or a mountain's worth of copper.

Assessing cryptocurrencies by calculating the value of their future payments is therefore a dead end. If cyber coins can be appraised, even tentatively, another approach must be found.

That cryptocurrencies do not generate cash does not mean that they lack worth. Seashells and peacock feathers don't go very far these days, but throughout history and across societies, gold has reliably been prized. So, too, have been rare gems.
How do you keep it safe? One of the functions of a bank, which exists within the formal financial system, is to keep you money safer than stuffing it under the mattress. Banks are there to mitigate situations of the apocryphal story of the Bitcoin pioneer who put a token $100 into BTC during its early days. Several years later, he realized he was a millionaire but he lost his password.

This also brings up the issue of the role of money and banking in managing a medium of exchange that functions as a store of value.



The full post can be found here.

Wednesday, March 13, 2019

From oversold to overbought to...

Mid-week market update: In my last post, I suggested that the stock market is headed for a corrective period, though a short-term bounce was possible this week because of its oversold condition (see Correction ahead: Momentum is dying). The market has staged a remarkable recovery this week by surging to test a key resistance level and readings are now overbought.



The key question then becomes, "Is the correction thesis dead?"

The full post can be found here.

Sunday, March 10, 2019

Correction ahead: Momentum is dying

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: Neutral*
  • 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.



Momentum is dying
I have been cautious on the near-term equity market outlook for several weeks (see Here comes the growth scare and Still bullish, but time to reduce risk). I reiterate my point for being bullish and bearish over different time frames. While I believe stock prices will be higher by year-end, investors should be prepared for some turbulence over the next few months.

We are now seeing definitive technical evidence of a softer market in the near-term. Momentum is dying, and across a variety of dimensions. One key technique that I use to monitor momentum is the behavior of different moving averages. If the shorter moving average starts to roll over while the longer moving average continues to rise, that's a sign of fading price momentum.

The chart below depicts the weekly S&P 500 chart, with a MACD histogram on the bottom panel. Note how MACD, while still strongly positive, is starting to roll over. I find that the weekly chart is useful for intermediate term price moves while filtering out the noise from daily fluctuations.



In the past, such episodes have resolved themselves with either a sideways consolidation or market downdraft. I expect that the most likely outcome is a correction that will last 1-3 months, followed by a resumption of the bull market.

The full post can be found here.

Wednesday, March 6, 2019

Consolidation or correction?

Mid-week market update: I have been cautious about the US equity market outlook for some time, and the market seems to be finally rolling over this week. The SPX violated an uptrend while failing to rally through resistance.



In the short rim, stock prices are likely to experience difficulty advancing. However, such episodes of trend line breaches can either resolve themselves through a sideways consolidation or a correction. What is the more likely scenario?

The full post can be found here.

Monday, March 4, 2019

An EM warning

For several months, the BAML Fund Manager Survey shows that global institutions have been piling into emerging market equities.


The purchase of EM equities has been a smart move, as they have been leading the market upwards. However, their time in a leadership role may be coming to an end owing to a series of disappointments. EM started to top out against the MSCI All-Country World Index (ACWI) in early February, and relative performance has been rolling over ever since.



The full post can be found here.

Sunday, March 3, 2019

The boom of 2021

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: Neutral*
  • 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.



The Great MMT Experiment of 2021
As I watched last week`s CNBC interview with Stephanie Kelton, I became increasingly convinced that 2021 could see a great experiment in MMT. In that case, the market hiccup of late 1998 could serve as a template for the recent hiccup of late 2018. In that case, the best is yet to come!


Stephanie Kelton is one of the leading academic proponents of Modern Monetary Theory (MMT). I wrote about MMT before, so I won't repeat myself (see Peering into 2020 and beyond). MMT postulates that a government which borrows in its own currency is only constrained by the inflationary effects of excessive debt, and until it hits that point, a government does not have to worry about deficits (for further background, see this Barron's interview with Stephanie Kelton).

There are a number of myths about MMT. It does not mean that deficits doesn't matter, deficits don't matter until the bond market decides it matters. There is no free lunch. It does not mean that government doesn't have to tax. Taxes are and remain a tool of fiscal policy. It is not Keynesian economics. Keynes believed that governments should try run deficits in bad times and surpluses in good times. MMT says that debt, by itself, is not a constraining factor.

With that introduction, I can sketch out a scenario in which MMT becomes the dominant ideology after the 2020 election, which could unleash a powerful fiscal stimulus on the American economy for the following reasons:
  • The rise of millennial political power;
  • A growing acceptance of government debt; and
  • Stimulus will occur, regardless of who wins the 2020 election.
Fiscal stimulus will be reflationary and equity bullish. I have no idea if the implementation of MMT will be a boon, or if Kelton will become the Arthur Laffer of the Left. The bill will be payable much later. In the meantime, investors should be prepared to party. If the results were to turn out to be catastrophic, investors can then opportunistically position themselves to profit from the cleanup.

The full post can be found here.

Wednesday, February 27, 2019

A tale of two treaties

Mid-week market update: Posting will be lighter than usual, I was hit by a nasty flu bug this week and I am barely recovering.

It was the best of times, it was the worst of times. Two treaties (actually one of them isn't a treaty but an MOU despite Trump's objections to the term) have either been signed or about to be signed.

The lessor known agreement is the Treaty of Aachen, signed Macron and Merkel, to revive the EU, and as update to the Franco-German friendship pact the Élysée Treaty signed by de Gaulle and Adenauer in 1963. The Élysée Treaty was one of the key foundations of the European Union. No sooner than the treaty was signed, Der Spiegel wrote about the bickering than nearly scuttled the agreement:
Indeed, despite all the ceremony and pomp in Aachen, fundamental differences between the Germans and the French very nearly prevented them from reaching an agreement. To make matters worse, the two countries have trouble seeing eye to eye in an area that is particularly vital to Europe's future: forging a joint defense and common policies on arms exports. German and French negotiators only barely managed to save the deal thanks to a secret supplementary agreement.
To be sure, the Élysée Treaty needed an update as the challenges for Europe have changed since 1963:
Throughout the history of the European Union, Germany and France have always served as both the leaders and the driving force of the European project. Close cooperation between the two countries is today more important than ever to counter everything from attacks by right-wing populists, to Russian subversion and American threats to impose import tariffs on European goods -- not to mention the looming Brexit chaos that threatens to engulf Europe.
Then the squabbles began:
The crisis began more than a year ago, when Macron unveiled his vision for Europe in a speech at Sorbonne University in Paris -- and received nothing but silence in response from Berlin. Since then, the two partners have quarreled like an old married couple nearly every chance they get, bickering over everything from a joint budget for the eurozone to the details of the digital services tax on major tech companies like Google and Apple and emission limits for nitrous oxide. In addition, Germany's aspirations to become a permanent member of the United Nations Security Council are only halfheartedly supported by France. "I'm afraid there are a ton of issues where we have to get our act together," a government official in Berlin complained.
One of the points of contention was over Nord Stream 2:
But their differences rarely surface as openly as they did in last week's conflict over the Nord Stream 2 natural gas pipeline. The French had long embraced a neutralité politique, as they call it, to avoid sabotaging the German-Russian plans. But only a few weeks after the declarations of mutual devotion in Aachen, the two countries came within a hair's breadth of a major diplomatic spat.

The evening before a vote on a contentious EU directive that would have severely impeded the gas project, the French Foreign Ministry released a statement that left officials in Berlin completely taken aback.

"France intends to support the adoption of such a directive," it said in the press release. The Foreign Ministry showed little sympathy for the shocked reaction in Berlin, adding that the Germans were well aware of French reservations concerning the project, "but perhaps didn't want to hear them."
Both sides have differing views of defense policy:
There's been much talk recently of Europe's "strategic autonomy," which is the official objective of EU defense policy. If the importance of NATO is likely to wane, Germany and France have no choice but to cooperate with each other, as officials in Paris and Berlin know perfectly well.

There is no lack of lofty intentions, but the reality of the relationship is an entirely different matter. "Germany and France have completely different traditions in some areas," says Michael Roth, state minister at the Foreign Ministry in Berlin.

When it comes to security issues, the Germans always initially react with restraint, and military missions by the German armed forces, the Bundeswehr, are viewed as a last resort. By contrast, France sees itself as a global power capable of restoring order around the world, and Paris views its military as a natural instrument of foreign policy.
...and on it goes.

The other "treaty" is the upcoming US-China trade agreement, which was announced by Presidential tweet on Sunday. Despite Trump's objections over terminology, it is being negotiated as a Memorandum of Understanding (MOU) rather than as a treaty. That's because treaties are subject to Congressional ratification, whereas MOUs are not.


Soon after Trump tweet, doubts began to surface. Bloomberg outlined a series of analyst reactions summarized as "Trump Tariff Delay Doesn't Mean Trade War Is Over, Analysts Say". Bloomberg also reported that much of the objection related to how credibly the Chinese could commit to maintaining a stable exchange rate, and what that precisely means:
The U.S. and China haven’t yet agreed on the critical issue of enforcement in a proposed currency deal that would ensure Beijing lives up to its promise to not depreciate the yuan, four people familiar with the matter said.

Treasury Secretary Steven Mnuchin on Friday touted the currency pact as the strongest ever, though he offered no details, following two days of high-level talks in Washington between U.S. and Chinese officials. The discussions were extended into the weekend in search of a broad trade deal to prevent the U.S. from increasing tariffs on Chinese goods next week.

President Donald Trump has previously accused China of gaming its currency to gain a competitive advantage, though his Treasury Department has repeatedly declined to name the Asian nation a manipulator in its semi-annual reports on foreign-exchange markets.

Still, the U.S. asked China to keep the value of its currency, the yuan, stable as part of trade negotiations between the world’s two largest economies. If successful, that would neutralize any effort by Beijing to devalue its currency and make its exports cheaper to help counter American tariffs, people familiar with the ongoing talks said this week.
In addition, James Politi of the Financial Times noted that ending forced technology transfer would make China a more attractive place to invest, and therefore have the perverse effect of raising the trade deficit.

International agreements tend to be well-intentioned, but the devil is in the details of their implementation. More importantly for investors, here are the investment implications of these agreements.

The full post can be found here.

Sunday, February 24, 2019

Still bullish, but time to reduce risk

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: 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.



Take some chips off the table
Don't get me wrong. I haven't turned bearish. The US equity market is no longer wildly cheap. The current forward P/E is now 16.2, which is between its 5-year average of 16.4 and 10-year average of 14.6. It is a far cry from the sub-14 multiple seen at the December lows.




When I turned bullish in mid-January 2019 (see A rare "what's my credit card limit" buy signal and Ursus Interruptus), my model portfolio became overweight equities in the snapback rally. Its equity weight would have drifted to either the top or above its asset allocation range. Now that the market is no longer cheap, it is time to trim equity weights back to a more neutral position.

This is not a bearish call. The US stock market is not going to crash, and it should be higher a year from now. This is just a call to reduce risk, and near-term risk levels are rising. Looking to the next few months, a number of risks have appeared.
  • Rising financial stress
  • Weak market internals and negative divergences
  • US-China trade deal blowback
  • USD strength is a threat to stock prices
The full post can be found here.





A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.


Wednesday, February 20, 2019

Defying gravity

Mid-week market update: For the last few weeks, I have been writing about a possible market stall ahead (see Peering into 2020 and beyond). So far, the pullback has yet to materialize, though risk levels continue to rise as the SPX approaches its resistance zone at 2800-2810.



Here are some reasons why the market might be defying gravity.

The full post can be found here.




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.


Monday, February 18, 2019

China is healing

Recent top-down data out of China has been weak (see How worried should you be about China?), but there are some signs of healing as the latest round of stimulus kicks in.



The full post can be found here.



A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.


Sunday, February 17, 2019

Peering into 2020 and beyond

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: 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.



Gazing into the crystal ball
In the past year, I have been fortunate to be right on the major turning points in the US equity market. I was steadfastly bullish in early 2018 after the correction (see Five reasons not to worry, plus two concerns). I turned cautious in early August because of the early technical warning, which was accompanied by deterioration in top-down data (see Market top ahead? My inner investor turns cautious). Finally, I turned bullish on stocks in mid-January 2019 (see Ursus Interruptus).


What's next, as I gaze into the crystal ball for 2020 and beyond?

The full post can be found here.





A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

Wednesday, February 13, 2019

Nearing peak good news?

Mid-week market update: Stock prices have been rallying as it hit a trifecta of good news. First, a compromise seems to have been made on the avoidance of another government shutdown. As well, Trump has been making encouraging noises about a US-China trade agreement. Either both sides could come to an understanding on or before the March 1 deadline, or the deadline will be extended, which is a sign of progress. Should the announcement of a definitive time and date of a Trump-Xi meeting, that would be an encouraging signal that an agreement has been made, and the formal signing ceremony would occur at the summit.

Lastly, Reuters reported that the Cleveland Fed President Loretta Mester stated the Fed is finalizing plans on scaling back or completely eliminating its program to reduce its balance sheet, otherwise known as quantitative easing:
The Federal Reserve will chart plans to stop letting its bond holdings roll off “at coming meetings,” Cleveland Fed President Loretta Mester said on Tuesday, signaling another major policy shift for the Fed after pausing interest rate hikes.

“At coming meetings, we will be finalizing our plans for ending the balance-sheet runoff and completing balance-sheet normalization,” Mester said in remarks prepared for delivery in Cincinnati. “As we have done throughout the process of normalization, we will make these plans and the rationale for them known to the public in a timely way because transparency and accountability are basic tenets of appropriate monetary policymaking.”
As a consequence, the SPX is breaking out above its 200 day moving average (dma) and approaching resistance at about the 2800 level.


I have been bullish about the likely prospect for a Sino-American trade deal (see Why there will be a US-China trade deal March 1 and The Art of the Deal meets the Art of the Possible). Should we see news of a trade deal, but that event may represent the short-term peak of good news. After all this, what other bullish developments can you think of that could propel stock prices to further highs?

The full post can be found here.




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

Monday, February 11, 2019

The Art of the Deal meets the Art of the Possible

In his 2019 State of the Union address, President Trump said he was seeking "real structural change" to China's economy:
I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.
In the next breath, he referred to the reboot of NAFTA, which only yielded minor changes:
Another historic trade blunder was the catastrophe known as NAFTA. I have met the men and women of Michigan, Ohio, Pennsylvania, Indiana, New Hampshire, and many other states whose dreams were shattered by the signing of NAFTA. For years, politicians promised them they would renegotiate for a better deal, but no one ever tried, until now.

Our new U.S.-Mexico-Canada Agreement, the USMCA, will replace NAFTA and deliver for American workers like they haven’t had delivered to for a long time. I hope you can pass the USMCA into law so that we can bring back our manufacturing jobs in even greater numbers, expand American agriculture, protect intellectual property, and ensure that more cars are proudly stamped with our four beautiful words: “Made in the USA.
While Trump positions himself as a master dealmaker in his book The Art of the Deal, it is said that politics is the art of the possible. Let us consider what is actually possible during these rounds of US-China trade negotiations.

The full post can be found here.




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

Sunday, February 10, 2019

Here comes the growth scare

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: 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.



Bullish and bearish over different time frames
I was recently asked to clarify my market views, as they appear to have been contradictory. Let me make this clear, I am both bullish and bearish, but over different time horizons.

I expect that the U.S. equity market should perform well into the end of 2019. The recent Zweig Breadth Thrust signal on January 7 (see A Rare “What’s My Credit Card Limit” Buy Signal) has historically seen higher prices over longer time frames. Exhibitions of powerful price momentum have historically been very bullish.

Troy Bombardia recently pointed out that the NYSE McClellan Summation Index (NYSI) recently exceeded 850, and past episodes have resolved bullishly. My own shorter-term study shows that the market was higher 75% of the time after one month with an average return of 1.8%, and higher 83.3% of the time after three months with an average return of 3.9%.


However, I do have some concerns about the possibility of stock price weakness over the next few months. As we pointed out last week (see Recession Ahead? Fuggedaboutit!), the market is likely to be spooked by growth slowdown as we approach Q2. Evidence of a growth scare is already emerging.

The full post can be found here.



A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

Thursday, February 7, 2019

Why there will be a US-China trade deal by March 1

Stock prices began on a sour note this morning (Thursday) on the fears of a European growth slowdown. They slid further when Trump advisor Larry Kudlow appeared on Fox Business News and said that there's "a sizable difference" between the US and China's positions in the trade negotiations. The White House went on to pour cold water on the idea of an imminent Trump-Xi summit and said that the two may not meet before the March 1 deadline.

The two most trade deal sensitive vehicles, Chinese equity ETFs and soybean prices, weakened as a consequence. However, their technical patterns remain constructive. FXI (top panel) remains in an uptrend as it tested a resistance zone after exhibiting a double bottom. Soybean prices are also in an uptrend and they are also testing resistance.


My inclination is to shrug off the negative headlines as posturing by American negotiators. There will be a trade deal. Here is why.

The full post can be found here.




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.


Wednesday, February 6, 2019

What gold tells us about stock prices

Mid-week market comment: The SPX has risen roughly 400 handles since the December 24 bottom, and it is approaching its 200 dma. Can the market stage a sustainable rally above this key hurdle?




Golden clues
For some clues, we can turn to the price of gold. The top panel of the chart below shows that gold prices tend to have an inverse correlation with stock prices, and that relationship is especially true now. When stocks rise, gold falls, and vice versa.

The full post can be found here.



A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.


Monday, February 4, 2019

Demographics isn't destiny = History only rhymes

As new data has crosses my desk, I thought I would write a follow-up to my bullish demographic analysis published two weeks ago (see A different kind of America First). To recap, I observed that America is about to enter another echo demographic boom as the Millennial generation enters its prime earnings years.


A study by San Francisco Fed researchers pointed out that this should raise demand for equities from Millennials. This is especially important as the Baby Boomers reduce their equity holdings as they retire.


I then postulated that rising savings from Millennial should usher in another golden age in US equities.

This is the part where history doesn't repeat itself, but rhymes.

The full post can be found here.




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).



We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).


The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:
  • The annual subscription price will rise from US$249.99 to US$365 per year.
  • The monthly subscription price will rise from US$24.99 to US$36.50 per month.
  • The 24-hour subscription will no longer be offered.
  • The embargo period for free content will change from two weeks to four weeks.
Remember, if you subscribe now, you will be grandfathered at the old price - permanently.