Wednesday, September 11, 2019

Market breakout = FOMO surge?

Mid-week market update: Last week's upside breakout through resistance was impressive. Since then, the market has consolidated above the breakout level, but a FOMO (Fear Of Missing Out) rally has yet to materialize. In the past, such surges have been accompanied by a series of "good overbought"  5-day RSI readings, signs of buying stampedes from TRIN, only to see the rally stall when the 14-day RSI becomes oversold.



Will the upside breakout lead to a FOMO surge? Let us consider the possibilities.

The full post can be found here.

Monday, September 9, 2019

Fun with quant: Pure and naive factors

A reader alerted me to a CNBC report of a bullish analysis by Bespoke's Paul Hickey:
Bespoke Investment’s Paul Hickey believes a market hot streak is unfolding.

The independent market researcher is building his bullish case by zeroing in on the Citi Economic Surprise Index, which is built to measure optimism in the economy.

In the week ending Friday, the index flipped into positive after spending more than 100 days in negative territory. Hickey contends the move suggests investors are feeling more confident about the economy’s direction, so there’s a good chance stocks will rip higher.

“There are five prior periods that we’re talking about. One, three and six months later, the S&P was higher four out of five times,” Hickey told CNBC’s “Trading Nation” on Friday. “When we looked at when these prior streaks have ended and expectations have been ratcheted down enough, the market actually did quite well going forward.”

Quantitative analysts often struggle with a hidden problem called multicollinearity, which is the tendency of two variables that are closely correlated but have different effects. One example of multicollinearity is a person's height and weight. One way of addressing this problem is to isolate the "pure" effect of a signal from its "naive" multicollinear effect.

Here is an analysis of the pure and naive effects of the Economic Surprise Index (ESI) surge factor.

The full post can be found here.

Sunday, September 8, 2019

Should you buy the breakout?

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: 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.



An upside breakout
About a month ago, I suggested that the market was in need of a valuation reset, and outlined a price and forward P/E range for the market (see Powell's dilemma (and why it matters)). Since then, the index weakened into the top of my projected range, followed by an upside breakout from a month-long trading range.



Is it time to buy the breakout?

The full post can be found here.

Wednesday, September 4, 2019

How to trade foreign cross-currents

Mid-week market update: Global markets have taken a decided risk-on tone today on the news that Hong Kong leader Carrie Lam has withdrawn the controversial extradition bill. As well, the revolt in the British parliament has lessened the chances of a chaotic no-deal Brexit on October 31. On the other hand, the market was hit by some somber news earlier in the week, when the PMI reports revealed a slowing global economy.

In the meantime, US equity prices remain range-bound.



Should we interpret these developments as net bullish or bearish? The answer is...

The full post can be found here.

Sunday, September 1, 2019

The rise of the Fear Bubble

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: 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.



The Fear Bubble
Ever since the NASDAQ Bubble burst, investors have been looking for additional bubbles to be wary of. The subsequent housing boom created a subprime bubble, which was facilitated by cheap financing, and wild leverage in the financial system that eventually led to a crisis. Now everyone is a bubble hunter.

We now have a new bubble, a Fear Bubble. The Fear Bubble can be found across all asset classes, and it can be seen in the diving 10-year Treasury yield; the deeply negative 10-year Bund yield and the growing count of negative yielding European fixed income instruments; and even the forex market, as evidenced by the cratering NZDJPY cross, which is a bellwether of the carry trade. The big surprise is US equities have held up reasonably well in this fearful environment.



The Fear Bubble is creeping into the equity market. Yahoo Finance reported that Goldman analysis found that funds are now increasingly defensive.
The average large-cap mutual fund is Underweight on U.S. firms with the highest sales exposure to China and has been gradually cutting exposure to these stocks during the past 18 months, according to fresh data from Goldman Sachs. Being Underweight is another way of Wall Street saying it expects the U.S. trade war with China to overly hurt companies with outsized exposure to the country and likely, and its stock prices.

Goldman notes that mutual funds are also Underweight semiconductors housed in the S+P 500 , another sector being damaged by the escalating trade war with China and also Huawei.

Meanwhile, hedge funds have also tilted more defensive with their portfolios. Goldman’s research shows hedge funds are Underweight information technology (trade exposed, too) and financials (also trade exposed — worsening trade conditions are causing the Fed to consider lower interest rates, which hurt bank profitability).

Tech overall is the largest net Underweight among hedge funds, Goldman says.
What should investors do, and how should they position themselves in light of this latest bubble?

The full post can be found here.

Wednesday, August 28, 2019

Home in the range

Mid-week market update: The stock market is continuing its pattern of sideways choppiness within a range, bounded by 2825 to 2930, with a possible extended range of 2790 to 2950.



My inner trader continues to advocate for a strategy of buying the dips, and selling the rips. On the other hand, my inner investor is inclined to remain cautious until we can see greater clarity on the technical, macro, and fundamental outlook.

The full post can be found here.

Tuesday, August 27, 2019

How not to push back against Trump

Former New York Fed president Bill Dudley penned an explosive Bloomberg op-ed today:
U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?

If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach.
Dudley ended the op-ed by abandoning the normal apolitical stance of a (former) Fed official and picking sides [emphasis added]:
I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable. Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.

There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.
Wow! What were they drinking at Jackson Hole? Maybe Dudley is angling for a job at the Bundesbank.

The full post can be found here.

Monday, August 26, 2019

Hong Kong: The next financial domino?

Bloomberg reported that Carmen Reinhart had a chilling warning about Hong Kong:
Hong Kong’s rolling political turmoil could prove a tipping point for the world economy, Harvard University economist Carmen Reinhart said.

Noting an incidence of shocks that have rattled global growth, including the intensifying U.S.-China trade war, Reinhart cited Hong Kong as among her main concerns. Having previously warned that Hong Kong faces a housing bubble, she said the world economy could be hit by “shocks with a bang or with a whisper.”

“One shock that is concerning me a great deal at the moment is the turmoil in Hong Kong,” which could impact growth in China and Asia generally, Reinhart said in an interview with Bloomberg Television’s Kathleen Hays.

“These are not segmented regional effects, these have really global consequences. So what could be a tipping point that could trigger a very significant global slowdown, or even recession -- that would be a candidate, that could be a candidate,” said Reinhart, who specializes in international finance.
Indeed, the unrest has taken a toll on the local economy.

...and GDP growth expectations are tanking.


Let me calm everyone down, and you can timestamp this forecast. China will not send the troops into Hong Kong in 2019, which reduces tail-risk. At the same time, however, investors should not ignore Carmen Reinhart's warnings either.

The full post can be found here.

Sunday, August 25, 2019

How worried should you be about a 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 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: 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.



Recession fears are rising
The whiff of recession is in the air, and anxiety levels are rising. Analysis from Google Trends reveals that searches for the terms "recession" and "yield curve" have spiked.



Tariff Man is getting worried. At the nadir of last week's stock market decline, Trump tweeted, "The Fake News Media is doing everything they can to crash the economy because they think that will be bad for me and my re-election".



The New York Times reported Trump is convinced that there is a conspiracy to distort economic data and exaggerate the prospect of a recession,
President Trump, confronting perhaps the most ominous economic signs of his time in office, has unleashed what is by now a familiar response: lashing out at what he believes is a conspiracy of forces arrayed against him.

He has insisted that his own handpicked Federal Reserve chair, Jerome H. Powell, is intentionally acting against him. He has said other countries, including allies, are working to hurt American economic interests. And he has accused the news media of trying to create a recession...

Mr. Trump has repeated the claims in private discussions with aides and allies, insisting that his critics are trying to take away what he sees as his calling card for re-election. Mr. Trump has been agitated in discussions of the economy, and by the news media’s reporting of warnings of a possible recession. He has said forces that do not want him to win have been overstating the damage his trade war has caused, according to people who have spoken with him. And several aides agree with him that the news media is overplaying the economic fears, adding to his feeling of being justified, people close to the president said.
How serious are the recession risks? What should and shouldn't equity investors be worried about? We examine some details.

The full post can be found here.

Wednesday, August 21, 2019

Buy the dips, sell the rips

Mid-week market update: The SPX has been mired in a trading range for several weeks. Even as the market is once again testing resistance, it is displaying a mild positive RSI divergences, which argues that there may be further minor upside to resistance at about 2950.



Nevertheless, this pattern argues for a trading strategy of buying the dips, and selling the rips.

The full post can be found here.

Monday, August 19, 2019

Peak Brexit panic?

The Brexit headlines look dire and Apocalyptic. The Sunday Times published the leak of Operation Yellowhammer, which was the UK government's base case plan for a no-deal Brexit.


Britain faces shortages of fuel, food and medicine, a three-month meltdown at its ports, a hard border with Ireland and rising costs in social care in the event of a no-deal Brexit, according to an unprecedented leak of government documents that lay bare the gaps in contingency planning.

The documents, which set out the most likely aftershocks of a no-deal Brexit rather than worst-case scenarios, have emerged as the UK looks increasingly likely to crash out of the EU without a deal.
The newspaper went on to reported that up to 85% of truck "may not be ready" for French customs, and disruption may last up to three months. In addition, the government is preparing for a hard border at the Irish border, as current plans to maintain the Irish backstop are unrealistic and unsustainable.

In other words, it's going to be ugly, especially when Prime Minister Boris Johnson has vowed to take the UK out of the EU by October 31, with or without a deal.

The full post can be found here.

Sunday, August 18, 2019

Peering into 2020: New decade, new paradigm

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: 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.



The remarkable FAANG run
Technology stocks, and FAANG in particular, have had a remarkable run in the last decade. The chart below reveals the level of dominance.

The top panel shows the relative performance of the NASDAQ 100 (NDX) in the last 15 years (blackline). Not only is the NDX dominating the market, the NDX has also been steadily beating the equal-weighted NDX (green line), indicating that large caps within that index have outperformed small caps. The bottom panel also shows the relative performance of large cap technology (black line) and small cap technology (green line) against their respective indices. Both have led the market in the past decade.



As we peer into 2020 and the next decade, numerous signs are appearing that this cycle of technology and FAANG leadership may be coming to an end.

The full post can be found here.

Wednesday, August 14, 2019

Audit your trading the way pros do it

Traders are always interested in improving their techniques. Today, I would like to offer a framework for thinking about your trading, using the way fund sponsors evaluate investment managers, called the 5 Ps.
  • People: Who are you, and what's your experience and training?
  • Performance: How have the returns been, and what kind of risk did you take to achieve those results?
  • Philosophy: What makes you think you have an edge?
  • Process: How do you implement the edge you have on the market?
  • Portfolio: Does your portfolio reflect what you are saying about philosophy and process?
With the preface that there are never any single right answer in investing and trading, I will focus on "philosophy" and "process".

The full post can be found here.

Tuesday, August 13, 2019

A White Swan market

Mid-week market update: I am writing my mid-week update a day early because of the extraordinary volatility in the stock market.

My wife and I took a few days to go on a Danube river cruise. As we arrived in Vienna, we spied a white swan swimming beside our ship. The white swan seems to be an  apt metaphor for today's market, which is a market of known risks.



The full post can be found here.

Sunday, August 11, 2019

A correction, or trade war meltdown?

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: Buy equities*
  • Trend Model signal: Bearish (downgrade)*
  • 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.


Welcome to the Q3 tantrum
The stock market has enjoyed a terrific run in the first six months of 2019. Welcome to Q3, as the challenges become more evident. The Sino-American trade war is flaring up again and threatens to escalate into a currency war. While the Fed has turned dovish, it is becoming apparent that rate cuts are no panacea to the problem of slowing growth and a loss of business confidence.

For investors, the question of the day is, "Is this an ordinary correction, or the start of a recession and bear market?"

The full post can be found here.

Wednesday, August 7, 2019

Ripe for a counter-trend rally

Mid-week market update: My trading model has turned bullish, and there are plenty of signs that the market is ripe for a relief rally. There was the CNBC Markets in Turmoil program Monday, which as SentimenTrader pointed out, tends to mark short-term bottoms.


The full post can be found here.

Monday, August 5, 2019

USDCNY at 7? It's not you, it's me

The market has adopted a risk-off tone today because the Chinese yuan rose above the rate of 7 to 1 to the USD. The move was positioned as retaliation for Trump`s new tariffs. In addition, China has halted all purchase of American agricultural goods.


What did you expect? The controlled depreciation of CNY is not unexpected. The chart below of the Chinese yuan ETF shows that it had been unusually strong compared to the trade weighted dollar. Viewed in this context, the PBOC devaluation in 2015 was fully justified. Today's fall is reflective a decision by the PBOC to stop leaning against the market winds.



To put it differently, the broader problem isn't CNY weakness, but USD strength.

The full post can be found here.

Sunday, August 4, 2019

Powell's dilemma (and why it matters)

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: Buy 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.



What Powell couldn't say
The message from Jerome Powell's post-FOMC press conference was confusing. The overall economic outlook was positive, but the Fed was nevertheless cutting the Fed Funds target rate by a quarter-point. It was advertised as an "insurance" cut. Powell went on to spook the markets by stating that it was not the start of an easing cycle, but walked that partially back by holding out the possibility of more cuts.

What is going on?

Josh Barro, writing in the New York Times, read between the lines and outlined what Powell couldn't say. The Fed was reluctant to cut rates, but it believed that monetary policy was forced to offset the negative effects of the trade war.
One of the key factors the Fed must respond to is the specific economic mess Trump creates when he upsets the global trade regime, and the size of that mess requires a qualitative assessment. Powell can’t say “We’ll cut rates in September if Trump threatens Xi Jinping seven times on Twitter, but not if he only does it five times”; he’s going to have to make a judgment call about where we stand with trade (and about how businesses and investors are responding based on their own assessments about where we stand with trade) when the time comes.

“I would love to be more precise, but with trade, it is a factor that we have to assess in a new way,” Powell said, diplomatically. “It is not something that we have faced before and we are learning by doing,” he said at another point.
 Powell also made it clear that the Fed is staying neutral and not taking sides in the trade war:
“We play no role in assessing or evaluating trade policies other than as trade policy uncertainty has an effect on the U.S. economy in the short and medium term,” he said. “We are not in any way criticizing trade policy; that is really not our job.”
The two dissenting votes against the rate cut was evidence of the reluctance of Fed policy makers to ease interest rates. In addition, former New York Fed president Bill Dudley, who was able to speak more freely, wrote in Bloomberg Opinion that he believed that only one cut was necessary.

The full post can be found here.

Wednesday, July 31, 2019

A (deceptive) long-term buy signal

Mid-week market update: It is month-end, and the day after an FOMC meeting. Regular readers may recall that I have been monitoring the monthly MACD indicator for a long-term buy signal. Troy Bombardia recently highlighted what happens when the SPX flashes a long-term buy signal. Subsequent one-year returns have been almost all positive.


The verdict is in, the index has flashed a long-term MACD buy signal.



While the signal is constructive for the long-term outlook, let me temper your enthusiasm.

The full post can be found here.

Monday, July 29, 2019

A hawkish cut ahead?

As we look ahead to the July FOMC meeting this week, market expectations of additional rate cuts have moderated. The market is discounting a 100% chance of a quarter-point cut this week. It also expects an additional quarter-point cut at the September meeting, and a third rate cut by year-end.


The better than expected Q2 GDP report just made the Fed's job a lot more complicated.

The full post can be found here.

Sunday, July 28, 2019

Is this how a currency war begins?

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: Buy 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.



Sleepwalking into a currency war?
As we look ahead to the FOMC meeting next week, it may be the start of a synchronized global easing cycle. The ECB signaled a dovish tone last week at its meeting. The EURUSD exchange rate weakened, and the USD Index strengthened. From a technical perspective, the USD is exhibiting bullish patterns on multiple time frames. The index staged an upside breakout on an inverse head and shoulders formation on the daily chart, with an upside measured upside target of about 99.10. Conversely, EURUSD has broken down in a head and shoulders, with a downside target of about 110.



It is also forming a possible bullish cup and handle pattern on the weekly chart, with an upside target of 107.70 to 108.00 on a breakout.



In addition, the trade weighted USD has also formed a possible cup and handle pattern that stretches back to 2002, with bullish implications.


The global nature of the seemingly coordinated central bank easing begs the question of whether monetary policy is inadvertently starting a cycle of competitive devaluation. Is this how a currency war starts?

We examine this thesis from the viewpoints of the three main currency and trading blocs, Europe, China, and the US.

The full post can be found here.

Wednesday, July 24, 2019

Caution: Upside potential limited

Mid-week market update: Even as the bears were all lined up to push prices down last Friday, the bulls managed to make a goal-line stand and retain control of the tape. The index is tracing out a triangle pattern and testing resistance, while exhibiting negative RSI divergences.



In addition, other cautionary signs can be found elsewhere. While I would not necessarily discount an upside breakout to further fresh highs, current conditions argue for limited upside potential.

The full post can be found here.

Sunday, July 21, 2019

Will stock prices surge on a Fed rate cut?

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: Buy 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.



A well-telegraphed rate cut
As we look forward to the FOMC meeting on July 30-31, the market is discounting a 100% chance of a rate cut, with the probability of a half point cut at 22.5%.



Analysis from Ned Davis Research reveals that an initial rate cut and no recession has historically lit a rocket under stock prices.


What will happen this time? Should investors be piling into equities in anticipation of a market surge?

The full post can be found here.

Wednesday, July 17, 2019

A market on a knife edge

Mid-week market update: Regular readers know that I have been tactically cautious on stocks in the last two weeks, but I don't want to give the impression that I am wildly bearish. In fact, the SPX is on the verge of a long-term buy signal, marked by the positive monthly MACD reading. Should the index close at or close to current levels by month-end, it will have flashed a buy signal that has shown to be highly effective for intermediate and long term investors.



Before anyone becomes wildly bullish here, some caution may be warranted.

The full post can be found here.

Tuesday, July 16, 2019

Questions for Judy Shelton and gold standard supporters

President Trump has nominated Judy Shelton as one of the candidates for the open seats on the Federal Reserve's Board of Governors. While Shelton is a controversial nominee, she is less problematical than the previous two, Herman Cain and Stephen Moore.

While I certainly understand the reasoning behind a gold-backed currency, which is a way to control inflation, I have some difficult questions for Shelton and other supporters of a gold standard.



The full post can be found here.

Sunday, July 14, 2019

The path to a European Renaissance

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: Buy 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.



In search of the eurozone buy signal
I had a number of discussions with readers in the wake of last week's publication, Europe: An ugly duckling about to be a swan. The topics revolved mainly around further justification for buying into Europe, when US equities had performed so well in the last 10 years. In short, the questions were:
  • What is the valuation for Europe, and
  • Finding a bullish catalyst for their relative revival.
As to the first question, I offer the following chart from Robeco Asset Management.


The gulf in valuation, as measured by the Cyclically Adjusted P/E ratio (CAPE), provides some clear reasoning for American investors to diversify outside their home country. As well, European stocks look cheap relative to their own history. But that is not the entire story.

The full post can be found here.

Wednesday, July 10, 2019

Stay cautious

Mid-week market update: I highlighted a tactical trading sell signal from the VIX Index on the weekend. The VIX had fallen below its lower Bollinger Band,, indicating an overbought market, and mean reverted above the band last Friday.



As a reminder, the historical study of such episodes since 1990 show negative returns bottom out roughly a week after the signal, which would be this coming Friday.


The full post can be found here.

Monday, July 8, 2019

The limits of central bank powers

With interest rates at or close to the zero lower bound, here are a couple of examples of limits to the power of central bankers.
  • The Federal Reserve: Will it still cut rates after the strong jobs report?
  • The European Central Bank: What are the limits and price of monetary stimulus?


Will the Fed cut rates?
Let us begin with the Fed. After the blow-out Jobs Report, the bond market reacted violently and there were murmurs as to whether the Fed will still cut rates. Let me lay the first concern to rest. Historically, the Fed has telegraphed its interest rate decisions. With the market expectations of at least a quarter-point cut at the next FOMC on July 30-31, the Fed is unlikely to surprise the market.


The full post can be found here.

Sunday, July 7, 2019

Europe: An ugly duckling about to be a swan?

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: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Neutral*
* 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.



Buy the ugly duckling?
In the past few weeks, these pages have been all trade war, all the time. While that was not the original intent of this publication, headlines have conspired to turn the focus on the Sino-American relationship. Now that an uneasy truce is in place, it is time to switch gears and turn the spotlight on other unexplored parts of the market.

Finance literature since the Great Financial Crisis has been filled with the imagery of swans. Black swans. White swans. Grey swans. What is missing is the ugly duckling that grew up to be a swan. More importantly, what if an investor could identify an ugly duckling before it becomes a swan?

I have identified such a candidate. The chart below shows the relative performance of US stocks against the MSCI All-Country World Index (ACWI) in black, and the Euro STOXX 50 against ACWI in green. While there is no question that US stocks have been the winners, eurozone equities are in the process of making a broad saucer based relative bottom, and may be poised for a period of outperformance. The relative bottoming process is especially remarkable in light of the current environment of global trade uncertainty, which may be a signal of investor capitulation and the inability to respond to bad news.



The full post can be found here.

Wednesday, July 3, 2019

New highs are bullish, but...

Mid-week market update: It is said that there is nothing more bullish a stock or an index can do other than to make new highs. Both the DJIA and the SPX made fresh all-time highs today. While that may appear to be bullish, there are plenty of warning signs beneath the surface that this advance may not be entirely sustainable.

One of the missing ingredients in this rally is momentum. The SPX is exhibiting a negative 5-day RSI divergence, indicating flagging momentum even as the index made new highs. In addition, the VIX Index fell below its lower Bollinger Band, indicating an extremely overbought condition.


The full post can be found here.

Tuesday, July 2, 2019

Will the Fed still cut after the trade detente?

The results out of the Trump-Xi summit were slightly better than market expectations. Not only do we have a trade truce, a suspension of escalation, but Trump promised that American companies can sell to Huawei.

Now that we have achieved a detente of sorts, the CME's Fedwatch Tool shows the market is still discounting a 100% likelihood of a quarter-point rate cut at the July FOMC meeting, and a 21.4% chance of a half-point cut.


Is this for real? Will the Fed disappoint the markets?

The full post can be found here.

Sunday, June 30, 2019

A framework for a Sino-American relationship

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: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Neutral*
* 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 framework for Sino-American relations
The anticipation is over. The Trump-Xi summit is done. Did you think that things would be so easy, and everything could be solved in a single meeting?

The market came into weekend knowing that there was a high degree of uncertainty surrounding the summit, but the consensus was both sides would agree to a trade truce. Mytrade war factor, which measures the relative performance of companies with pure domestic revenues, was complacent about the prospects of a trade war.


The option market behaved in a similar way. The ratio of 9-day implied volatility (VXST) to one-month volatility (VIX) exhibited only mild signs of anxiety, and levels were not high compared to recent history.


The market was indeed fortunate that the outcome was slightly better than market expectations. Not only did both sides agree to a truce while discussions continue, and Trump has lifted a temporary ban on on American companies selling equipment to Huawei.

Notwithstanding the short-term results from the summit, here are some issues that investors and policy makers should think about in terms of the future Sino-American relations.
  • If this is a war, what costs is America willing to bear?
  • Is this a trade war, or something more?
  • How much support can the Fed offer, and what are the implications of the Fed's actions?
The full post can be found here.

Wednesday, June 26, 2019

What's up with gold?

Mid-week market update: Gold staged an upside breakout from a multi-year base, which got a lot of technicians excited. The point and figure chart upside targets range from about 1630 to the mid-1700s, depending on how the parameters are set.



Before you pile in and buy, let me educate you on the causes of this move, so that you can make a reasoned decision. Think of this as the case of a dog and his tail. Gold is the tail, and it is wagging very rapidly. Figure out why before taking action.

The full post can be found here.

Sunday, June 23, 2019

Caution: Market is mis-pricing trade talks 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: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Neutral*
* 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.



Signs of complacency
I have been writing in these pages that the market faced two key sources of near-term volatility. The first was the uncertainty of the FOMC decision. Approaching the meeting, the market was expecting three quarter-point rate cuts by year-end, with the first occurring in July. The Powell Fed delivered a dovish hold. The bond market reacted with a bull steepening, and stock prices soared.

The next key event is the Trump-Xi meeting on the sidelines of the G-20 meeting in Osaka. In the wake of the Fed decision, the ensuing equity market euphoria is seemingly discounting a successful conclusion to the trade talks. Our trade war factor, which is measured by the relative performance of an ETF of Russell 1000 stocks with pure domestic revenues, is indicating a dramatic decline in trade tensions.



While I have no idea how the trade talks will be resolved, some caution is warranted as the market appears to be mis-pricing trade talks risk.

The full post can be found here.