Wednesday, January 16, 2019

There is no magic black box to profits

Mid-week market update: Since my publication detailing the Zweig Breadth Thrust buy signal (see A rare "what's my credit card limit" buy signal), I have been inundated with questions about the possible twists and turns of the market after such a signal. I discussed this issue extensively in 2015 (see The Zweig Breadth Thrust as a case study in quantitative analysis), my conclusion was:
What can we conclude from examining the data? Perturbing the data can yield different ZBT signals, Even discounting the different versions of the ZBT buy signals, I think that everyone can conclude that we saw a bona fide ZBT buy signal last week.

The question then becomes one of what subsequent returns were and how much can we rely on ZBT to take action in our portfolios. My conclusion, which agrees with Rob Hanna, is that the stock market tends to rise after ZBT buy signals. At worse, stocks didn't go up, so a long position really doesn't hurt you very much. The poor ZBT returns from the 1930's represent a market environment from a long-ago era that may not be applicable today and therefore those results should be discounted.
Investors and traders should not treat these models and indicators so literally. History doesn't repeat, it rhymes.

This is another reason why I am not a big fan of analogs. I recently referred to the 1962 Kennedy Slide as a possible template for the stock market, though I was thinking in terms of the bottoming pattern. From a different perspective, Global Macro Monitor highlighted a 1962-2019 analog for the stock market, which was picked up by Zero Hedge (bless their bearish hearts).


Does this look scary? Does this mean that the stock market is about to fall off a cliff, or is this just click bait?

The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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, January 14, 2019

A State of Emergency for the markets too?

President Trump has threatened to impose a State of Emergency in order to get his Wall built. Can he do that? Analysis from The Economist indicates that there is historical precedence for such actions:
Presidents do have wide discretion to declare national emergencies and take unilateral action for which they ordinarily need legislative approval. A “latitude”, John Locke wrote in 1689 (and his writings influenced the US constitution), must be “left to the executive power, to do many things of choice which the laws do not prescribe” since the legislature is often “too slow” in an emergency. American presidents have, for example, suspended the constitutional guarantee of habeas corpus (Abraham Lincoln during the Civil War), forced people of Japanese descent into internment camps (Franklin Delano Roosevelt during the second world war) and imposed warrantless surveillance on Americans (George W. Bush after the September 11th attacks). With some notable exceptions, including when the Supreme Court baulked at Harry Truman’s seizure of steel mills during the Korean War, the judiciary has usually blessed these actions. In addition, Congress has passed dozens of laws—New York University law school’s Brennan Centre for Justice has catalogued 123—giving presidents specific powers during emergencies.
Once Trump has opened has opened the door to a State of Emergency, what happens next? What does that mean for the markets?

The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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, January 13, 2019

Ursus Interruptus

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: 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.



Why I turned bullish
A number of readers were surprised by my change of recent change of view (see A rare "what's my credit card limit" buy signal), I had been adopting a cautious tone since August (see Market top ahead? My inner investor turns cautious).

The September to December decline had been highly ambiguous. I believed that unless I could pinpoint the reasoning behind the risk-off episode, it was impossible to call a market bottom. However, US equity prices had already fallen about 20% on a peak-to-trough basis, and the historical evidence indicates that such a decline is already discounting a mild recession. How much worse can it get?


In addition, technical signals such as the Zweig Breadth Thrust (see A rare "what's my credit card limit" buy signal) indicate that psychology is washed-out and turning around. The statistical odds favor high prices over a one-year time frame.

That said, I stand by my assertion of a choppy market for the next few months. Even though the odds are in the bulls favor, key risks remain unresolved and they are likely to weigh on the market in the near term.
  • Negative fundamental momentum, in the form of downward earnings revisions and a decelerating macro outlook;
  • China and the trade war;
  • Trump's likely confrontation with the Democrats may lead to a political risk premium; and
  • Credit markets remain unsettled, and monetary policy could put downward pressure on stock prices.
The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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, January 9, 2019

The Animal Spirits are stirring

Mid-week market update: In light of Monday`s Zweig Breadth Thrust signal, I thought I would do one of my periodic sector reviews to analyze both sector leadership and the implications for stock market direction.

As a reminder, Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

A review of the latest RRG chart shows a market in a bottoming process, with defensive sector leadership starting to roll over, and selected high beta and cyclically sensitive sectors becoming the emerging market leaders. While defensive sectors such as the Consumer Staples, Healthcare, REITs, and Utilities, are in the leading quadrant, they are losing relative strength. By contrast, Communication Services, led by selected FAANG stocks and high beta names, and Materials appear to be poised to become the next market leaders.


The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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.

Tuesday, January 8, 2019

Will the Fed pause in March?

In the wake of Powell's statements last Friday, the market now expects no changes in the Fed Funds rate this year, with a slight chance of a rate hike.



Contrast those expectations with the dot plot, which has penciled in two rate hikes this year.


The history of Fed policy is slow incremental changes. Has the market gone overboard on the dovish when it expects a change from two hikes to no hikes?

The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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, January 7, 2019

A rare "what's my credit card limit" buy signal

The Zweig Breadth Thrust (ZBT) is a variant of the IBD Follow-Through day pattern, but on steroids. Steven Achelis at Metastock explained the indicator this way [emphasis added]:
A "Breadth Thrust" occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A "Thrust" indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought.

According to Dr. Zweig, there have only been fourteen Breadth Thrusts since 1945. The average gain following these fourteen Thrusts was 24.6% in an average time-frame of eleven months. Dr. Zweig also points out that most bull markets begin with a Breadth Thrust.
Monday's strong NYSE breadth has pushed the ZBT Indicator into buy signal territory. Call this a "what's the limit on my credit card" buy signal for investors, though not necessarily traders.



Here is how the market has behave after ZBT buy signals. The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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, January 6, 2019

H1 2019 roadmap: Expect volatility

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: Bearish*
  • Trading model: Bullish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



A look ahead to H1 2019
It gives me little pleasure to say "I told you so". But I told you so.

I warned in early December that earnings were going to disappoint in 2019 (see 2019 preview: Winter is coming). Since then, tumbling earnings estimates have been one of the main reasons for the weakness in stock prices.


The recent warning from Apple is just setting the table for further disappointment, and the upcoming Q4 earnings season will be revealing as to how far estimates have to fall. I expect more market sloppiness in Q1 and the first six months of 2019, until the uncertainties surrounding the upcoming growth deceleration and trade war are resolved.

The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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, January 3, 2019

A simple decision vs. a decision process

I got some pushback from a reader to my weekend post (see How to spot the bear market bottom) about the FT Alphaville article indicating that former Secretary of Defense Mattis raised concerns about how the White House lacked a decision making process. The reader went on to defend Trump's decisions.

I try very hard to remain apolitical on this site. Everyone is entitled to their own opinion, but there is a distinction between a decision, and a process. Here is an example from the investment realm. Josh Brown recently ranted about people "who called the correction". Click this link if the video is not visible.


Josh Brown's main complaints can be summarized as:
  • Anyone can make a market call. If you are wrong, very few people will remember, or you can delete your articles or tweets.
  • Managing a portfolio is a much tougher task. Portfolio managers are measured by actual returns. As an example, if you decide to sell out, what is your discipline for buying back in?
  • Just because someone doesn't say anything, it doesn't mean that they are unprepared for market volatility. Most firms have compliance guidelines about what individual portfolio managers or advisors can or cannot say or publish. 
Despite my own efforts at transparency (see A 2018 report card) where I have published my track record, and owned up to bad calls, I sympathize with Brown. Josh Brown's rant amounts to distinguishing a decision (market call) to an investment process. A timely market call means little if there is no investment process behind it.



The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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, January 2, 2019

How much do the bulls have left in the tank?

Mid-week market update: Happy 2019 to everyone. The post-Christmas period started off with a bang. After bottom out on December 24, the stock market enjoyed four consecutive days of gains - until today when it was spooked overnight by a series of disappointing PMI prints.

The Caixin Manufacturing PMI fell to 49.7 from 50.2 (50.0 expected), indicating contraction. As a reminder, the Caixin PMI differs from China`s official PMI as the Caixin measures mostly the activity of smaller companies, while the official PMI measures the activity of larger SOEs.


Beijing has responded to past episodes of weakness with a stimulus program, but the stimulus announced so far has been underwhelming, as it has consisted mostly of targeted tax cuts. Anne Stevenson-Yang of J-Capital observed that China lacks the debt service ability for another round of shock-and-aw credit-driven stimulus.


The market was further hit by the news of weakness in eurozone M-PMIs, indicating deteriorating European growth. The outlook for the core European countries of France and Germany stand out as particularly problematical.


While the disappointing PMI figures put stock prices under pressure at the open, the bulls must have been encouraged by the intra-day recovery to see the market close only slightly negative on the day.

The full post can be found at our new site 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$356 per year.
  • The monthly subscription price will rise from US$24.99 to US$35.60 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.