Wednesday, January 29, 2020

Time to sound the all-clear?

Mid-week market update: I am old enough to remember that one of the burning question for the January FOMC meeting was be whether the Fed would make a technical adjustment on Interest Paid on Excess Reserves (IOER) by 5 basis points. (They did).

Those were simpler times! The stock market rose relentlessly, day after day, and all was well in the land.

Now that stock prices have turned back up again as I had suggested (see Buy for the Turnaround Tuesday bounce), is it time to sound the all-clear and jump back into equities again?



Based on the historical experience, here are some questions that should be answered.

The full post can be found here.



Monday, January 27, 2020

Buy for the Turnaround Tuesday bounce?

I just wanted to put out a quick note this morning. The markets are obviously very chaotic this morning and they have taken on a risk-off tone. The VIX Index has spiked above its upper BB, and its term structure has inverted. Both are indications of high fear.



Should traders step in and buy for a Turnaround Tuesday bounce? Here are bull and bear cases.

The full post can be found here.

Sunday, January 26, 2020

A market stall?

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 Asset Allocation 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: Bullish*
  • 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 market stall?
For the last two weeks, I have been warning about the extended nature of the stock market (see Priced for perfection and Froth everywhere!). Now that the advance is pausing over concerns the Wuhan coronavirus, is this the start of a market stall?

It's starting to look that way. The SPX violated its 5 and 10 day moving averages, and printed an outside reversal day. These are all indications of a possible change in trend.



Here are bull and bear cases.

The full post can be found here.

Saturday, January 25, 2020

How my "Sorcerer's Apprentice" trade got out of hand

Remember the story of the Sorcerer's Apprentice from Fantasia (click link for YouTube video)? Mickey Mouse played the role of a sorcerer's apprentice tasked to carry buckets of water. Instead of doing it himself, he stole the sorcerer's hat and animated a broomstick to carry the buckets for him. To speed up the work, he animated more and more broomsticks, until everything got out of hand.


While I don't claim to be a prescient genius who can see the future of the market, I was fortunate to spot the beta chase early. Bloomberg reported on December 18 that Stanley Druckenmiller had turned bullish, and Druckenmiller would not have gone on television to proclaim his embrace of risk if he hadn't fully entered into his entire position yet. As Kevin Muir at The Macro Tourist pointed out, "It is also probably safe to say that Druckenmiller, on the whole, is way ahead of most investors." In other words, the fast money crowd was stampeding into the reflation and cyclical recovery trade.

Nevertheless, the subsequent melt-up does feel a bit like a "sorcerer's apprentice" rally that got out of hand. Now the equity risk appetite seems to rolling over, and the steady advance seems to pausing on the news of the Wuhan coronavirus, what's next?


The full post can be found here.

Wednesday, January 22, 2020

Cruisin' for a bruisin'

Mid-week market update: Bloomberg reported that BAML strategist Michael Harnett wrote a report back on December 12 forecasting a melt-up. He believed the market's gains would be front loaded in 2020. and he projected an S+P 500 target of 3,333 by March 3. The index reached that level intra-day today, and it's still January. Are the front-loaded gains over?

Sentiment is certainly extended. II %bulls rose to 59.4% this week, and the bull-bear spread has reached the highest level since October 2018.



SentimenTrader observed that Trump's tweets about the stock market had reached a new record.


As well, Macro Charts pointed out that further analysis from SentimenTrader showed that option buy-to-open volume reached a record high for a second week in a row.


It certainly seems that the stock market is "cruisin' for a bruisin'".

The full post can be found here.

Sunday, January 19, 2020

Froth everywhere!

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 Asset Allocation 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: Bullish*
  • 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.


Will history repeat itself?
Looking to the week ahead, there is no doubt that the stock market is becoming more and more frothy. While I did alert readers to the potential for a melt-up in early December (see Buy signal confirmed: It's a global bull), the magnitude of the price surge has caught me even by surprise.
I remain bullish on an intermediate term basis. The SPX may be undergoing a melt-up in the manner of late 2017. It is unusual to see the index remain above its weekly BB for more than a week, which it did two weeks ago. The melt-up of late 2017 also saw similar episodes of upper weekly BB rides, punctuated by brief pauses marked by “good overbought” conditions on the weekly stochastic. The technical conditions appear similar today, and I am therefore giving the intermediate term bull case the benefit of the doubt.
The melt-up of 2017/18 ended in late January, 2018. Will history repeat itself? As a reminder, here is the latest cover from Barron's.


Today, market conditions are characterized by:
  • Excessively bullish sentiment: While crowded long sentiment readings are warnings of downside risk, they do not act well as timely trading indicators.
  • Waiting for a catalyst: While there has been plenty of good news, there has also been bad news lurking in the background. This brings investors and traders to ponder the question of, "Is the glass half full or half empty?"
  • Overbought markets: But overbought markets can indicate either "good overbought" markets dominated by price momentum, or overbought markets ripe for a reversal.
The full post can be found here.

Saturday, January 18, 2020

Energy: Value opportunity, or value trap?

Callum Thomas recently highlighted an observation from BAML that the market cap of Apple (AAPL) is now larger than the entire energy sector.


AAPL is now the largest stock in the index, but its weight at 4.5% is not especially extreme in the context of the historical experience. The fact that AAPL's market cap has eclipsed the aggregate weight of the energy sector is telling.



Is this an inflection point for the energy sector? Do energy stocks represent a value opportunity that should be bought, or a value trap to be avoided?

The full post can be found here.

Wednesday, January 15, 2020

The 2017/18 melt-up: Then and now

Mid-week market update: The stock market is over-extended. I warned on the weekend about the market's nosebleed valuation (see Priced for perfection). The market's forward P/E ratio of 18.4 matched the levels last seen at the 2017/18 market melt-up.


But there are some crucial differences between the last melt-up episode and the one today.

The full post can be found here.

Monday, January 13, 2020

Demographics beyond the 2020s

I received some thoughtful feedback to my recent post (see The OK Boomer decade). In particular, one reader referred me to an article by Greg Ip of the WSJ regarding the demographic headwinds affecting the American labor force.
The U.S. will run out of people to join the workforce. Indeed, this bright cyclical picture for the labor market is on a collision course with a dimming demographic outlook. While jobs are growing faster than expected, population is growing more slowly. In July of last year, the U.S. population stood at 327 million, 2.1 million fewer than the Census Bureau predicted in 2014 and 7.8 million fewer than it predicted in 2008. (Figures for 2019 will be released at the end of the month.)


Population growth is dependent on two factors, fertility rate and immigration, but the US is fading in both areas:
The U.S. has had two longstanding demographic advantages over other countries: higher fertility and immigration. Both are eroding. Since 2008, the U.S. fertility rate has gone from well above to roughly in line with the average for the Organization for Economic Cooperation and Development, a group 36 mostly developed economies...

Meanwhile, the inflow of foreign migrants to the U.S. has been trending flat to lower, while trending flat to higher in other countries. Last year, the foreign-born population expanded by a historically low 200,000, according to the Census Bureau. The exact reasons are unclear. The illegal immigrant population had stopped growing before President Trump took office. Legal immigration remained above 1 million through 2018.
Indeed, the FRED Blog recently highlighted the difference between prime age population growth in the US and Canada and hinted that the widening spread may be explained by differences in immigration policy:
While fertility rates have declined a little, immigration has helped sustain population growth. Immigrants are typically of working age, so immigration can increase the working-age population specifically.

The 63 Canadian passengers (out of a total of 167) who died on the doomed Ukrainian airliner in Tehran provides a window on Ottawa's skilled immigration policy (via Bloomberg):
They were doctors, engineers and Ph.D. students. The Canadians who lost their lives in the plane crash in Iran were mainly highly educated professionals and students, a reflection of the country’s push to attract skilled workers in the face of an aging population.

As governments around the world grapple with how to make immigration work without fanning political flames, Canada has taken a different tack, welcoming newcomers last year at the fastest pace in decades. About 12% of Canada’s post-secondary school population is made up international students, according to the country’s data agency...

“It’s really difficult to train someone on that level, integrate them and absorb them as high talent,” Parisa Mahboubi, a senior policy analyst at C.D. Howe Institute, a Toronto-based research firm, said by phone. “Doctors and dentists for example, to be able to obtain the degree that they are able to work in Canada. It takes time. It is really sad for both countries, losing those brains,” she said.

Mahboubi is Iranian-Canadian and has lived in Canada for more than 13 years.

Last year, Canada added a net 437,000 people from abroad, despite being only a tenth the size of the U.S., helping to drive its fastest population increase in decades, even with declines in fertility.

“Immigration has been a driver of Canada’s economic and cultural development. And with natural population’s slow growth, immigration contribution to growth in the labor force and even the tax base has been becoming more important,” Mahboubi said.
If labor force growth is being hampered by population growth, what does that mean for the rest of the world, and the world's long-term economic growth potential?

The full post can be found here.

Sunday, January 12, 2020

Priced for perfection

I have been in the habit of writing a weekend publication consisting of a relatively long research piece combined with a tactical trading commentary, which has at times been very long. As an experiment, I am splitting the two up. Please let me know if you prefer the format of two shorter posts, or a combined longer publication.

As the market advanced to another fresh high, the forward P/E rose to 18.4, which roughly matches the level last seen at the melt-up high of early 2018.


From a pure valuation perspective, stock prices have risen too far, too fast. Oliver Renick, writing in Forbes, justified the elevated valuations this way:
Actually, if there’s anyone for the bears to blame, it’s themselves.

Economic data in the U.S., China and Eurozone are beating expectations by the biggest gap since early 2018 and on the longest win-streak since mid-2017, according to the sum of Citi’s economic surprise indices I compiled using Bloomberg. Geopolitical risk between the U.S. and China is fading, Brexit is on some path toward completion, a dropping dollar is providing relief to emerging economies, and the global banking system is still intact despite an unnerving foray into the land of negative interest rates. So stocks are rallying as things improve. It’s as simple as that.
Macro concerns have been resolved bullishly, one by one. The reduction of macro risk has compressed risk premiums, and conversely, boosted P/E ratios.

In other words, the market is being priced for perfection.

The full post can be found here.

Saturday, January 11, 2020

A 2020 commodity review

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 Asset Allocation 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: Bullish*
  • 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 commodity bull market ahead?
It is time for a commodity review, which is timely for two reasons. First, gold bulls got excited when prices had broken out of a multi-year base last summer. They then paused and traced out a bull flag. Gold then staged an upside breakout out of the bull flag, and rose to test resistance as geopolitical tensions spiked. More importantly, the inflation expectations ETF (RINF) staged an upside breakout out of a downtrend.



The second reason is China, which has been a strong source of demand for commodities. Bloomberg reported that the market is getting excited about the prospect of a Phase One trade deal and a rebound in Chinese growth.
Investors are snapping up Chinese financial assets, encouraged by progress on trade and signs that the world’s second-largest economy may be stabilizing.

Improving confidence helped stoke a 0.5% rally in the yuan Tuesday, pushing it to its strongest level since early August. The currency punched past the key 6.95-per-dollar level, and traded on the strong side of its 200-day moving average for the first time since May. The CSI 300 Index of stocks closed at an almost two-year high as volume jumped.

The return of risk appetite in China comes amid growing optimism that Beijing and Washington may sign an initial deal on trade as soon as next week. Momentum is also improving in China’s economy, with recent data showing a recovery in the nation’s manufacturing sector continued in December.

“Risk sentiment is strong onshore,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. “There are signs of bottoming out in the economy and a more flexible monetary policy.”
Indeed, the offshore yuan has been steadily strengthening as news that a Chinese delegation is expected to visit Washington January 13-15 to sign the trade deal.


Is it time to turn bullish on gold, and commodities?

The full post can be found here.

Wednesday, January 8, 2020

Buy the cannons, sell the trumpets?

Mid-week market update: The financier Nathan Rothschild was said to have coined the phrase, “Buy on the sound of cannons, sell on the sound of trumpets”. After the New York market closed last night, the news flashed across the wire that Iran had launched missile strikes at Iraqi bases housing American and Coalition military personnel. Equity futures cratered as much as -1.6%, but by the time the dust settled, the market had opened in the green on Wednesday.

Have we had a cannons and trumpets moment?

For some perspective, Ryan Detrick highlighted analysis from Sam Stovall that documented the equity market's reaction to major geopolitical shocks since Pearl Harbor. The initial reaction and drawdown averaged -5%. If we were to exclude the events that led to major US military commitments (Second World War, Korea, Vietnam, Gulf War I, and 9/11), the average drawdown falls to -3.0%, with a median of -1.8%.


For readers who have been writing me about the Apocalyptic nature of the Iran developments, what are you so worried about?

The full post can be found here.

Monday, January 6, 2020

Fade the fear spike

Global stock markets opened the week with a risk-off tone. As the day went on, the New York market began in the red, but recovered to be positive for the day.



I wrote on the weekend that I still had a bullish tilt, but "the market action in the coming week will be highly informative of market psychology and the market's technical structure":
I interpret these conditions as the short-term bias to be still bullish. Our base case scenario is the melt-up is not over. The geopolitical shock represents a welcome test for both the bulls and the bears. Watch for a minor pause in the market, followed by further gains marked by negative divergences and an inverting VIX term structure. Those will be the signals for traders to sell. Assuming our bullish thesis is intact, the market is sufficiently oversold levels for prices to bounce.
My base case scenario seems to be playing out as expected.

The full post can be found here.

Sunday, January 5, 2020

Trading the market 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 Asset Allocation 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: Bullish*
  • 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.


Melt-up hangover ahead?
Back in mid-December, I rhetorically asked if the stock market was undergoing a melt-up (see Is the market melting up?). At the time, the jury was out on that question. Today, we have the answer. The market is exhibiting the classic signs of a blow-off.

CNBC reported that even the perennial bullish Ed Yardeni, who had a SPX 2020 year-end target of 3500, was openly worried about an air pocket.
″[A] 10% to 20% [correction] would be quite possible if this market gets to 3,500 well ahead of my schedule,” he said.
What should traders and investors do? If we were to use the late 2017 and early 2018 episode as a template, there are definite indications that the market has overrun its rising trend line and a soaring net new highs to lows, which are signs of a melt-up. By comparison, the advance in the summer of 2018 was far more orderly. From a technical perspective, there are not the same warnings of an imminent market top that we saw in early 2018. In January 2018, the market broke down without any negative RSI divergences, but did see a negative NYSI divergence. Today, there are neither RSI nor NYSI negative divergences, which could mean that this rally has more room to run.



The market's risk-off reaction to the killing of Qasem Soleimani certainly presents a challenge to the bulls. Iran has vowed to retaliate for the targeted assassination, and the geopolitical risk premium has spiked as a result. Are we headed for a melt-up hangover? We discuss the bull and bear cases.

The full post can be found here.

Wednesday, January 1, 2020

A Humble Student 2019 report card

Mid-week market update: Normally, this is the time I write a mid-week market update. I arrived back home last night from my vacation after celebrating two New Year's Eves. We celebrated NYE when we connected through Taipei just as we boarded our flight home, and we arrived on the night of December 31 after crossing the International Date Line to celebrate a second. While I was keeping half an eye on the markets while I was gone, I do not have a full trading analysis just yet.

I do know that there is a growing consensus among traders that the market is melting up. Sentiment is wildly bullish, and the market is poised to fall off a cliff as soon as everyone returns to their desks on Thursday. I would highlight an observation from Ryan Detrick to cast some skepticism on the meltdown scenario.


I will have a full analysis to address the issues this weekend. Please be patient.

In the meantime, it is time to assess the Humble Student of the Markets track record for 2019.

The full post can be found here.