Saturday, February 29, 2020

A Lehman Crisis of a different sort

Remember the Lehman Crisis? The failure of Lehman Brothers marked the start of the Great Financial Crisis that destabilized and almost brought down the global financial system.

What we are seeing is a Lehman Crisis of a different sort. The Lehman Crisis of 2008 was characterized by financial institutions unwilling to lend to each other and banking system liquidity seized up.

Today’s version of the Lehman Crisis is characterized by countries and regions in lockdowns, and the propensity of individuals or groups to increase their social distance, either owing to quarantine, or by fear. This is leading to both supply and demand shocks. It is a supply shock because production and transportation are seizing up, which is leading to a collapse in global trade. Even before the onset of the COVID-19 outbreak, global trade had been weak. It is about to become even weaker.



It is also a demand shock because when social distance rises, it leads to a collapse in the demand for goods and services. As an example, France’s Finance Minister Bruno Le Maire told CNBC at the G-20 meeting that tourism had fallen 30-40%.

The full post can be found here.

Wednesday, February 26, 2020

In search of a market bottom

Mid-week market update: After two consecutive days where the market was down over 3%, I am seeing numerous statistical studies that suggest either an imminent oversold bounce, or a sentiment washout. One example is this analysis from Nomura, as published by Marketwatch.


Has the sell-off bottomed?

Subscribers received an email alert last night outlining the short-term outlook, and I would also like to introduce my "Ultimate Intermediate Bottom Spotting Model", which showed an uncanny accuracy rate of 86% in the last 15 years.

The full post can be found here.

Monday, February 24, 2020

A panic bottom?

I should thank my lucky starts. i turned bearish last Wednesday (see Why this time is (sort of) different) and tactically shorted the market just as equities topped out, followed by today's -3% downdraft.


As today proceeded, I fielded several inquiries from readers with versions of the same question, "Nice call last week. Is it time to buy, or are you covering your short?"

The full post can be found here.

Sunday, February 23, 2020

Correction ahead?

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

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


A downside break?
Is this the start of a correction? I made the point in the past (see Why the market is rallying on fear - Yes, Fear!) that USD assets were rising because foreigners were piling in because the US is the last safe haven. That was why US equities, bonds, and the USD were rising in concert. The equity market began to decouple late last week from bond prices, which are the possible signs of a downside break, but the conclusion is not definitive.



The full post can be found here.

Saturday, February 22, 2020

Don't count on a V-shaped recovery

The covid-19 coronavirus outbreak is a human tragedy, just like Ebola, MERS, and SARS. For investors, it has an economic impact. Even before the outbreak, world merchandise trade volume had been falling. New data is likely to show that the outbreak disrupted global supply chains sufficiently to further depress global trade.


The market consensus initially expected the effects of the virus to top out in mid or late February, and they consequently penciled in a V-shaped recovery. As China slowly returns to work amidst draconian measures to control the outbreak, doubts are rising on whether China's economy could bottom out in Q1. The authorities would have to be satisfied that the worst of the infection is over before giving the all-clear for everyone to return to work. An economy as large as China's will not be able to restart itself overnight, and the process will take time. In the meantime, much damage has been done, both to global supply chains and Chinese company balance sheets, and a wave of insolvencies is likely to follow. The only question is the magnitude.

As well, fear has to fade for business confidence to return to normal. The latest statistics from Johns Hopkins CSSE shows that the growth of covid-19 cases is not under control outside China. Equally disturbing is the challenges faced by two First World economies, Japan and Singapore, to deal with the outbreak. What happens when the infection appears in countries with health care systems that are less prepared?



It is therefore difficult to believe that the economic impact will bottom out in Q1, or the economic recovery will be V-shaped.

The full post can be found here.

Tuesday, February 18, 2020

Why this time is (sort of) different

Mid-week market update: Some elements of the market have recently taken on a definitive risk-off tone, such as yesterday's upside breakout in gold that was achieved in spite of a similar upside breakout in the USD Index.



That has to be equity bearish, right? Well...this time is (sort of) different.

The full post can be found here.

Monday, February 17, 2020

How to trade a frothy momentum market

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

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


A momentum driven market
As the stock market continues to grind to new all-time highs, there is mounting evidence that this is a strong price momentum driven market, as evidenced by the breach of the upper monthly Bollinger Band. As well, Arthur Hill pointed out that 8 of the 11 equal-weight sector ETFs recorded new highs last week, as did SPY and the equal-weighted equivalent RSP. While such episodes have signaled tops in the past, they have also been a key characteristic of strong uptrends.


How should investors and traders react to such circumstances?

The full post can be found here.

Saturday, February 15, 2020

The guerrilla war against the PBOC

The enemy advances, we retreat
In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like "whatever it takes" moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings, and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China's stock markets stabilized and recovered, and so too the markets of China's Asian trading partners.



However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC by using Mao Zedong's principles of war. The first principle is "When the enemy advances, we retreat."

Indeed, when the PBOC flooded the market with liquidity, stock prices went up. But that's not the entire story.

The full post can be found here.

Wednesday, February 12, 2020

Why the market is rallying on fear - Yes, Fear!

Mid-week market update: What should investors do when faced with competing narratives and historical studies with opposite conclusions?

The major market indices made another all-time high today. Ryan Detrick pointed out that ATHs tend to be bullish. That's because of the price momentum effect that is in force which propels stock prices to new highs.


On the other hand, SentimenTrader observed last week that the market has flashed another series of Hindenburg Omens. Subsequent to that tweet, Tom McClellan pointed out that there was another Hindenburg Omen on Monday. Historically, clusters of Hindenburg Omens have resolved with a bearish bias.



Should traders be bullish or bearish?

Here is some out-of-the-box thinking. I would argue that the stock market rally is actually the result of a fear. Yes, you read that correctly - Fear.



The full post can be found here.


Monday, February 10, 2020

The ESG challenges to energy investing

I received a ton of comments from my post three weeks ago on the energy sector (see Energy: Value opportunity, or value trap?). I engaged in multiple long email discussions with several readers on different aspects of that post. This is a follow-up to the publication address two main issues that were raised:
  • The impact of the solar cycle hypothesis on the Earth's climate, and as a bullish catalyst for the energy sector
  • How to investing in energy stocks in the new ESG era.
The full post can be found here.

Sunday, February 9, 2020

Where's the sentiment reset?

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: 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.


Is sentiment too bullish?
Mark Hulbert warned about excessively bullish sentiment leading to a market decline in a Marketwatch column on February 1, 2020. At the time, Hulbert wrote that he would like to see bullish sentiment to retreat and the Wall of Worry to rebuild.
It would be a good sign if they rush to the sidelines and then quickly jump onto the bearish bandwagon. In contrast, it would be a bad sign if they stubbornly hold onto their bullishness in the wake of the decline. In that case, contrarians would expect that an even deeper correction would be necessary to rebuild the Wall of Worry that would support a new leg upwards.
The market did fall briefly, but rallied in the face of massive PBOC market support. In a follow-up column last week, Hulbert issued a second warning about excessive bullishness. His Hulbert Stock Newsletter Sentiment Index fell, but rose again into the top 80% of bullishness. Such readings have historically been resolved with subpar returns over a 1-3 month time frame.


The stock market advance appears to be unsustainable on an intermediate term basis, but even Hulbert's analysis shows a return of 0.0% over one month, which is hardly a wildly bearish forecast. The bigger question is, how vulnerable is the market in the short run?

It would be very easy to turn tactically bearish here, but let us turn conventional technical and sentiment analysis on its head. It is entirely possible that we are undergoing a period where sentiment resets briefly, and stock prices rally to even more highs as pictured by my green annotated periods.


How vulnerable is the market? Has sentiment reset sufficiently for the market to make another run at fresh highs?

The full post can be found here.




Saturday, February 8, 2020

Is the melt-up back?

What should investors make of the market's recent air pocket and subsequent recovery? John Autthers, writing at Bloomberg, proposed an analytical framework where investors view the coronavirus outbreak mainly as a China problem. The MSCI World with China exposure (blue line) has been far more volatile than the MSCI World Index (white line). The companies with high China exposure have tanked in response to the virus scare and dramatically underperformed global stocks.



While global investors fret about the economic impact of China's slowdown in the wake of the coronavirus infection, the PBOC has responded with a tsunami of liquidity to support the market. Moreover, extraordinary measures have been put in place to forbid short selling, and to discourage major shareholders from selling their shares. In response the Asian stock markets have rocketed upwards after a brief corrective period, and global markets have followed suit with a risk-on tone.



These policy responses beg two obvious questions. Is the melt-up back? If the market is focused mainly on China and the coronavirus, should investors even try to fight the PBOC?

The full post can be found here.

Wednesday, February 5, 2020

An animal spirits revival?

Mid-week market update: The animal spirits are back. Just look at the price action in Tesla.



In this environment, it is no surprise that the stock market is embarking on a test of the old highs.

The full post can be found here.

Monday, February 3, 2020

A key test: The Zero Hedge market bottom?

The website Zero Hedge has built a successful franchise on the internet highlighting bearish and market crash narratives with a series of half-truths, misinformation, and conspiracy theories. A recent screenshot of Zero Hedge headlines gives you an idea of their editorial bias.


In other words, it occupies the supermarket tabloid niche of financial news.

A recent Buzzfeed story revealed that Zero Hedge, which had 670,000 followers, was permanently banned from Twitter for violating its platform manipulation policy. In one article, Zero Hedge accused a Chinese scientist of releasing the coronavirus from a bioweapons lab, released the scientist's email and phone number, and invited readers to "pay the scientist a visit".

Notwithstanding the controversy over Twitter's actions, could this incident may be a sign of the Zero Hedge market bottom, marked by peak hysteria over the coronavirus threat.

Here are the bull and bear cases.

The full post can be found here.

Sunday, February 2, 2020

Whistling past the graveyard (doji)

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 disappointing January
The month of January turned out to be a disappointing. Stock prices roared ahead out of the gate and pushed major market indices to fresh all-time highs. By the end of the month, the market had retreated to end the month slightly in the red. More importantly, the monthly chart printed a graveyard doji, which is often interpreted as a sign of trend reversal.


Steve Deppe studied past instances when the market rose 3% or more, set a fresh new all-time high, but finished in the red for the month. While the sample size is not high (N=10), the historical results reveal a heightened probability of large drawdowns in February.


The melt-up hangover may just be beginning.

The full post can be found here.

Saturday, February 1, 2020

Trading the coronavirus panic

Mark Hulbert made a terrific point last week. The coronavirus was not the real reason for the market sell-off. The real reason was excessively bullish sentiment. The coronavirus news was just the excuse.
That real culprit is market sentiment: Short-term stock market timers, on balance, have been extraordinarily bullish for a couple of months now. Even a few days of such excessive bullishness would normally lead to market weakness, much less a few months of such exuberance. So conditions were ripe for a pullback.

If it weren’t the coronavirus, in other words, something else would have been the straw breaking the camel’s back.

I had made a similar point in the past. Fast money positioning had become too extreme. Readings were at a crowded long, and portfolio leverage was highly elevated. The market was just ripe for a bearish catalyst.

In that case, how should you react to the coronavirus pullback?

The full post can be found here.