The wall at S&P 4200

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 that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

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 email alerts is 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.

The S&P 500 tests overhead resistance

The S&P 500 has been trading sideways since mid-April, with overhead resistance at roughly the 4200 level. While the market action in the past week has been frustrating for both bulls and bears, I believe the index should be able to advance past the 4200 level to test the old highs and probably make marginal new highs in early June. My bullish view is supported by the behavior of the VIX Index, which has convincingly fallen below its 20 dma after recycling from above its upper Bollinger Band.

The full post can be found here.

What a bond market rally could mean for your investments

The trader Alex Barrow recently observed that the sentiment backdrop is setting up for a bond market rally.

 

While Barron's is not as reliable as The Economist as a contrarian magazine cover indicator, the stars appear to be lining up for a counter-trend rally in bond prices. Here is what a potential bond market means for the other major asset classes.

The full post can be found here.

A test of the old highs?

Mid-week market update: I wrote on the weekend that one of my bullish tripwires were violations of relative support by defensive sectors (see Is the pullback over?). The bulls have largely achieved that task.

The S&P 500 appears to be on its way to a test of the old highs.

The full post can be found here.

Is the pullback over?

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 that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

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 email alerts is 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.

A slow-motion pullback

I have been writing about the possibility of a blow-off top ever since the S&P 500 rose above its rising trend line (see A blow-off top ahead?). In the past, blow-off top episodes were characterized by a spike upwards in one week, followed by a precipitous drop the next week. 

This time, the S&P 500 experienced a slow-motion pullback as it visited the site of the 50 dma during two consecutive weeks.

Is the pullback over?

The full post can be found here.

In search of the global opportunities

It is said that the only free lunch in investing is diversification. That's especially true for US-based investors in light of the elevated valuations of US equities.

With that idea in mind, let's take a quick tour around the world to see where the opportunities are, and where they're not. Geographically, the world is divided into three major trade blocs consisting of North America, Europe, and Asia, which is represented by Japan in the developed markets and China within emerging markets. For measurement purposes, the performance of each country or region is benchmarked to the MSCI All-Country World Index (ACWI) and returns are all measured in USD.

The analysis of relative performance shows that there are few clearly defined market leaders. The US has been a mixed bag. The growth-heavy NASDAQ 100 had been going nowhere against ACWI since last summer. The S&P 500 weakened against ACWI in November, recovered, but it has consolidated sideways in the last two months. Of the other regions, Japan has been weak, and so has all of the emerging markets (EM). Europe has begun to perk up in the last month.

Let's examine each of the regions in more detail. The analysis will mainly be from a technical analysis viewpoint for price signal indications of relative changes in growth patterns and outlooks.

The full post can be found here.

Here comes the retest

Mid-week market update: I wrote on the weekend (see Where's the fear?) that the relief rally that began last Thursday was unconvincing and my base case scenario called for a retest of the lows. The retest appears to be underway. 

Spikes of the VIX Index above its upper Bollinger Band (BB) were signals of an oversold market. Such episodes were resolved in two ways. Strong market rallies were characterized by price momentum and definitive violations of the VIX 20 dma (blue arrows). On the other hand, if the VIX was unable to fall below its 20 dma, the S&P 500 advance stalled and weakened again (grey bars). The current situation appears to fall into the latter category.

The full post can be found here.

Where's the fear?

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 that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

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 email alerts is 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.

A lack of panic

The stock market tumbled last Wednesday on inflation fears from an unexpected "hot" CPI report. It became oversold and rebounded. That bottom seemed a little too easy. The nagging question is, "Where's the fear?"

While a number of technical indicators became oversold, sentiment models did not show any signs of panic or the sort of seller capitulation usually found at bottoms.

The full post can be found here.

Interpreting the gold breakout

Did anyone notice the upside breakouts in both gold and gold mining stocks? In the short-term, gold may have to contend with overhead resistance at the site of its 200-day moving average (dma). While I am no gold bug, the breakout could be a technical signal of an intermediate bullish phase for precious metals.

This week, I explore the bull and bear case for gold and the macro implications of this upside breakout.

The full post can be found here.

The bears take control

Mid-week market update: I have been saying for several weeks that the stock market is vulnerable to a setback but it is a bifurcated market. Value stocks have held up well, but growth stocks were getting smoked. The bears finally broke through this week and they are showing signs that they are seizing control of the tape. Defensive sectors are exhibiting signs of relative breakouts against the S&P 500.

The full post can be found here.

NFIB conservatives grudgingly turn bullish

Investors received some data points today that is highly revealing about the economy. The most important was the NFIB small business survey. Small business sentiment is especially important as they have little bargaining power and they are therefore sensitive barometers of the economy. The other is the March JOLTS report of labor market conditions, which is a little dated but nevertheless revealing.

Small business owners tend to be small c-conservatives, and their political leanings tilt Republican. We can see that optimism fell in the wake of the election when Biden and the Democrats took control. What is remarkable is the uptick in optimism despite the leftward drift in government policy.

This is a strong indication of economic strength.

The full post can be found here.

Q1 Earnings Monitor: The jobs puzzle

This will be the final Q1 Earnings Monitor as 88% of the S&P 500 has reported and the results are mostly known. It was a solid earnings season and beat rates are well above average. Callum Thomas of Topdown Charts observed that analysts have scrambled to revise their estimates upwards in response to earnings reports and corporate guidance.

Before the bulls gets too excited, there was one puzzle in a sea of strong earnings reports. If the economy as shown by earnings is so strong, why did the April Employment Report miss expectations so badly? What are the implications for Q2 and Q3 earnings outlook?

The full post can be found here.

A stealthy growth stock correction

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 that 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 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.

Growth stocks stumble

Marketwatch reported last week that a meltdown of Cathie Wood's ARK Innovation ETF (ARKK) may spark a S&P 500 pullback.

“Many of the ARK and similar funds that hold high growth stocks are now trading between one and two standard deviations below their 50[-day moving averages] where buyers usually enter,” said technical analyst Andrew Adams in a Wednesday note for Saut Strategy. “I don’t think the market needs to go down any more, so a bounce attempt should occur given all the nearby support levels.”

Since the publication of that article, ARKK and other growth stocks have weakened further relative to the S&P 500.

“If the high-growth areas start breaking support and taking the rest of the market down with them, then maybe the 3,980-4,000 zone in the S&P 500 will be retested after all,” Adams wrote. The S&P 500 finished at 4,167.59 on Wednesday, 1% off a record close of 4,211.47 set on April 29.

A test of support in the 3,980-4,000 area would mark a pullback of only 5% to 6%, but given the damage seen in other parts of the market could lead to “some huge losses” elsewhere, he said. “I’d rather avoid that, so for now I think we can use yesterday’s lows as a test to see if that represented a selling climax in much of the market.”

The growth-heavy NASDAQ 100 bounced off a test of its 50-day moving average (dma) after being rejected twice at resistance. More worrisome is the breach of the relative support zone of NDX compared to the S&P 500 and ARKK to the S&P 500. Market internals such as the percentage of NASDAQ 100 stocks above their 50 dma is not oversold enough to signal a durable bottom.

The full post can be found here.

Do valuations matter anymore?

How expensive are US equities? Fed Governor Lael Brainard warned about "stretched valuations" in the preamble to the May 2021 Financial Stability Report:

Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year...The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.

By most measures, the market is highly extended. As an example, the S&P 500 trailing P/E looks unreal. But stock markets always look expensive when the economy recovers from a recession because the E in the P/E ratio is compressed.

Do valuations matter anymore? Yes and No. Let me explain my reasoning.

The full post can be found here.

What Sell in May really means

Mid-week market update: Should you Sell in May and go away? While many traders are familiar with the Wall Street adage, what "Sell in May" really means is the six months starting May 1 has experienced subpar returns compared to the six months starting in November 1. It's not necessarily bearish.

While it's not advisable to trade strictly on seasonality, investors might want to be extra cautious with their equity allocations this year.

The full post can be found here.

Q1 earnings monitor: Priced for perfection

We are well into Q1 earnings season. 60% of the S&P 500 has reported their results and the top and bottom line beat rates are well above average. The V-shaped recovery is complete.

Here is the more difficult question. The six largest companies in the S&P 500 reported last week and all of them beat consensus EPS expectations. Why was the S&P 500 flat last week?

The full post can be found here.

As good as it gets?

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 that 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 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.

What's wrong with this picture?

The six biggest stocks in the S&P 500 reported earnings last week. Every one of them beat consensus expectations. In addition, the FOMC reiterated its dovish stance after its meeting. These developments should all be bullish. Instead, the S&P 500 only made marginal gains while exhibiting negative divergences.

From a longer term perspective, the weekly S&P 500 chart shows the index recycling after overrunning  a rising trend line indicating a possible blow-off top. The S&P 500 then printed two consecutive weekly doji candles, each of which are signs of indecision.

What's wrong with this picture?

The full post can be found here.

The inflation red herring

Rising inflation fears are all over the headlines. From a top-down perspective, inflation pressures are clearly rising.

The Transcript, which monitors earnings calls, documented companies reporting rising inflationary pressures from supply chain bottlenecks and commodity price strength, which have the potential to create margin squeezes.

“…the inflationary pressures, particularly surrounding some of our key commodities, looks like it is going to be more of a headwind in ’22” – Coca-Cola (KO) CFO John Murphy

“…we’re watching and seeing SG&A inflation in different parts of the world and in different parts of the business, ranging from wage inflation in selective geographies. You’ve got global logistics inflation. You’ve got commodity inflation.” – Genuine Parts (GPC) President William Stengel

“In the first quarter, global semiconductors and resin shortages amplified existing supply constraints, and thus impacted our product availability. Further, we are faced with rapidly rising inflationary pressures, primarily in steel and resins. To address these issues, we swift the responses with the necessary actions to protect margins and product availability. We announced significant cost based price increase in various countries across the globe ranging from 5% to 12%” – Whirlpool (WHR) CEO Marc Bitzer

BoA also documented a surge in the mentions of "inflation" on their earnings calls.

Instead, I would argue that the inflation threat to equity prices is a red herring. Tax policy poses a stronger threat.

The full post can be found here.