What's a safe withdrawal rate?

I was recently asked my opinion on what a safe withdrawal rate for a deferred-tax pension plan managed with the Trend Asset Allocation Model. 

As a reminder, the Trend Model has shown equity-like returns with balanced fund-like risk. The latest update of the model shows another strong month, with a one-month return of 2.5% compared to 1.7% for the 60/40 benchmark and a YTD return of 18.0% compared to a 60/40 return of 12.8% (full details here). Model returns are based on out-of-sample signals, though based on a hypothetical asset mix.

The full post can be found here.

The Zweig Breadth Thrust watch

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 possible ZBT buy signal

The Zweig Breadth Thrust buy signal is a rare momentum buy signal that only occurs once every few years. Steven Achelis at Metastock explains 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 [sixteen] 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.

The ZBT window began on Friday August 20, 2021. It has 10 trading days, or until September 2, 2021 to flash a ZBT buy signal.

Besides a possible ZBT buy signal as an indicator of powerful price momentum, here is what else I am watching.

The full post can be found here.

A rate hike roadmap

Now that a QE taper announcement is more or less baked-in for this year, the next question is when the Fed will raise rates. The July FOMC minutes highlighted the point that the criteria for a taper decision is entirely different from that for a rate hike.

Several participants emphasized that an announcement of a reduction in the Committee's pace of asset purchases should not be interpreted as the beginning of a predetermined course for raising the federal funds rate from its current level. Those participants stressed that the Committee's assessment regarding the appropriate timing of an increase in the target range for the federal funds rate was separate from its current deliberations on asset purchases and would be subject to the higher standard, as laid out in the Committee's outcome-based guidance on the federal funds rate. 

While the rate hike decision process can be analyzed in terms of the Fed's Flexible Average Inflation Targeting (FAIT) framework, it also depends on the Powell Fed's newfound focus on inequality and employment. How does the Fed define full employment? In particular, a comparison of the US prime-age employment to population (EPOP) to Canada's is a laboratory in monetary and government policies in light of the similarities in age (though not race) demographics. Canadian prime-age EPOP has been higher than the US in the last two expansion cycles and it recovered faster from the pandemic when compared to each country's respective 2019 peaks.

All of these questions are important considerations for the analysis of Federal Reserve monetary policy.

The full post can be found here.

The market endures a summer squall

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 risk-off episode

A week ago, I highlighted the risk of stock market weakness because the correlation between the S&P 500 and VVIX, or the volatility of the VIX, had spiked. The pullback duly arrived and the S&P 500 briefly tested its 50 dma. 

In the past, S&P 500 and VVIX correlation spike sell signal sell-offs have bottomed when the VIX Index spiked above its upper Bollinger Band. Barring a new and unexpected shock, market internals have sufficiently deteriorated that a short-term bottom is near.

If I am right in my tactical assessment, the minor panic last week was just a brief summer squall.

The full post can be found here.

The market risk hiding in plain sight

As the infrastructure and budget bills make their way through Congress, I was surprised to see that the latest BoA Global Fund Manager Survey did not mention a corporate tax increase as a key risk to the S&P 500. 

The full post can be found here.

The USD's exorbitant privilege

For the crypto folks who embrace the libertarian philosophy of using a medium of exchange not issued by any national government, here are a couple of reminders of what the USD "exorbitant privilege" means in real life. 

The full post can be found here.

A fear of Delta?

Mid-week market update: Stock prices have taken a minor and uneven risk-off tone this week. The pullback has been attributable to fears over a Delta variant-related slowdown. 

I beg to differ. Instead, the weakness can be better explained by market technical conditions. The 5-day correlation between the S&P 500 and VVIX, or the volatility of the VIX, had spiked recently. Past instances have resolved themselves with minor bearish episodes in the last three years.

The full post can be found here.

Prepare for a 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. 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.

Growth leadership faltering

Changes in macro conditions are setting up for a growth stock correction. The strength in the 10-year Treasury yield is putting downward pressure on growth stock leadership. The growth style is a duration play because it is more sensitive to changes in interest rates than value. 

In addition, I made the case yesterday for a value style revival which is negative for the growth stock leadership (see Constructive value and reflation green shoots). 

The full post can be found here.

Constructive value and reflation green shoots

One of my principal tools of market analysis is the use of trend-following techniques to spot changes in macro conditions. My models are seeing some early green shoots in the value and reflation trade. It began with the stronger than expected July Jobs Report. The subsequent tame core CPI print also helped to reinforce the narrative of non-inflationary growth. As a consequence. the value/growth ratio is turning up after exhibiting a positive RSI divergence and relative internals improved. The Russell 1000 Value Index even rallied to a fresh all-time high.

The economic winds are shifting and it may be time for investors to trim their sails.

The full post can be found here.

What are the risks to this market?

Mid-week market update: I have been relatively constructive on the stock market in recent weeks, but I am going to do something different this time. Aside from the obvious negative RSI divergences to the rising S&P 500, what are the downside risks to this bull?

There are many to consider.

The full post can be found here.

Trading the gold flash crash

Gold prices crashed overnight when a flood of sell orders hit the illiquid Asian markets. Prices fell below the 1700 mark but recovered. This has the smell of a margin clerk liquidation, which is often the sign of capitulation. 

Is this an opportunity to buy gold?

The full post can be found here.

A range-bound August?

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 holding pattern

Regular readers will know that I have been calling for a sideways holding pattern for the S&P 500. That remains my base case scenario for the rest of August. Continuing concerns about the Delta variant stalling growth are likely to put downward pressure on risk appetite. On the other hand, an improving EPS growth outlook is putting a floor on stock prices.

To be sure, the S&P 500 made a marginal new high on Friday, but the market's less than enthusiastic reception to Friday's strong jobs report is indicative of the market's internals and makes my case that the stock market is likely to be range-bound. On the surface, the S&P 500 advance. Looking under the hood, the yield curve steepened and cyclical and value stocks rallied, while growth stocks fell.

The full post can be found here.

The brewing Lehman Crisis in Crypto-Land

There has been much debate over the usefulness and viability of crypto-currencies. Notwithstanding my opinion on the topic, the current crypto-currency ecosystem has an Achilles Heel of Lehman Crisis proportions. 

It's called Tethers, which is a stablecoin used as a critical piece of plumbing in the offshore crypto markets. This week, I explain:

• What is a digital token, or stablecoin?
• Why do stablecoins matter in Crypto-Land?
• The vulnerability of Tether
• Possible solutions

The full post can be found here.

Can stocks avoid the seasonal swoon?

Mid-week market update: Evidence of a negative seasonal pattern has been circulating on the internet for the S&P 500. As one of many examples, LPL Financial pointed out that the S&P 500 has typically topped out in early August and slides into late September.

While past performance is no guarantee of future returns, will 2021 repeat the past seasonal pattern? Can the stock market avoid negative seasonality?

Here are the bull and bear cases. The full post can be found here.

A whiff of rotation in the air

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.

Unanswered questions

As the S&P 500 advanced to fresh highs despite widespread evidence of negative RSI and breadth divergences, the market faces a number of unanswered questions that may be indicative of possible impending leadership rotation.

How the market resolves those questions will be clues to the next major leg for stock prices.

The full post can be found here.