Will rising yields spook stocks?

Mid-week market update: Last week, the market was rattled by the prospect of an Evergrande default. This week, it's rising yields. Both the 5 and 10 year Treasury yields surged decisively this week and the 2s10s yield curve has steepened.

Are rising yields destined to spook stock prices?

The full post can be found here.

A classic washout bottom

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.

Panic and recovery

Last week, I wrote, "A tactical low looks near.,,[but] traders should be open to the possibility that the market may need one final panic for a tradable bottom to appear." What I didn't expect was the China Evergrande panic that gripped the market, though the subsequent relief rally was not unexpected. 

The S&P 500 fell -4% from its all-time high and rebounded by the end of the week to regain its 50-day moving average. The VIX Index flashed a buy signal when it rose above its upper Bollinger Band last week. However, traders should be aware of the caveat that rallies can stall once the VIX recycles from above the upper BB to the 20 dma. This scenario is a very real possibility as market jitters over a debt ceiling impasse, Treasury default, and a widespread government shutdown looms ahead.

The full post can be found here.

Time for a mid-cycle swoon?

The S&P 500 fell as much -4% from its all-time high in Evergrande panic pullback last week. Is the recent weakness just typical seasonal weakness or something more serious? The intermediate-term breadth looks disconcerting. The percentage of S&P 500 stocks above their 200-day moving average (dma) had been at the 90% level which indicates a "good overbought" sustained advance. This indicator has retreated below the 75% level. There have been four similar episodes in the last 20 years. Three of the four occasions resolved themselves with substantial drawdowns while the remaining one saw the market trade sideways in a choppy way.

The odds don't look good. The market may be setting itself for a mid-cycle swoon.

The full post can be found here.

The Evergrande panic bottom?

Mid-week market update: The stock market gapped down on Monday on China Evergrande contagion fears. The technical outlook darkened further Tuesday when a rally attempt failed. The markets took on a risk-on tone this morning when Evergrande issued an ambiguous statement that a coupon due on its yuan-denominated bond. An agreement had been reached with its lenders but the statement didn't specify the nature of the payment, or when it would be paid. 

While today's rally is constructive for the bulls, the S&P 500 has yet to fill in the gap from Monday's downdraft.

Was that the bottom?

The full post can be found here.

How US equity investors should trade the Evergrande panic

Global markets have taken a decided risk-off tone today. The spark is the China Evergrande implosion. Fears are rising that Evergrande is turning from a liquidity crisis in which the company doesn't have enough cash to pay its obligations, to a solvency crisis in which the company's assets are less than its liabilities if it is forced to fire-sale its properties.

In the US, the S&P 500 had been largely immune to Evergrande news until today. The index decisively violated its 50 dma. Investors are becoming spooked not only over the possibility of an Evergrande contagion but a looming crisis in Washington over the debt ceiling.

Is this a buying opportunity, or a crack in the dam that foretells disaster?

The full post can be found here.

A correction in time?

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.

The stealth correction?

For several weeks, I have been calling for a choppy sideways market, but the S&P 500 continues its upward grind. To be sure, the index pulled back about 2% last week and briefly tested its 50 dma, but its upward trajectory has been relentless. 

A discussion with another chartist raised the possibility that the market has been undergoing a stealth correction. As good technicians know, corrections can occur in price or in time. Beneath the surface, market internals have been correcting in both price and time. My equity risk appetite models have been trading sideways for much of this year.

Breadth indicators tell a similar story. While the S&P 500 Advance-Decline line has made fresh highs during the current advance, other versions of the A-D Line have been flat to weak. The weakest have been the NASDAQ and the S&P 600 small-cap A-D Lines. 

The tactical outlook is more constructive. Even as the S&P 500 tested the 50 dma and made a marginal low last Friday, all of the A-D Lines except for the S&P 500 did not make a fresh low.

The full post can be found here.

Not your father's stagflation threat

Stagflation worries are rising. A recent analysis of search activity shows that searches for stagflation have spiked compared to other inflation search terms.

The latest BoA Global Fund Manager Survey also shows that stagflation concerns are rising.

These fears are misplaced. The conventional mechanisms for stagflation are not present. Instead, investors should be prepared for a different sort of stagflation threat.

The full post can be found here.

Evergrande catastrophe = Lehman Moment?

13 years ago yesterday, Lehman Brothers fell into bankruptcy. Today, the world is watching China Evergrande collapse in a debt spiral. The overly indebted property developer told China's major banks that it won't be able to pay loan interest due Sept. 20. The company has been swamped with protests from individuals who invested in its paper through wealth management products, its employees and suppliers who haven't been paid, and numerous buyers who paid deposits for properties that haven't been constructed.

The full post can be found here.

Another test of the 50 dma

Mid-week market update: As the S&P 500 revisits the area around its 50 dma, will the weakness persist or will it be halted? The index has found good support at the 50 dma all of this year. Equally constructive is the bull flag pattern being traced out by the S&P 500, though the index hasn't staged an upside breakout through the flag yet.

The full post can be found here.

Breadth can show the way

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 BB ride ends

Last week, I pointed out that the S&P 500 had gone on a ride on the upper Bollinger Band. The upper BB ride ended with the market pulling back. What's next?

The clues to the next major move in the S&P 500 can be found in breadth indicators.

The full post can be found here.

A time for caution, or contrarian buy signal?

Recently, a number of major investment banks have published warnings for the US stock market. The strategists at BoA, Citigroup, Credit Suisse, Deutsche, Goldman Sachs, and Morgan Stanley have issued either bearish or cautionary outlooks. 

On the other hand, Ryan Detrick at LPL Financial documented the effects of strong price momentum on stock prices. 

History says that great starts to a year tend to see continued strength the final four months. “Looking at the previous top 10 starts to a year ever, the final four months have gained eight times,” explained LPL Financial Chief Market Strategist Ryan Detrick. “So should we see any seasonal weakness, we’d use it as an opportunity to buy before likely continued strength.”

In these circumstances, I am reminded of Bob Farrell's Rule 9, "When all the experts and forecasts agree – something else is going to happen." How should investors react? Turn cautious, or is this a contrarian opportunity to buy the dip?

The full post can be found here.

Two stealth breakouts you may have missed

Mid-week market update: There have been two breakouts that may be of significance. The first is an upside breakout of the SPY/TLT ratio. The ratio is pulling back to test its breakout. The SPY/IEF already staged a convincing breakout in late June. 

The full post can be found here.

A consolation prize for the bulls

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.

Cautiously bullish

Last week, I alerted readers to a possible rare Zweig Breadth Thrust buy signal (see The Zweig Breadth Thrust Watch). Unfortunately for the bulls, the ZBT failed to materialize, but the S&P 500 remains on an upper Bollinger Band ride while flashing a series of "good overbought" readings on the 5-day RSI. Historically, such advances have not stalled until the 14-day RSI becomes overbought.

You can tell a lot about the tone of the market by the way it reacts to news. The bears had a golden opportunity to seize control of the tape when presented with a huge Non-Farm Payroll miss on Friday. Instead, the S&P 500 closed roughly flat on the day.

The full post can be found here.

What China decoupling looks like

When Trump began his trade war with China, the Street's narrative was "decoupling". It took a few years, but it's finally happened. As China's economic outlook and market deteriorated, it did not drag down the economies of Europe and North America.

To be sure, the news out of China is grim. A series of "common prosperity" crackdowns, financial restructuring, and a slowing economy have combined to tank Asia's stock markets. The relative performance of the markets of China and her major Asian trading partners against the MSCI All-Country World Index (ACWI) has been weak. With the exception of Taiwan, all have broken key relative support levels indicating relative underperformance against global equities.

The good news is other developed markets have held their ground. That's what decoupling looks like.

The full post can be found here.

No breadth thrust, but a slow grind-up

Mid-week market update: I recently highlighted the possible development of a rare momentum-based Zweig Breadth Thrust buy signal (see The Zweig Breadth Thrust watch). The window for the ZBT buy signal closes tomorrow (Thursday). While the S&P 500 has been advancing slowly, we are unlikely to see the buy signal barring some gargantuan melt-up tomorrow.

However, the failure of the ZBT buy signal doesn't mean that the outlook has turned bearish. Instead, the stock market appears to be undergoing a slow grind-up.

The full post can be found here.