Waiting for the FOMC

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.

An asset rotation review

A review of the asset returns on an RRG chart and found a possible inflection point for both equity market leadership and bond prices. As a reminder, I use the Relative Rotation Graphs, or RRG charts, as the primary tool for the analysis of sector and style leadership. As an explanation, RRG charts are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which change to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

Here are the main takeaways from the analysis of daily asset returns using a 60/40 US stock/bond mix as a benchmark for USD investors.

• The S&P 500 is in the leading quadrant and shows no signs of weakness. The market is on track for a rally into year-end. The open question is whether value or growth stocks will lead the charge.
• EAFE, or developed market international stocks, is in the improving quadrant, but price momentum is weakish.
• MSCI China is also in the leading quadrant, but it is showing some signs of weakness. Investors are returning to Chinese equities but face considerable risks.
• EM xChina has fallen into the lagging quadrant.
• Bond prices are in the lagging quadrant but showing signs of improvement. In particular, long Treasuries (TLT) is on the verge on rising into the improving quadrant. Much depends on the language from the FOMC meeting in the coming week.

The full post can be found here.

Making sense of the Great Resignation

An unusual labor market shift has occurred since the onset of the pandemic. Employers everywhere are complaining about a lack of quality employees. The Beveridge Curve, which describes the relationship between the unemployment rate and the job opening rate, has steepened considerably. 

Workers are not returning to their jobs, at least not without considerably more incentives. Some factors that affected labor supply are temporary and should moderate over time, such as the fear of catching COVID-19 and childcare availability, but many people are reassessing their priorities in the wake of the pandemic. They call it the "Great Resignation".

The full post can be found here.

A brief pause in the advance

Mid-week market update: The S&P 500 had been on an upper Bollinger Band ride, but the ride may be over. In the past year, such events have resolved themselves in either a sideways consolidation or pullback. As well, the 14-day RSI has reached levels consistent with a pause in the advance. 

Based on recent history, we should know about the magnitude of the pullback within a week. Initial support can be found at the breakout level of about 4540.

The full post can be found here.

What more could the bulls ask for?

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.

An all-time high

It is said that there is nothing more bullish that an all-time high. The S&P 500 did just that on Thursday. Neither of my warning signals have sounded warnings just yet. The 14-day RSI is not overbought. As well, the VIX Index has not fallen below its lower Bollinger Band.

What more could the bulls ask for?

The full post can be found here.

Where are we in the market cycle?

Where are we in the market cycle? The accompanying chart shows a stylized market cycle and changes in sector leadership.

• Bear markets are characterized by the leadership of defensive sectors such as healthcare, consumer staples and utilities.
• Early-cycle markets are sparked by the monetary stimulus or the promise of monetary stimulus. The market leaders in this phase are the interest-sensitive sectors such as financials and real estate.
• Mid-cycle markets are characterized by economic expansion. Expect rotation into consumer discretionary stocks, followed by capital-intensive industrials and technology.
• Late-cycle markets will find investors become increasingly concerned about inflation. Inflation hedge sectors such as energy and materials lead during this phase.
• In response to rising inflation expectations, either the central bank or the market tightens monetary policy, which resolves in a market top and a bear market.

Please be aware that while the psychology of a market cycle parallels an economic cycle, they are not the same. Since Wall Street's attention span approximates that of a 16-year-old, it is not unusual at all to find several market cycles compressed within a single economic cycle.

What I have described is an idealized market cycle. This economic and market cycle is very different from others. The last bear market was not sparked by monetary tightening, but the exogenous effect of a pandemic. The market leaders of the 2020 bear were not the usual defensive names. Instead, investors piled into work-from-home beneficiaries consisting mostly of Big Tech stocks.

With that preface in mind, where are we in the psychology of the market cycle?

The full post can be found here.

Another upper BB ride

Mid-week market update: The S&P 500 has been undergoing a ride on its upper Bollinger Band (BB), which historically has been a bullish sign of price momentum. The bigger question is how the tape will behave when the upper BB ride ends.

The full post can be found here.

Opportunities in energy and gold

As the CRB Index decisively broke out to a new recovery high while breaking through both a horizontal resistance level and a falling downtrend that began in 2008, a divergence is appearing between crude oil and gold. The oil to gold ratio has strengthened to test a falling trend line. 

This test of trend line resistance could present some opportunities for traders.

The full post can be found here.

Market liftoff?

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.

To boldly go?

Last week, I characterized the stock market as like a rocket on a launch pad. Last week's events also featured William Shatner, the actor who played Captain Kirk in the original Star Trek series, being blasted into space. Now that Captain Kirk has gone into space, will equities follow?

Let's take a look. One of the bullish tripwires I outlined was for the S&P 500 to decisively regain its 50 dma. The index convincingly breached the 50 dma and it is now testing a resistance zone, which is positive.

However, traders are cautioned to monitor the VIX Index. In the past, VIX breaches of the lower Bollinger Band have been overbought signals when market rallies have temporarily stalled in the past.

The full post can be found here.

Team Stagflation, or Team Transitory?

Stagflation fears are rising again. It's a natural reaction to the short-term data. September headline CPI came in hot, though the core CPI print was in line with expectations and PPI was soft. Inflation expectations are spiking...

...while the Atlanta Fed's GDP nowcast is plummeting. Consumer confidence is dropping, driven by supply chain bottlenecks and rising costs. The combination of these factors is becoming a threat to corporate profits.

As a QE taper is more or less baked in for November, these worries have unsettled markets as the narrative is that the Fed could be making a policy mistake. Should investors cast their lot with Team Stagflation, or Team Transitory?

The full post can be found here.

An excess of caution?

Mid-week market update: Is market psychology cautious enough? A recent Deutsche Bank survey of investors reveals that not only is a correction the consensus, correction sentiment rose between September and October.

The full post can be found here.

What rhymes with 2011?

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 2011 template

The market action today is somewhat reminiscent of 2011. Then, the macro backdrop was characterized by a debt ceiling impasse in Washington and a Greek Crisis in Europe that threatened the very existence of the eurozone. I can remember endless European summits and plans to make plans for Greece. The news flow worsened and it seemed like no one was in charge in Europe, but the S&P 500 tested support multiple times while exhibiting a series of positive RSI divergences. The logjam was finally broken when the ECB stepped in and announced its LTRO program. Stocks bottomed and never looked back.

History doesn't repeat itself, but rhymes. Today, the market has been beset by a debt ceiling impasse in Washington and concerns over inflationary pressures which may or may not be transitory from supply chain bottlenecks. The logjam appears to have been temporarily broken when the Democrats and Republicans agreed to kick the can down the road and revisit the debt ceiling question in December. Stock prices duly staged a relief rally.

Does 2011 rhyme with 2021?

The full post can be found here.

Will the energy price surge cause a recession?

As energy prices surged around the world, I had an extensive discussion with a reader about whether the latest price spike could cause a recession. This is an important consideration for investors as recessions are equity bull market killers.

The evidence isn't clear. On one hand, every recession in the post-War period (shaded grey zones) has been accompanied by rising oil prices. On the other hand, interest rates were also rising in virtually all of the cases.

The full post can be found here.

Unsettling news from Crypto Land

The NY Times recently published a note with the headline, "Crypto regulation heats up".

The wrangling over spending bills and debt-ceiling dramas may be generating the biggest headlines in Washington, but the race to regulate the fast-growing cryptocurrency industry is also ramping up. Here’s a tour of some of the key developments this week:

Activist groups target crypto’s environmental impact. Today, more than 70 nonprofit groups, including the Sierra Club, the Open Markets Institute and the Action Center on Race and the Economy, urged Congress to consider crypto’s energy use when writing new rules for the sector. “As you explore legislative and regulatory responses to ensure investor protection in the industry, it is critical that you also consider the financial stability risks that climate change presents,” they wrote in a letter shared exclusively with DealBook that took particular issue with many cryptocurrencies’ energy-intensive “mining” process.

Industry players make the case for balance. The venture capital firm Andreessen Horowitz submitted a proposal to the Senate Banking Committee outlining its view on the future of digital assets and decentralized technology. The firm, which runs a big crypto fund, urged lawmakers to “ensure that the private sector can experiment and build” as it protects against “the real downside risks that might otherwise harm individuals.”

They also complain about burnout. Brian Armstrong, the C.E.O. of Coinbase, a large crypto exchange, tweeted yesterday that company chiefs in the U.S. were under too much pressure from officials, the news media and the public. He likened this to the crackdown on companies in China, “putting something that gets too successful in its place.”

Crypto notches a win. The S.E.C. approved Volt Equity’s exchange-traded fund that tracks companies whose values swing with Bitcoin prices, with an emphasis on firms that hold Bitcoin on their balance sheets. It’s not quite a pure Bitcoin E.T.F., but it brings the industry closer to that long-sought goal. Investors want “exposure to Bitcoin price movement,” Volt Equity’s Tad Park told DealBook, without necessarily buying crypto directly.

There is a more serious problem that they didn't cover. I recently published a post raising questions about Tether (see The brewing crisis in Crypto-Land). A Tether is a stablecoin used regularly in the offshore market to trade cryptocurrencies. They are supposed to be backed 1-for-1 to the USD. There are now $69 billion Tether in circulation. This would make Tether one of the biggest banks in the US, except that it's not a bank and not subject to regulation.

A recent Bloomberg article traced down Tether's billions and found some disconcerting results.

The full post can be found here.

The risks to Big Tech

Mid-week market update: As the S&P 500 continues its test of support while exhibiting a positive RSI divergence, one important consideration is what happens to large-cap technology stocks. Large-cap tech and FANG+ account for about 45% of S&P 500 weight, and further weakness could prove to be a drag for the overall market, no matter what happens to the rest of the index.

The full post can be found here.

Q3 earnings season preview

The recent pullback in the S&P 500 has deflated the forward P/E to 20.1 as of close last Thursday, which is in the bottom of the post-COVID Crash recovery range. The P/E derating is not surprising as bond yields have risen to put downward pressure on P/E ratios.

What's next? The upcoming Q3 earnings season will be a test for both bulls and bears. The key question for investors is whether the E in the forward P/E ratio rises fast enough to support stock prices and offset rising rates?

The full post can be found here.

A Q4 meltup 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 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.

Positive seasonality ahead

If history is any guide, stocks are expected to be bottom out in early October and begin a period of seasonal strength into year-end.

 

What are the odds of a melt-up for the rest of 2021?

The full post can be found here.

Q4 sector review: Assessing the yield surge

In light of the recent surge in global rates, it's time for another review of sector leadership. I will conduct the review in two ways. First, the market will be viewed through a cross-asset framework. Rising yields and a steepening yield curve have been bullish for the value/growth cycle in the past, will this time be different?

As well, the market will be viewed through a conventional technical analysis lens.

The full post can be found here.