Riding the seasonal bull

Mid-week market update: The Santa Claus rally, which begins just after Christmas and ends on the second day of the new year, began with a bang. The S&P 500 surged 1.4% on Monday to kick off the Santa rally and managed to make another marginal closing high today. The bullish impulse has been relentless.

Marketwatch documented a small sample study (n=8) indicating that Santa rallies that began with an advance of 1% or more tended to be strong.

The full post can be found here.

A 2021 report card

The year 2021 is nearly complete and it's time to issue a report card for my three investment models. Going in order of short to long time horizons, these are:

• The Trading Model;
• Trend Asset Allocation Model; and
• The Ultimate Market Timing Model.

All showed strong results.

The full post can be found here.

The anatomy of a Santa rally

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.

Has Santa come to town?

Will the real Santa Claus rally, which begins on Monday and lasts until the second trading day of January, now begin in earnest? 

I pointed out last week (see A breakout to S&P 4920?) that the S&P 500 was potentially forming an inverse head and shoulders pattern, but head and shoulders patterns are incomplete until the neckline breaks. The market staged a marginal upside breakout through resistance on Thursday. The measured objective of the inverse H&S breakout is about 4920, but that level may be overly ambitious. If the Santa rally has truly begun, one of the tactical indicators that he has returned to the North Pole is whether the VIX Index falls below its lower Bollinger Band, which is an overbought signal to take trading profits.

Here is what else I am watching.

The full post can be found here.

Was the Grinch in the house?

Mid-week market update: I am publishing this note one day early ahead of my holiday hiatus. Regular service will return Sunday with a trading note.

In the Dr. Seuss children's story, "How the Grinch Stole Christmas", the Grinch is a grouchy character who conspired to steal all the Christmas presents from the nearby village. He later has a change of heart and returns all the gifts and participates in the villagers' Christmas celebrations. 

Was the Grinch in the house? It certainly seemed that wau. The Grinch arrived last week in the form of a market pullback accompanied by weak breadth and negative momentum, capped by Omicron shutdown fears and disappointment over delays of Biden's Build Back Better fiscal stimulus program.

Even though the Grinch has stolen the presents, we may be nearing the end of the story. The market printed a Turnaround Tuesday and the S&P 500 regained its 50 dma.

The full post can be found here.

A breakout to S&P 4920?

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.

Publication schedule next week: There will be no regular strategy publiction next Saturday owing to the seasonal holidays. I will publish a tactical trading comment next Sunday.

A potential inverse H&S

A potential inverse head and shoulders pattern is forming in the S&P 500? The measured upside objective is roughly 4920. Despite the volatility from Friday's quadruple witching, the S&P 500 held support at its 50 dma.

The bulls shouldn't break out the champagne just yet. Strictly speaking, head and shoulders patterns are incomplete until the neckline breaks. If the index can stage an upside breakout above resistance, then traders can declare a risk-on tone to the market. On the other hand, if the S&P 500 were to undercut the "head" at about 4500 and invalidate the inverse head and shoulders pattern, things could get very ugly.

Here are bull and bear cases.

The full post can be found here.

A recession in 2023?

The Fed has spoken by pivoting to a more hawkish trajectory for monetary policy. The FOMC announced that it is doubling the scale of its QE taper, which puts the program on track to end in March. The December median dot-plots show that Fed officials expect three quarter-point rate hikes in 2022 and three quarter-point rate hikes in 2023.

The 10-year Treasury yield is about 1.4% today. All else being equal, the Fed's dot-plot puts monetary policy on track to invert the yield curve some time in 2023. Historically, inverted yield curves precede recessions and recessions are bull market killers.

Is the Fed on course to raise rates until the economy breaks?

The full post can be found here.

Heightened fear + FOMC meeting = ?

Mid-week market update: I don`t have very much to add beyond yesterday`s commentary (see Hawkish expectations). Ahead of the FOMC announcement as of the Tuesday night close, fear levels were elevated.

The full post can be found here.

Hawkish expectations

Ahead of tomorrow's FOMC decision, market expectations are turning bearish. Even as the S&P 500 consolidated sideways, defensive sectors are all starting to show signs of life by rallying through relative performance downtrends.

The full post can be found here.

The Fed's inflation problem

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 data and political problem

The S&P 500 experienced an air pocket in late November, sparked by a combination of the news of the emergence of the Omicron virus variant and the Fed's hawkish surprise. Since then, the Omicron news has been mostly benign. While the new variant is more transmissible, its effects appear to be less severe. Pfizer and BioNTech reported that lab tests showed that a third dose of its vaccine protected against the Omicron variant. A two-dose regime was less effective but still prevents severe illness. With the Omicron threat off the table, the market staged a strong relief rally.

The second threat of a hawkish Fed still remains. As investors look ahead to the FOMC meeting next week, the Fed faces both a data and political inflation problem. The data problem is that inflation surprise is surging all around the world.

The full post can be found here.

China gets old AND rich, but...

China has a well-known demographic problem: its working population is aging quickly. For years, many analysts have rhetorically asked whether China can get rich before it gets old. 

We have the answer. A recent McKinsey study found that China has beaten the US to become the richest nation. McKinsey found that China’s wealth rose from $7 trillion in 2000 to an astounding $120 trillion in 2020. By contrast, the US doubled its wealth to $90 trillion during the same period.

Be careful what you wish for. China becoming rich just as it begins to age is like the dog that caught the car but doesn’t know what to do next.

The full post can be found here.

Omi-what?

Mid-week market update: The most recent stock market downdraft was sparked by the news of a new virus variant that was initially identified in South Africa and the Fed's hawkish pivot. As evidence emerged that Omicron is more transmissible but less deadly, the market staged an enormous rip-your-face-off short-covering rally. Today, Pfizer and BioNTech reported that lab tests showed that a third dose of its vaccine protected against the Omnicron variant. A two-dose regime was less effective but still prevents severe illness. Here we are, the S&P 500 is within 1% of its all-time high again.

Omi-what?

In the wake of the relief rally, the bulls still face the challenge presented by next week's FOMC meeting. The risk of a hawkish Fed still looms. 

Here are the short-term bull and bear cases from a chartist's perspective.

The full post can be found here.

About that crypto crash...

Risk-off came to the crypto world on the weekend as all cryptocurrencies took a sudden tumble. Bitcoin fell as much as 20%. Prices slightly recovered and steadied, but all major coins suffered significant losses.

How should investors analyze the crypto crash and what does it mean for equity investors and other risk assets.

The full post can be found here.

In search of the next bearish catalyst

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.

Another leg down?

Here is some good news and bad news. The good news is that the S&P 500 tested its 50-day moving average (dma) while exhibiting a positive 5-day RSI divergence. That's bullish, right?

The bad news is the same pattern occurred during the COVID Crash of 2020. Even though RSI showed a series of higher lows and higher highs, the market continued to fall after a brief relief rally.

The moral of this story is that RSI divergences can be more persistent than you expect. Will history repeat itself? Will the market experience another leg down?

The full post can be found here.

Assessing the damage

Stock markets were recently sideswiped by the dual threat of a new Omicron strain of COVID-19 and Jerome Powell's hawkish pivot. Global markets adopted a risk-on tone and the S&P 500 pulled back to test its 50-day moving average.

This week, I assess the damage that these developments have done to the investment climate from several perspectives:

• Fundamental and macro;
• Omicron and Federal Reserve monetary policy; and
• Technical analysis.

The full post can be found here.

Do you still believe in Santa Claus?

Mid-week market update: Last Friday's Omicron surprise left a lot of bulls off-guard when the markets suddenly went risk-off on the news of a new variant emerging from South Africa. Stocks became oversold and I observed that "To be bearish here means you are betting on another COVID Crash." (see COVID Crash 2.0?). Even as the market staged a relief rally Monday, my alarm grew when it appeared that the consensus opinion was the bottom was in. It was a sign of excessive complacency.

Stock prices were sideswiped Tuesday by the news that existing vaccines may be of limited utility against Omicron and Powell's hawkish turn. At a Senate hearing, Powell called for the retirement of the "transitory" term as a way to describe inflation, "It’s probably a good time to retire that word and explain more clearly what we mean." As well, Powell stated that it was time for the FOMC to consider accelerating the pace of QE taper at its December meeting. The S&P 500 tanked and undercut its lows set on Friday.

Can the market still manage a year-end Santa Claus rally? Ryan Detrick of LPL Financial argues that history is still on the bulls' side.

When the S&P 500 is up >20% for the year going into December, the final month of the year is actually stronger than normal.

What about you? Do you believe in Santa?

The full post can be found here.