How commodity tail wags the stock market dog

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 bsoe 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: Bearish*
• 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.

How strong is the commodity bull?

How far can the inflation trade run? A long-term chart of the conventional inflation hedge gold shows a bullish cup and saucer pattern with strong upside potential.

By contrast, the CRB Index approaching resistance appears overbought and extended.

Here's why this matters. An analysis by KKR concluded that the US economy is in a late cycle expansion, which is a period of decelerating equity returns. As the Fed raises rates to choke off inflation pressures, the inflation-sensitive commodity bull will fade and take the stock market down with it as economic growth decelerates.

In effect, we have a case of the commodity tail wagging the stock market dog.

The full post can be found here.