Jackson Hole turbocharges the FOMC market cycle

Mid-week market update: The stock market has mostly followed an FOMC cycle where prices decline into an FOMC meeting and rallied afterward. While the Jackson Hole symposium wasn't an FOMC meeting, it nevertheless seems to have sparked market weakness. 

After the S&P 500 stalled and pulled back at its 200 dma, I thought that it might experience a minor setback The market action is pointing to a deeper downside as every rally attempt this week has been met with selling. Both the VIX and S&P 500 appear to be undergoing Bollinger Band rides: An upper BB ride for the VIX and a lower BB ride for the S&P 500. 

The full post can be found here.

Six reasons why this was just a bear market 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 prices. 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: Sell equities*
• Trend Model signal: Neutral*
• Trading model: Bearish*

* 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.

Something for everyone

During the recent bull and bear debate, Nautilus Research provided some historical analogs for both bulls and bears. Depending on what camp you are in, Nautilus had a market template for you.

I have been in the bear camp ever since this rally began (see Lessons from a study of past major bottoms). As the S&P 500 rally stalled and pulled back at the 200 dma, here are six reasons why the advance was likely a bear market rally and not the signal that a new bull had begun.

The full post can be found here.

Will Europe drag us into a global recession?

It's finally happened, the euro fell below par against the US Dollar. The weakness can be attributable to a combination of Fed hawkishness and European economic weakness.

Europe is almost certainly in a recession. Consumer confidence has skidded to levels last seen during the Eurozone Crisis of 2011-2012. The questions are whether the region will drag the rest of the global economy down and the implications for asset returns.

The full post can be found here.

Short covering rally is over, now waiting for Powell

Mid-week market update: According to Goldman Sachs, systematic hedge fund positioning has reversed from a crowded short to a crowded long. Readings are similar to the levels seen at the market top in late March. 

The S&P 500 stalled at 200 dma resistance. In light of this analysis of HF positioning, the bulls are unlikely to regain control of the tape in the near term. The key question for traders is, "How will the Powell speech Friday move the markets?"

The full post can be found here.

A Jackson Hole preview: Are expectations finally rational?

The Federal Reserve's annual Jackson Hole symposium is being held this week on August 25-27. Fed officials have fanned out across the land to deliver the message that market expectations of a dovish pivot are misplaced. The question for investors is, "Are market expectations finally rational?"

The CME's Fedwatch tool shows the market expects two consecutive 50 bps hikes in September and November, followed by a 25 bps hike and a plateau into mid-2023.

Is the market still misreading the Fed? How will Powell steer expectations?

The full post can be found here.

Just a flesh wound, or a deeper cut?

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 prices. 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: Sell equities*
• Trend Model signal: Neutral*
• Trading model: Bearish*

* 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 stall at resistance

The S&P 500 stalled as it approached overhead resistance after recycling from an overbought condition on the weekly chart.

The key question for investors, much like the famous scene of King Arthur's encounter with the Black Knight in Monty Python's Holy Grail, "Is this just a flesh wound, or a deeper cut?"

The full post can be found here.

"Price leads fundamentals", or "Don't fight the Fed"?

Wall Street is full of adages. Technical analysts are fond of, "Price leads fundaments" as a way of dismissing macro and fundamental analysis. But traders are also warned, "Don't fight the Fed". 

A vast gulf is appearing between bullish technicals and macro concerns. The bulls, who are mainly technicians, point to strong price momentum, which may be interpreted as discounting a soft landing for the economy. The bears can be found in macro and valuation, as equity markets are complacent about tight monetary policy and slowing growth. 

Who's right? Should you believe that price is leading fundamentals, or stay cautious and not fight the Fed?

In the 1993 Berkshire Hathaway shareholder's letter, Warren Buffett famously quoted Ben Graham:

In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine.

Where you stand on the bull and bear question depends on your time horizon. Do you focus on the voting machine or the weighing machine?

The full post can be found here.

Overhead resistance test = Possible weakness ahead

Mid-week market update; The S&P 500 has undergone a powerful rally off June's bottom, but it's now approaching technical resistance in the form of a 200 dma and a falling trend line. In addition, the market is overbought as measured by the 5 and 14-day RSIs, much in the manner of early November 2021.

Even if you are intermediate-term bullish, the convergence of these factors argues that it's time for a tactical pause and possible pullback.

The full post can be found here.

A warning from a market leadership review

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 prices. 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: Sell equities*
• Trend Model signal: Neutral*
• 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.

Dovish pivot?

The stock market has taken on a giddy tone in the wake of the tamer than expected inflation reports. The S&P 500 has staged an upside breakout through a key 50% Fibonacci retracement level, which according to some chartists, could be the signal for the all-clear and a resumption of the bull market.

Marketwatch reported that technical analyst Jonathan Krinsky interpreted the upside breakout with guarded optimism:

“Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows,” said Jonathan Krinsky, chief market technician at BTIG, in a note earlier this month...

Krinsky, meanwhile, cautioned that previous 50% retracements in 1974, 2004, and 2009 all saw decent shakeouts shortly after clearing that threshold.

“Further, as the market has cheered ‘peak inflation’, we are now seeing a quiet resurgence in many commodities, and bonds continue to weaken,” he wrote Thursday.

My review of market internals shows narrowing leadership which is a warning that the current rally is unsustainable.

The full post can be found here.

Lessons from a study of past major market bottoms

The mood has changed on Wall Street. The WSJ declared last week that the NASDAQ is back in a bull market.

The number of "new bull market" stories have skyrocketed in recent days. Suddenly, chartists on my social media feed are full of "if this index rises to X, or this indicator gets to Y, we have a new bull market". 

I am skeptical of single-variable models. Instead, I offer a study of past major bear market bottoms using factor and macro analysis to see how current circumstances fit with the fresh bull story.

The full post can be found here.

A useful step, but where`s the clear and convincing evidence?

Mid-week market update: The markets took on a risk-on tone in the wake of the softer than expected CPI report. It was a useful first step and a possible sign that inflation is peaking, but I am still waiting for the "clear and convincing evidence" that inflation is under control before getting overly excited about the stock market. Managing monetary policy is like steering a supertanker. Changes happen very slowly and market sentiment may be getting ahead of itself.

The full post can be found here.

The overlooked reason this market is so strong

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 prices. 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: Sell equities*
• Trend Model signal: Neutral*
• 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.

Defying gravity

Why is the stock market holding up so well? What happened to all the warnings from the Fed? One speaker after another warned that the Fed is nowhere near a dovish pivot. CNN reported that former New York Fed President Bill Dudley issued a similar warning that rising stock prices translate into even more rate hikes:

Dudley added that another rate hike of three-quarters of a percentage point is still "potentially in play," depending on how the economy evolves. He expects the Fed will need to raise interest rates to 4% or higher — up from 2.5% today...

Dudley warned that the uptick in the stock market may be counterproductive because it translates to easier financial conditions. And that's exactly the opposite of what the Fed wants as it tries to tame inflation.

"Ironically," Dudley said, "the big rally in financial markets increases pressure on the Fed to do more."

Wall Street shrugged off the Fed's warnings and Friday's hot jobs report. The S&P 500 is testing a key resistance level, and the NASDAQ 100 blew past resistance and it is now approaching a key falling trend line.

Why is the market defying gravity?

The full post can be found here.

Why this isn't your father's recession (and how to profit from it)

There is a growing acceptance among investors that the global economy is sliding into recession. S&P Global, which was formerly known as IHS Markit, reported:

The global manufacturing PMI survey's Output Index, which acts as a reliable advance indicator of actual worldwide output trends several months ahead of comparable official data (see chart 2), signaled stalled production in July. The stagnation signals a faltering of the global production rebound seen in June from two months of contraction in April and May.

The conventional view suggests a synchronized global recession. The more nuanced view is the world is undergoing a rolling recession, which offers more opportunities for investors.

The full post can be found here.

What's "Black Swan" in Chinese?

Mid-week market update: Here we go again. Just when you thought world events were under control, House Speaker Nancy Pelosi's visit to Taiwan raised the geopolitical risk premium.

And just as I predicted on the weekend (see In what world is fighting the Fed a good idea?), we've had a cacophony of Fed officials pushing back on market expectations of an imminent pause in rate hikes. Bond yields spiked in response.

Here is what I am watching.

The full post can be found here.

How a war of conquest has become a contest of pain

I received feedback from a number of readers in response to my publication, Bearishness, begone!. They expressed concern over the terrifying spike in European natural gas prices. In response to the EU's support for Ukraine, Russia has weaponized its energy exports. Gazprom has already reduced Nord Stream 1 gas flows to 20% of capacity. What happens this winter? What are the consequences for the region's economy? How will the ECB cope in light of inflationary pressures from rising energy prices?

The root of the surge in energy prices is the Russia-Ukraine war. In response to the aforementioned questions, I discuss:

• The state of the battlefield and its outlook;
• The hybrid war beyond the battlefield; and
• The contest of pain between Russia and the West.

The full post can be found here.