Wednesday, September 28, 2022

The BOE rescues the markets

Mid-week market update: Before going to bed last night, I check the overnight market and saw that S&P 500 futures were down as much as -1% and thought, "Here we go again!" I woke to see that the BOE had committed to buying Gilts "on whatever scale is necessary" which sparked a risk-on stampede.

The market was ready to be rescued, it just needed the bullish catalyst. One of the signs of an oversold stock market is the VIX Index rising above its upper Bollinger Band, and the VIX had gone on an upper BB ride for nearly a week. Tactically, the bullish impulse has historically petered out when the VIX reaches its 20 dma.



The full post can be found here.

Monday, September 26, 2022

How to estimate S&P 500 downside risk

As we approach Q3 earnings season, the Street cut the bottom-up S&P 500 forward 12-month EPS estimates by an estimated -0.41% as recession anxiety begins to rise. The good news is the market is trading at a forward P/E of 15.8, which is below its 5- and 10-year averages.


In light of the heightened recession risk, what's an appropriate valuation for the S&P 500? What's the downside risk from here?

The full post can be found here.

Sunday, September 25, 2022

The right and wrong way to throw in the towel

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: 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 crowded short 
In the wake of the post-FOMC meeting downdraft, three of the four components of my bottom spotting models flashed buy signals. 
  • The VIX Index has spiked above its upper Bollinger Band, which is an oversold condition for the market, 
  • Yhe NYSE McClellan Oscillator had become wildly oversold, and 
  • TRIN spiked above 2, indicating price insensitive panic selling. 
In the past, buy signal counts above two have indicated bullish risk/reward conditions for stock prices.


Other sentiment models are also pointing to crowded short conditions. In many ways, traders had already thrown in the towel even before the FOMC meeting, which is likely to put a floor on stock prices. But there is a right way and a wrong way to throw in the towel.

The full post can be found here.

Saturday, September 24, 2022

What the Fed and FedEx are telling the markets

Both the Fed and FedEx had messages of recession for the markets. Fed Chair Jerome Powell said that the Fed would raise rates until there was clear and convincing signs that inflation was headed toward its 2% target, and its projections amounted to a recession that begins either late this year or early next year. FedEx warned about a slowdown in global shipping volumes and recessionary conditions.

As we approach Q3 earnings season, an interesting divergence is appearing in the derivative markets. While the SKEW, which measures the price of option tail-risk, is low for the S&P 500, the SKEW for individual stocks has been elevated. This reflects rising anxiety about possible blow-ups in individual stocks as earnings season approaches.


Still, a review of the risks shows that not all is at it seems below the surface.

The full post can be found here.

Wednesday, September 21, 2022

Higher for longer

Mid-week market update: The Fed has spoken. As expected, it hike interest rates 75 bps. In its Summary of Economy Projections (SEP), it sharply lowered GDP growth for this year and it raised the Fed Funds projection to 4.4% for this year and 4.6% next year, which are both ahead of market expectations. In other words, higher for longer (though it did signal rate cuts in 2024).

Fed Funds futures reacted by extending the already elevated Funds Funds rates for next year, but it did show some skepticism of the Fed's SEP by expecting rate cuts by September 2023.


The full post can be found here.

Sunday, September 18, 2022

A flock of hawks circle Wall Street

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.


Waiting for the FOMC
As investors look ahead to the FOMC meeting next week, rates are rising and the 2s10s yield curve is inverting further. The 10-year to 3-month spread is not inverted yet, but it likely will once the Fed raises rates.



It's difficult to make definitive bull or bear views on equities and bonds as there is much policy uncertainty. Here is what I am watching:
  • The Fed has given the obligatory nod to a “soft landing” but what’s the body language about a possible recession?
  • The Fed has said higher for longer, but how much longer?
  • What are its inflation projections for 2022, 2023, and 2024 in the Summary of Economic Projections (SEP)?
  • How far does the dot plot get revised up, and what is the terminal rate?
The full post can be found here.

Saturday, September 17, 2022

A pending major market bottom? It sounds too easy!

Is the universe unfolding as it should? Most technical and sentiment indicators argue for a near-term double bottom in the S&P 500. The June bottom was the initial capitulation bottom. The market rallied and it is poised to weaken and re-test the old lows in the near future. That's when the new bull begins.


The new bull narrative sounds far too easy. Macro and fundamental factors argue for further downside potential. The Powell Fed is in a "whatever it takes" mode to tame inflation. The 2-year Treasury yield has been climbing relentlessly, which is an indication of rising market expectations of a terminal Fed Funds rate. Forward P/E valuations are becoming increasingly challenging even as the E in the P/E ratio declines ahead of a likely recession. If support at the June low doesn't hold, SPY faces a possible air pocket and a rapid fall to the 260-320 support zone, which represents considerable downside risk from current levels.

The full post can be found here.

Wednesday, September 14, 2022

Fed: Do you believe us now?

Mid-week market update: Yesterday's hot CPI report finally convinced the market that the Fed is serious. For weeks one Fed official after another gave the same message: We will raise rates to about 4% and hold them there while we evaluate the inflation picture. We don't want a repeat of the 1970s when the Fed prematurely eased while inflation pressures were still strong.

Former Fed Vice Chair Richard Clarida said in a CNBC interview,  "I think they’re going to 4% hell or high water, if I had to put it into two boxes. They are data-dependent, but that’s why they’re going to 4%. Inflation is way too high."

The market is now discounting a 75 bps move next week with about a 25% chance of a 100 bps. The terminal rate is rose to 400-425 bps from 375-400 bps before the CPI report.


The full post can be found here.

Sunday, September 11, 2022

How I learned to stop worrying and love the bond market

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.


An inverted yield curve
James Carville, who was Bill Clinton's political strategist, famously said, "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

If the bond market were to intimidate everybody, what's it saying? The accompanying chart shows the spread between the 2-year and 10-year Treasury yield, which is currently inverted. If history is any guide, inverted yield curves are bad news for stock prices.



The full post can be found here.

Saturday, September 10, 2022

Assessing "Big Short" Michael Burry's crash warning

A number of readers asked me to comment on Michael Burry's forecast of a crash, according to a report from Business Insider.
Doomsday is finally here, he hinted in a since-deleted tweet this week.

The fund manager of "The Big Short" fame shared a screenshot of a S&P 500 chart, showing the benchmark stock-market index has tumbled 18% from its December peak, despite several blistering rallies this year.

"And yet I keep getting asked 'wen crash?'" he tweeted, poking fun at some of his followers' poor spelling, and underlining his view that the market collapse is underway.

Burry suggested in May that the S&P 500 could drop as low as 1,900 points, or another 53%, over the next few years, based on how past crashes have played out. Moreover, he has dismissed the rebounds in stocks this year as bear-market rallies or "dead cat bounces" — temporary reprieves along the road to inevitable disaster.


The S&P 500 has a downside potential of 1900? How plausible is that scenario?

The full post can be found here.

Wednesday, September 7, 2022

Saved by Fibonacci

Mid-week market update: I suggested on the weekend that the stock market was oversold and poised for a short-term rally (see How to trade the failed breadth thrust). The rally seems to have arrived.

The weakness in the S&P 500 has been stunning as it sliced through multiple levels of support like a hot knife through butter. The decline was halted at the last remaining support was the 61.8% Fibonacci retracement level, which also coincided with a volume support zone. 



Saved by Fibonacci! The logical initial upside resistance is the 50 dma at 4020 on the S&P 500, or 401.25 on SPY.

The full post can be found here.

Sunday, September 4, 2022

How the trade the failed breadth thrust

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.


Faltering momentum
Technical analysts recently became excited when the percentage of S&P 500 stocks above their 50 dma surged from below 5% at the June low to over 90% in mid-August. In the past, such strong price momentum has always signaled the start of a new equity bull.



Since then, the S&P 500 fizzled at its 200 dma. Markets further took a risk-off tone when the Fed and other central bankers signaled their determination to raise interest rates and warned about pain ahead. The reversal has been so dramatic that the percentage of S&P 500 stocks above their 20 dma has retreated to under 10%.

If it's any consolation, the intermediate technical outlook is still bullish for equities.

The full post can be found here.

Saturday, September 3, 2022

Why a financial crisis could be the bulls' best hope

I pointed out two weeks ago the strong disagreement between technical analysts, who were bullish because of strong price momentum, and macro investors, who were bearish because of concerns over hawkish central bank policy and a slowing growth outlook (see "Price leads fundamentals", or "Don't fight the Fed"?). In the wake of the market reaction to the Fed's Jackson Hole symposium, it seems that macro investors have won the argument, at least for the time being.

In Fed Chair Powell's speech, he underlined that tight monetary policy will “bring some pain to households and businesses” but vowed to “keep at it until the job is done”, which was a signal that there will be no dovish pivot until inflation is beaten. The only exception to that rule is a financial crisis. Historically, equity markets haven't bottomed until the St. Louis Fed Financial Stress Index has risen to positive. While the index has begun to turn up from a very low level, stress levels are still very tame, indicating that financial crisis risk is still relatively low.



The full post can be found here.