My case for a correction

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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 possible stall

The stock market was choppy on earnings season-induced volatility last week, but a case is being formed for a correction. Even as the S&P 500 tested overhead resistance Friday, it exhibited several negative divergences, which is a signal that the market rally is poised for a stall.

 

Here are the bull and bear cases.

The full post can be found here.

 

The final Fed rate hike?

The main events in the coming week will be the interest rate decisions by Federal Reserve on Wednesday and the ECB on Thursday. Both are widely expected to raise rates. However, market expectations for the trajectory of the U.S. Fed Funds rate is a 25-basis-point hike at the May meeting, a pause, and rate cuts later in the year. By contrast the ECB is expected to continue hiking.

On the other hand, the ECB path is more hawkish and its rate hike cycle does not appear to be complete. The governing council is reportedly split between a 25-basis point and a 50-basis point hike at the May meeting. ECB board member Isabel Schnabel told Politico in an interview that underlying inflation, which filters out volatile food and energy prices, shows very strong momentum and it was not clear that it would peak “very soon”. Belgium’s central bank head and ECB setting governing council member Pierre Wunsch told the Financial Times in an interview: “We are waiting for wage growth and core inflation to go down, along with headline inflation, before we can arrive at the point where we can pause.”

The Fed hates to surprise markets. A 25-basis-point rate hike is a virtual certainty. Unless it doesn’t plan to pause increases after the May meeting, it will signal its intention next week, subject to the usual caveats about data dependency. The challenge for investors is how to position themselves should the Fed pause.

The full post can be found here.

Market correction signals

Mid-week market update: Subscribers received an alert on Monday that my trading model had turned bearish. Despite the positive reaction to the Microsoft earnings report, which is holding up the NASDAQ today, there are plenty of signs beneath the surface that the stock market is weakening.

 

The failure of the S&P 500 to hold its MSFT led gains today is disconcerting. Three of the four defensive sectors are either in relative uptrends or staged upside relative breakouts, which is an indication that the bears are seizing control of the tape.

 

There are other cautionary signs.

 

The full post can be found here.

 

Making sense of the Mona Lisa 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 Mona Lisa market

The Economist aptly characterized the current circumstances like the Mona Lisa:

What is the Mona Lisa doing? At first glance the subject of the world’s most famous painting seems to be smiling. Look again and her smile fades. When it next reappears, it is a different sort of smile. Leonardo da Vinci achieved this ambiguous effect with the use of sfumato, where he blurred the lines around Mona Lisa’s face. No matter how many times you look, you are unsure quite what is happening.

The post-pandemic economy is like the Mona Lisa. Each time you look, you see something different. After chaos in the banking industry, many analysts are now convinced that the world economy is heading for a “hard-landing” recession. Few seem to expect a “no-landing” scenario, in which the economy remains untroubled by rising interest rates—a fashionable opinion just weeks ago, and one which itself supplanted a common view late last year that a mild recession was certain.

Even though the stock market isn’t the economy, it’s also beset by a series of cross-currents that are difficult to interpret, much like the Mona Lisa.

 

Starting with earnings season, which is in full swing. It began with a series of strong reports from large banks, but one key test came last week when about 50% of regional banks, which were at the epicentre of the latest banking crisis, reported. Equity bulls breathed a sigh of relief when the KBW Regional Banking Index held technical support.

 

 

Even though the regional banks held support, the bulls face a series of obstacles to overcome, and it isn’t clear at all whether they’ll succeed.

The full post can be found here.

Why I'm not overly bullish or bearish

As the S&P 500 stalls at overhead resistance while exhibiting negative divergences, here are some reasons why you shouldn’t be overly bullish or bearish on U.S. equities.

 

The full post can be found here.

Words of warning for equity bulls

Mid-week market update: I am publishing this note slightly early today as I have an appointment just after the market close and the prices shown in the charts will not reflect today's closing prices.  As the S&P 500 struggles with overhead resistance, I would like to offer some words of warning for equity bulls. The VIX Index has returned to levels not seen since November 2021, before the market topped out. Is that a sign of complacency, or normalization?

As a reminder, November 2021 was just before the onset of the omicron variant, and the retirement of the transitory language by the Federal Reserve. While this doesn't mean that the market will necessarily fall immediately, it does indicate a possible precarious backdrop and an accident waiting to happen.

 

The full post can be found here.

The market leaders hiding in plain sight

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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 mystery chart

As investors search for evidence of market leadership, here is a mystery chart of constructive patterns of a closely related group. The chart shows patterns of either upside breakouts or pending breakouts out of long multi-year bases.

 

 

Can you guess what they are?

 

The full post can be found here.

How to position for the coming growth slowdown

The International Monetary Fund published its latest World Economic Outlook. It cut its global GDP growth estimate by 0.1% from 2.9% in January to 2.8%. More ominously, it issued a warning about a growing risk of recession in the advanced economies from financial instability risk from bank failures: “A hard landing — particularly for advanced economies — has become a much larger risk”
 

 

In light of the risks of a substantial slowdown, how should investors position themselves?

The full post can be found here.

Does inflation matter to stocks anymore?

Mid-week market update: The S&P 500 roared out of the gate this morning on a slightly softer than expected CPI print. Robin Brooks observed that super-core CPI (core services  ex-housing and healthcare, light blue bars) have been decelerating.

Unfortunately for equity bulls, the gains faded over the course of the day.

Callie Cox pointed out that stock market volatility has been falling on CPI days when compared to FOMC and NFP days.

Does inflation matter to stocks anymore?

The full post can be found here.

Why I am fading the latest 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: 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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.

 

 

About that breadth thrust

I have had several discussions with investors over the meaning of the recent Zweig Breadth Thrust (see Interpreting the Zweig Breadth Thrust Buy Signal). A ZBT is a rare condition that occurs when the market moves from an oversold to an overbought condition within 10 trading days. There have been seven out-of-sample signals since Marty Zweig wrote his book, Winning on Wall Street. The stock market was higher a year later in every instance, though it did pause and pull back on two occasions, which occurred against Fed tightening cycles. I think that the latest signal will resolve in a pullback.

 

The full post can be found here.

A fire and ice challenge to risk assets

 In case you missed it, the 10-year Treasury yield fell and broke a technical support level even as the 3-month T-Bill yield rose. This left the 10-year to 3-month yield spread inverted further, which has historically been a strong recession signal.
 

  
The 10-year and 3-month Treasury yield spread has inverted before every recession. If history is any guide, a slowdown is just around the corner.
 

 

The stock market and other risk assets are facing a fire and ice challenge. Fire in the form of still overly hot inflation readings and ice in the form of a deteriorating economy.
 

The full post can be found here.

A NFP preview

Mid-week market update:  I know that we mostly focus on the outlook for the stock market in these pages, but investors should cast their eyes on the bond market once in a while, as they might learn something. Bond prices staged an upside breakout, which is a signal of economic weakness.

 

 

As the next major economic data point is the March Employment Report due Friday morning, this is a good time to review the jobs market outlook, which is probably more important  to the bond market than the stock market.

The full post can be found here.

Interpreting the Zweig Breadth Thrust buy signal

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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 ZBT buy signal

The market flashed an extremely rare Zweig Breadth Thrust buy signal late Friday. Without going into a lot of detail, the ZBT buy signal is triggered when the market surges from an oversold to an overbought reading within 10 trading days, which it managed to achieve on Friday.

How should investors interpret this buy signal? At first glance, it appears to be an excitingly bullish development, or a "what's the credit limit on my VISA card" buy, but I have doubts.

 

The full post can be found here.

What USD weakness may mean for asset returns

An unusual anomaly arose during the latest banking crisis when a long-standing historical relationship broke apart. When bank stocks skidded in response to the problems that first appeared at Silicon Valley Bank, the 2-year Treasury yield fell dramatically, indicating a rush for the safety of Treasury assets. What was unusual this time was the weakness in the USD. The greenback has rallied during past financial scares and crises as investors piled into the safety of the USD and Treasury paper. This time, Treasuries did reflect a flight to safety, but not the USD. As the USD has been inversely correlated to the S&P 500, and the dollar can’t advance even with the macro tailwind of a banking crisis, what does this mean for asset returns?

 

The full post can be found here.