Could this be the start of a major bearish episode?

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: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Neutral (Last changed from “bullish” on 11-Oct-2023)*

* 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 X/Twitter 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.

 

 

Oversold markets can become more oversold

This stock market is oversold on a whole host of indicators. Consider, for example, the Zweig Breadth Thrust Indicator. A Zweig Breadth Thrust buy signal occurs when the ZBT Indicator surges from an oversold to overbought condition within 10 trading days. In the last 10 years, there have been four such buy signals (red dotted lines) and numerous oversold conditions (grey lines). 

Here’s what we know. In all cases, the market has been higher 12 months later after a buy signal, though they didn’t always rise in a straight line. In all cases, the market has staged a relief rally when the ZBT Indicator has become oversold, but oversold markets can become more oversold.

 
A case can be that this is one of those occasions the market could become more oversold and experience a deeper drawdown. 

The full post can be found here.

What a soft landing looks like

Has the Fed managed to achieve a soft landing? If so, Jerome Powell will go down in Federal Reserve history as a legend, and one of the greatest Fed Chairs who occupied that position.

There is some cause for optimism. The latest flash PMIs show that U.S. and China manufacturing PMI on the rebound, though the eurozone is weak, and U.S. services PMI turning up.

 
 
Not only that, the U.S. is outperforming the other major economic blocs since the COVID Crisis.

 The full post can be found here.

A better tone from the Treasury market

Mid-week market update: There was a lot of angst last week about how Treasury market, whose yields had been rising steadily, was the main driver of risk appetite. When I saw this cartoon circulating, I thought that it marked the top in yields as a contrarian indicator. Indeed, the bond market rallied when Bill Ackman announced that he had closed his bond short and Bill Gross declared that a recession was in sight and investors should buy bonds.

 The full post can be found here.

Stocks want to go to the party, but bonds won't go in the car

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: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Neutral (Last changed from “bullish” on 11-Oct-2023)*

* 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 X/Twitter 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.

 

 

Valuation pressures

Technical analyst Helene Meisler aptly characterized this market last Thursday as “Stocks want to go to the party. But the bonds won’t get in the car.” I agree.

The equity market appears to be enjoying fundamental and technical tailwinds, but rising Treasury yields are pressuring both stock and bond prices. Indeed, the difference between the S&P 500 forward earnings yield and 10-year Treasury yield hasn’t been this low since 2002. 

 
Will these valuation pressures sink stock prices? What about the bond market?

 

The full post can be found here.

Why you should fade the war hysteria

Oil prices have jumped over $6 a barrel since the Hamas attack on Israel as a geopolitical risk premium became embedded in the oil price. The surprise attack brought up memories of the Yom Kippur War 50 years ago, in which the armies of Egypt and Syria launched a simultaneous surprise attack on Yom Kippur in 1973 that left Israel fighting for its existence. In the wake of that war, the Arab-producing states launched an oil embargo on the West which devastated growth. It’s no wonder oil prices popped this time.

 
I think investors should fade market’s war fears. Here’s why.

The full post can be found here.

Keep the (bullish) faith

Mid-week market update: The S&P 500 bounce stalled at the 4380-4400 resistance zone, which is just below its 50 dma.

I continue to believe that the next major move is up. Here’s why.

The full post can be found here.

3 reasons why stocks can rally into year-end

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: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 22-Sep-2023)*

* 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 X/Twitter 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.

 

Rebound from a panic bottom

Did you buy in at the bottom? I highlighted how insider purchases (blue line) exceeded insider sales (red line) in late September. Such episodes have signaled low-risk entry points into stocks in the past. Indeed, a market rebound appears to be under way. While past buy signals have resolved in relief rallies, not all were durable.

 
I believe the current market rebound from the recent lows will be long lasting. Here are three reasons why.
 

The full post can be found here.

The term premium red herring

About a week ago, market anxiety was high over surging Treasury yields, which was attributed to concerns over a soaring fiscal deficit and a rising supply of Treasury paper. This led to upward pressure on the term premium, or compensation for holding longer duration assets, and real yields.

 
Here’s what has happened since the peak in rate anxiety. In the space of a week, the market had to face a blowout jobs report, a surprise Middle East war, and hot PPI and slightly hot CPI prints. In the face of such news, one would think this would put upward pressure on yields. Instead, Treasury yields retreated.
The fall in yields was initially attributable to a flight to safety, but such an explanation doesn’t seem plausible as the USD Index fell in lockstep. If there had been a flight to safety, the USD would have been bid. 

What happened? The most reasonable explanation is that the jitters over rising term premium and real rates was a red herring.

 

The full post can be found here.

Time for a pause in the rally

Mid-week market update: This relief rally from last week’s lows has been stunning. The stock market shrugged off a hot employment report, a Middle East war that could set off an oil price surge, and a hot PPI print this morning to rise 3.5% off last week’s lows. But it may be time for a pause in the advance. The 5-day RSI is now in overbought territory, and the VIX Index has recycled from above its Bollinger Band to the 20 dma, or the middle of the band.

 The full post can be found here.

The out-of-the-box-way to play a relief 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: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 22-Sep-2023)*

* 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 X/Twitter 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.

 

Poised for a rebound

There are numerous signs that the U.S. stock market is oversold, washed out and poised for a FOMO (Fear of Missing Out) rebound. The latest indicator is the CNN Fear & Greed Index, which is beginning to recover from levels seen at the market lows of October 2022 and March 2023.

 

The full post can be found here.

What's spooking the bond market, and why it matters to equities

What’s bothering the bond market? The 10-year Treasury yield (blue line) has shot up to levels last seen just before the GFC. The surge in yields has occurred just as investors are seeing better news on inflation. At the same time, core PCE (red line) has been falling. Shouldn’t that be good news for the trajectory of monetary policy? Why are yields rising?

 The full post can be found here.

Time to buy? 1987 comparisons are crawling out of the woodwork

Mid-week market update: You know things are bad when 1987 parallels come out of the woodwork. The key difference is the Fed and the USD. In 1987, the Fed implemented a series of inter-meeting rate hikes to support the USD. The USD needs no support today.

During these times of market stress, it’s worthwhile keeping in mind the title of Walter Deemer’s book on technical analysis.

 

The full post can be found here.

Comparing the S&P 500 today to the October bottom

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: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 22-Sep-2023)*

* 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 X/Twitter 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 much downside risk from here?

The recent downdraft in stock prices left many indicators in severely oversold territory. But how oversold, as oversold markets have been known to fall further. I compare the current technical conditions to the market bottom of October 2022.

Consider, for example, the Zweig Breadth Thrust Indicator. The ZBT buy signal is triggered when the ZBT Indicator moves from oversold to overbought within 10 trading days, which is a rare display of price momentum. Nevertheless, investors can use the ZBT Indicator as a short-term trading signal to spot entry points on the long side. As the accompanying chart shows, oversold conditions on this indicator always resolved in a short-term bounce, with no guarantee of a sustainable rally. The market did become oversold on this indicator last week, but levels were not as severe as the October bottom. In fact, the October bottom was a complex bottom, with the market becoming initially oversold, rallied, fell to another oversold condition, rallied again and weakened to the final bottom. The bottom was signaled by a positive divergence in the ZBT Indicator. None of that is in evidence today.

 
If we were to define the October low readings as the floor, does that mean the market has more downside potential?

The full post can be found here.