The stock market's Q2 challenges

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: Bearish (Last changed from “neutral” on 25-Mar-2024)*

* 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.

 

A "good overbought" condition

Happy Q1 quarter end!

The S&P 500 ended the quarter exhibiting a series of “good overbought” conditions on the 5-week RSI, which are signals of strong momentum. It’s impossible to know when such bull runs end. If history is any guide, they usually resolve with a correction or consolidation once the momentum fades.

Can the momentum continue into Q2?

The full post can be found here.

Why the first Fed rate cut will be later than June

Sometimes being Fed Chair is a trying job. During the last post-FOMC press conference, Powell was given numerous opportunities to interpret the data in a hawkish fashion. Instead, he took a dovish tone.

As one of many examples, Jenna Smialek of the New York Times asked if strengthening in the labour market would be a reason to hold off on rate cuts. Powell’s response was, “No, not all by itself no.”
 

Even as Powell sounded a dovish tone, and markets took a risk-on tone as a relief that the median dot plot is still forecasting three rate cuts for 2024, not all is dovish within the FOMC. An analysis of how the 2024 dot plot evolved between December and March shows a mildly hawkish tone. Even though the median stayed at three cuts, the average fell and the distribution became far less dovish than the December projections.
 

The opinion of individual members of the FOMC has become more hawkish. If Powell needs to achieve a consensus for a rate cutting decision, it was be as difficult as herding cats.
 

 

The full post can be found here.

Lucy and the correction football

Mid-week market update: Since January, I have been saying that the stock market is extended and could pull back at any time. The latest conditions shows that the S&P 500 is consolidating sideways after pulling back from above its upper Bollinger Band. The stochastic has recycled from overbought to neutral, which is a tactical sell signal.

 

But the correction scenario could be a replay of the story of Lucy, Charlie Brown, and the football.

The full post can be found here.

This bull run is nowhere near finished

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: Bearish (Last changed from “neutral” on 25-Mar-2024)*

* 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.

 

Market structure review

This week I present a review of the overall market structure, starting from a long-term perspective and gradually shortening the time horizon.

I am  bullish on stock prices, as evidenced by the positive MACD histogram of the NYSE Composite that acts as a buy signal. In the past, such buy signals are long lasting and the bull run can stretch into years.

 

 

The full post can be found here.

The investor's cyclical mystery

Copper is a cyclically sensitive metal that was given the moniker of Dr. Copper, because it is said to have a Ph.D. in economics because of its ability to forecast global economic trends. Its recent breakout from a 10-month base excited a lot of people. Similarly, the turnaround in the relative performance of materials stocks was interpreted as a cyclical green shoot.

On the other hand, the sideways pattern of the copper/gold ratio gave a different message of economic stagnation. Both copper and gold are metals with inflation hedge properties, but copper is more cyclically sensitive. The copper/gold ratio acts as a cyclical indicator to filter out the inflation sensitivity of changes in metal prices.

Therein lies the mystery. Are the markets signaling a cyclical rebound, or not? 

The full post can be found here.

It's all about expectations

Mid-week market update: Four weeks ago, I published NVIDIA at the bat, in which I discussed the market expectations for leading AI stock NVIDIA ahead of its earnings report. NVIDIA came out with a strong report that exceeded Street expectations, and the stock reacted with a price gap the following day.

 

Fast forward a month. The company unveiled its new chip and the market reaction was a thud. In fact, the AI bellwether Semiconductor Index weakened and violated a relative uptrend channel (bottom panel). This was a lesson in expectations, how the market reacted to incoming data, and how expectations evolve.

The full post can be found here.

The stealth breakout you may have missed

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 24-Jan-2024)*

* 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.

 

A convincing breakout at 2100

My recent publication highlighting the opportunity in gold mining stocks worked out better than expected (see How gold miners could be a refuge from the YOLO and FOMO frenzy). The gold miners’ ETF (GDX) is up slightly over 10% in under two weeks.

While GDX may be a little extended in the short run, I would like to point out the long-term potential in gold. Gold has staged a convincing upside breakout from a multi-month cup and handle formation. Moreover, the gold-to-S&P 500 ratio (bottom panel) is turning up from a multi-year saucer-shaped bottom, indicating the possible start of a new relative bull for gold over stocks. As well, the breakout has occurred with little fanfare as investors have been focused on AI and GLP-1 plays. This combination of breakout and lack of public participation suggests a substantial upside potential.

 

 The full post can be found here.

A reply to Grantham's AI warning

Well-known value investor Jeremy Grantham recently penned an essay titled, “The Great Paradox of the U.S. Market”, in which he warned, “Prices reflect near perfection yet today’s world is particularly imperfect and dangerous”.

In particular, he sounded the alarm over the bubble in AI stocks and cited the Gartner Hype Cycle as the main reason for caution:

 

But every technological revolution like this – going back from the internet to telephones, railroads, or canals – has been accompanied by early massive hype and a stock market bubble as investors focus on the ultimate possibilities of the technology, pricing most of the very long-term potential immediately into current market prices. And many such revolutions are in the end often as transformative as those early investors could see and sometimes even more so – but only after a substantial period of disappointment during which the initial bubble bursts. Thus, as the most remarkable example of the tech bubble, Amazon led the speculative market, rising 21 times from the beginning of 1998 to its 1999 peak, only to decline by an almost inconceivable 92% from 2000 to 2002, before inheriting half the retail world!

As much as I respect Grantham’s investment insights, he suffers from the value investor problem of being too early and overly reliant on valuation for his views. I reiterate my view that it’s still early in the bull cycle for AI stocks (see The Path to Magnificent Exuberance). Here’s why.

 

The full post can be found here.

Waiting for the recycle amidst an elevated tail-risk backdrop

Mid-week market update: Marketwatch recently highlighted analysis from NDR which concluded that sentiment was extended and while it may make sense to be cautious about adding risk, it's too early to turn tactically bearish until readings recycle from an overbought condition.

 

I agree. I've been saying the same thing for several weeks. A correction or pullback is on the horizon, but hasn't arrived yet. While signs of technical deterioration are appearing, a sideways consolidation marked by a rolling correction is very possible.

 

Here are the indicators that I've been watching, some of which have recycled and some have not.

The full post can be found here.

A Hindenburg Moment for growth stocks?

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 24-Jan-2024)*

* 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.

 

NASDAQ Hindenburg warnings

I have been concerned about the extended and frothy nature of the advance in growth stocks. Worries came to a head when the Semiconductors Index rallied through and reversed though an upward trending relative performance channel, indicating a possible blow-off top. Beneath the hood, however, market internals are signaling breadth deterioration for NASDAQ stocks that warn of an impending corrective downdraft.

 

The ominous sounding but controversial Hindenburg Omen was designed by James Miekka to spot major market tops, though it purportedly only has many false positives and a success rate of 25%. The indicator looks for the combination of an increasingly bifurcated market, as measured by breadth divergences, and a downside momentum break from an uptrend.

NASDAQ stocks have been flashing Hindenburg Omens starting in January and the warnings continued into February. While the signal isn’t perfect, the history of such clusters in the last 10 years has usually resolved in declines, shown as pink bars), while the instances of false positives (grey bars) have been relatively low.

The full post can be found here.

Doesn't Fed policy matter to stocks anymore?

During Fed Chair Powell’s testimony to the Financial Services Committee of the U.S. House of Representatives, he said that it will likely be appropriate to begin cutting rates “at some point this year”. At the same time, he reiterated the message that other Fed officials sent to the markets that the Fed is not ready yet. The messaging has been the same and uniform by almost all speeches by Fed officials. The economy and labour market are strong. Central bankers have time to wait for more evidence that inflation is headed back to the 2% goal before cutting rates.

Market expectations of the timing of the initial rate cut have evolved from March to May in the past few weeks. At the same time, stock prices have rallied and they rallied in response to Powell’s testimony. 

 

Doesn’t Fed policy matter to stocks anymore?

 

The full post can be found here.

Mind the gaps

Mid-week market update: In the short run, how the market reacts after price gaps can be important clues to market psychology and direction. How quickly the market fills a gap is a measure of either strength or weakness.

 

As accompanying hourly chart of the S&P 500 shows, we have price gaps everywhere (upside gaps in grey, downside gap in pink). In particular, the price gap in reaction to the NVIDIA earnings report sticks out the most.

Here is how I interpret the gaps.

The full post can be found here.

How gold miners could be a refuge from the YOLO and FOMO frenzy

I wrote yesterday that the stock market has been gripped by a YOLO (You Only Live Once) and FOMO (Fear of Missing Out) madness. I can suggest a possible refuge: gold and gold miners.

Gold prices recently made a fresh high last week, but the breakout was not decisive to be judged as unabashedly bullish for the yellow metal. The technical pattern was nevertheless highly constructive as it’s tracing out a possible cup and handle formation. In addition, the inflation expectations ETF (RINF), which measures 30-year bond market inflation expectations, is upward sloping and confirms gold’s uptrend.

 The full post can be found here.

How to trade the YOLO and FOMO 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: 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 24-Jan-2024)*

* 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.

 

A YOLO and FOMO market

Another week, another all-time high for the S&P 500 and NASDAQ Composite. The U.S. market has been infected with the FOMO (You Only Live Once) and FOMO (Fear of Missing Out) sentiment viruses while numerous macro and technical warnings have appeared.

As an example, Bitcoin prices have soared. Historically, Bitcoin has been correlated with the relative performance of the ARK Innovation ETF (ARKK), which is a bellwether for speculative growth stocks. This time, ARKK hasn’t risen as much. Is this a positive or negative divergence?

 

The full post can be found here.

Are you ready to be a contrarian cigar butt investor?

How would you feel about a star value manager with the track record shown in the chart below. While he beat the market in the wake of the dot-com bubble, he has only matched the performance of the S&P 500 since 2011. To be sure, he did beat his style benchmark (second panel).

 

The star manager is none other than the legendary Warren Buffett and the chart shows the relative performance of Berkshire Hathaway’s stock price relative to the S&P 500 and the Russell 1000 Value Index. Buffett’s best known recent win was his purchase of Apple in 2016 which became his largest holding, and whose relative returns are shown in the bottom panel.

 

I examine how he achieved his results, and offer studies of sources of alpha as examples of different investing styles.

The full post can be found here.