A sentimental embrace of risk

Mid-week market update: When traders refer to "institutions" in the context of sentiment analysis, often the impression is that institutions represent some monolithic entity. Nothing could be further from the truth. I tend to analyze institutional sentiment by segmenting them into four distinct groups, each with their own data sources:

• US institutions, whose sentiment can be measured by Barron's semi-annual Big Money Poll
• Foreign and global institutions, as measured by the BAML Fund Manager Survey (FMS), which is conducted on a monthly basis;
• RIAs, as measured by the NAAIM survey, conducted weekly; and
• Hedge funds, as measured by option data and the CFTC futures Commitment of Traders data, though hedge funds are partly represented in the BAML FMS sample.

Each group is different and they can behave differently. The first three tend to represent slow but big money, while hedge funds represent the fast and high turnover money.

The differing groups of institutions don't always agree. Today, however, the US and global institutions all seem to have formed similar views. Institutional investors are bearish on bonds and they are becoming increasingly bullish on stocks, based on a belief that growth is improving.

Under these circumstances, the key question for traders and investors is whether they should jump on bullish equity bandwagon or be contrarian and fade the institutional purchases.

The full post can be found at our new site here.

Q3 earnings season: Stud or a dud?

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Risk-on*
• 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Is the earnings recession over?
Regular readers will know that I have been bullish on stocks for the last few months. My forecast has called for an equity rally into year-end and beyond. Last week, a couple of Street strategists have turned cautious on the stock market. I would therefore like to examine the bear cases that they present.

Bloomberg reported that Goldman Sachs strategist David Kostin set an SPX year-end target of 2100. The main reason for the bearish call is earnings disappointment.

"Variables that determine earnings surprises – changes in U.S. economic growth, interest rates, oil price, the dollar, and EPS [earnings per share] revisions – suggest a below-average share of firms will report positive earnings per share surprises (43 percent vs. 46 percent)," he writes in a note to clients. " We see a weak third-quarter reporting season coupled with negative fourth-quarter EPS revisions pushing stocks 2 percent lower to our year-end target of 2,100."

Bloomberg also reported that HSBC strategist Ben Laidler also sounded a cautious note, based on valuation and likely earnings disappointment:

"We think markets are pretty vulnerable. You have earnings expectations which are pretty high, you have valuations which are pretty high," he said. "You look around the world, the level of economic-policy uncertainty is very, very high — I think that is a dangerous combination right now."

As I will show, at the core is the bull vs. bear debate is whether the earnings recession ended in Q3 2016.

The full post can be found at our new site here.

Three reasons why this isn't 1987

A scary analog has been floating around in the last few days. Citibank FX analyst Tom Fitzpatrick postulated that the current market looks an awful lot like 1987 (via Business Insider).

Murray Gunn at HSBC also issued a similar crash warning. Oh, puh-leez! I can think of at least three reasons why this isn't 1987 (also recall The USD Apocalypse of September 30, 2016).

The full post can be found at our new site here.

Six reasons why I am still bullish

Mid-week market update: I wrote on the weekend to buy Yom Kippur, which ends today (see Buy Yom Kippur! SPX 2500 by Passover?). My inner trader sent out an email to subscribers yesterday indicating that he had added to his long position by buying a high-beta small cap position.

I would like to outline the reasons why I remain intermediate term bullish on equities:

• Market breadth is supportive of more gains
• Risk appetite is healthy across the board
• Investor anxiety is high, which is contrarian bullish
• The Fed is equity market friendly
• Growth expectations are healthy
• A period of positive seasonality is approaching

The full post can be found at our new site here.

Peak robo?

We all know about how the business model of robo-advisor works. First, determine the appropriate asset mix based on the risk, return, tax regime and other specific needs of the client. Then, build the portfolio and rebalance it on a periodic basis. The typical investment process can be summarized by the following steps:

1. Determine the target asset mix, which could change depending on market conditions.
2. Re-balance if:
• The asset mix weights moves more than a certain percentage, e.g. 10%, from the target weight; or
• Periodically, such on an annual basis These are all sensible rules that have long been practiced in the investment industry. In essence, the strategy involves taking profits on winning asset classes and averaging down on losers as a form of risk-control discipline

By following these simple rules, a portfolio will get investing decisions similar to what is depicted in the chart below. The top panel shows the price chart of the Dow Jones Global Index and the bottom panel shows the relative price performance of DJ Global against US Treasuries. Depending on the exact rebalancing rules, a fixed-weight portfolio that re-balances periodically will buy stocks near the bottom of the market and sell them near the top.

While the basic business model of the robo-advisor remains unchanged, I can see a couple of competitive threats to the standalone robo model. In fact, these threats may spell a peak of the standalone robo-advisor.

The full post can be found at our new site here.

Buy Yom Kippur! SPX 2500 by Passover?

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Risk-on*
• 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Positive seasonality ahead
Recently, Jonathan Krinsky of MKM Partners highlighted a bullish seasonal pattern with a likely market bottom in early October (chart via Marketwatch, annotations in red are mine).

Jeff Hirsch also documented the trading results from the trader's adage of "Sell Rosh Hashanah, buy Yom Kippur", as well as the returns from Yom Kippur to Passover, which occurs in the spring.

Normally, I don`t give a lot of weight to seasonal patterns in my investing and trading, but it appears that macro-economic, fundamental, and technical factors are all lining up for the positive seasonal pattern for the remainder of the year.

The full post can be found at our new site here.

My September NFP guess

This Friday will be another potentially market moving Employment Report day, even though the release is based on noisy data with a high margin of error. The latest Fedspeak indicates that Non-Farm Payroll (NFP) would have to see a big downside miss before the Fed would change its plans to hike rates in December. Even super-dove Charles Evans has the green light to a December move: "I would not be surprised, and if data continue to roll in as they have, I would be fine with increasing the funds rate once by the end of this year",

With that preface, what the likely result for the September NFP, especially in light of the miss in ADP's private employment report? Will September NFP come in above or below the 175K estimate?

The full post can be found at our new site here.

Don't ask me about gold, ask about the USD

Mid-week market update: The market gods must be angry. Just as a goldbug predicted the demise of the US Dollar (and therefore the rise of gold) as of September 30, 2016 at 4pm ET, the USD rallied and gold cratered on Tuesday. The technical damage to gold was extensive, as it broke a key support level at 1300, though it did stabilize today.

I have had a number of questions about the outlook for gold in the past. My reply has always been the same. Don`t ask me about gold, ask about the US Dollar. Consider this chart of stated gold reserves. Assuming that the conspiracy theorists are wrong and the United States has all the gold it says it has, the market value of US gold reserves at $1300 per oz comes to roughly $340 billion. That`s not even a single year`s fiscal deficit!

The global holdings of US Treasury paper dwarfs precious metal holdings. From a portfolio viewpoint, gold cannot be anything but a miniscule weight in the aggregate holdings of a global portfolio. As the gold price is inversely correlated to the greenback, it makes sense to analyze the more liquid asset class, namely the USD.

The full post can be found at our new site here.

Dangerous over-valuation, or a New Era?

Business Insider recently featured a chart from Vanguard Group founder Jack Bogle, who observed that the market cap to GDP ratio has become highly elevated to its own history starting about 1996. You might recall that the market cap to GDP ratio was also said to be one of Warren Buffett's favorite equity market valuation metrics, though he has been silent on the issue for a number of years.

What's going on? Has the stock market become dangerously overvalued, or is this a New Era?

The full post can be found at our new site here.

If Deutsche = Lehman, then Greek banks = ?

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Risk-on*
• 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


It's always something: Deutsche Bank edition
Readers of a certain age will recall the immortal line of late Gilda Radner as "Rosanna Rosanna Dana" in Saturday Night Live, "It's always something!"

Two weeks ago, the market was worried about the uncertainties posed by presidential debate. Last week, it was Deutsche Bank. This week, my market commentary will focus mainly on a tail-risk scenario of a Deutsche Bank sparking a European banking crisis.

To recap, the markets got spooked by continuing concerns over the financial health of Deutsche Bank (DB). The worries sparked a number of comparisons with the failure of Lehman Brothers, which sparked the Great Financial Crisis of 2008 (chart via Zero Hedge).

If you are still worried about DB, then consider the following: If Europe didn't allow the Greek banks to topple during the last couple of Greek financial crises, would it allow a systemically important bank like DB to fail? If you accept the Deutsche as Lehman analogy, then what would that make Greek banks?

The full post can be found at our new site here.

The USD Apocalypse of September 30, 2016?

A reader asked me today if I knew anything about a forecast of an imminent US Dollar Apocalypse of September 30, 2016. After digging around, I found this article on Daily Reckoning. It turns out that the Chinese RMB is going to get included in the Special Drawing Rights (SDR) basket of currencies as of 4pm on Friday, September 30, 2016. The weight of CNY is going to be 10.9%, which is higher than the weight of the Japanese Yen at 8.3%.

The story of RMB inclusion in SDR is another nail in the coffin of King Dollar. The article then went on to reiterate the thesis about the destruction of the USD as a store of value.

The obvious solution is, of course, to buy gold. Oh, PUH-LEEZ!

Sorry to disappoint the goldbugs, but some simple calculations show that gold to be an inferior investment to a USD cash position if we factor in T-Bill interest payments.

The full post can be found at our new site here.

Studies in market psychology: The Debate and Deutsche Bank

Mid-week market update: From a trader`s perspective, this market had been jittery and mainly driven by two themes. The first was the resolution of the uncertainty over the presidential debate that occurred Monday night. The other is the uncertainty over the fate of Deutsche Bank as a symptom of the systemic risk posed by European financials.

The market reactions to these themes can hold clues to short-term market direction.

The full post can be found at our new site here.

Some surefire stock winners under a Clinton presidency

As I write these words before the first presidential debate, expectations have been racheted up for a Trump win and Clinton loss. Here is just one example (via Politico):

'She will have to answer every single question flawlessly, exude gravitas...not cough, wear an acceptable pantsuit, smile enough, be likable, not laugh and have a good hair day. Donald Trump will just have to show up,” said an Ohio Democrat.

I have no idea of who might come out on top, or who will be the next president of the United States. Given the low expectations for a Clinton victory in the debates, here are some stocks with a common theme that could benefit should HRC perform well in the debate.

The full post can be found at our new site here.

Clinton vs. Trump: Charting the possible market reaction

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Risk-on*
• 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Reading the electoral tea leaves
Recently, there have been numerous reports on the unsettled macro and market environment as a result of the US presidential election. Bloomberg reported that consumer uncertainty had spiked.

Business Insider highlighted the deterioration in small business confidence ahead of the election:

Tom McClellan also identified a rough correlation between the stock market and the polls. The market seems to interpret a rising Clinton lead as bullish and rising Trump lead as bearish.

It's time to ask the question, "What is the likely equity market trajectory under a Clinton or Trump presidency?"

The full post can be found at our new site here.

How the Fed could induce a bear market in 2017

The Federal Reserve has spoken (see FOMC September statement). With three dissenting votes on the FOMC, a December rate hike is more or less baked in. The Fed will take a gradual approach to rate hikes, with the median "dot plot" forecasting a December rate hike and two more in 2017.

While the market doesn't really believe in the "dot plot" projections anymore, as actual action has consistently been below projections. This time may be different. There is a case to be made that the market is poised for a nasty upside surprise in 2017, where the pace of rate normalization will be higher than expected. Should such a scenario unfold, it would be very bearish for stock prices.

The full post can be found at our new site here.

Back in the rut

Mid-week market update: The world is full of surprises. Not only was I beside myself when news of the Bragelina breakup hit the tape, I mistakenly believed that the stock market did not display sufficient fear to form a durable bottom (see the trading comments in Is a recession just around the corner?).

Last week, Mark Hulbert found that the bullishness of his sample of NASDAQ market timers had retreated but readings weren't at a bearish extreme, which suggested that a scenario of more market choppiness.

The CNN Money Fear and Greed Index had fallen to levels where the market had bounced before, but it could have gone a lot lower. Even if it were to bottom at these levels, I would not necessarily discount a W-shaped bottom where the index declined to the recent lows before rising again.

I was wrong. Life is full of surprises.

The full post can be found at our new site here.

How China's Great Ball of Money rolled into Canada

I live in Vancouver on Canada's west coast. This was the city I grew up in and where I chose to settle after I went into semi-retirement. It's a great town, but property prices are sky high and have become unaffordable for many locals.

Some real estate boosters will resort to the standard explanations such as "we've hosted the Winter Olympics" and therefore "it's a world class city". But have property prices gone parabolic in other "world class city" Winter Olympics host cities like Turin, Salt Lake City, Nagano, Lillehammer, Sarajevo, or Lake Placid? I didn't think so.

The main reason for the stratospheric prices has been called China's Great Ball of Money and it has rolled into Canadian real estate. Factset recently documented how residential property prices have skyrocketed in Vancouver and Toronto while the rest of Canada have been flat as Mainland Chinese money has been buying in those two cities. Based on the stories that have surfaced, the flood of money has made the Vancouver and Toronto real estate markets a Wild West (chart annotations below are mine).

I am not here to write about how foreign money pouring into Vancouver and Toronto have caused affordability problems for local residents (true, see #HALTtheMadness on Twitter), or how Canadian authorities have turned a blind eye to the problems of money laundering and tax evasion due to offshore money flows (see this SCMP article). This is a post about vulnerabilities posed by the financial linkages between China and the rest of the world (see my previous post How much "runway" does China have left?). What happens if we see a hard landing or banking crisis in China?

The full post can be found at our new site here.

Is a recession just around the corner?

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Risk-on*
• 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


My answer to Northy
Recently, a lot of US macro economic releases has been coming in a bit on the soft side. As the chart below shows, stock prices have a high degree of correlation with the Citigroup Economic Surprise Index, which measures whether economic data is beating or missing expectations.

As a result, I am sensing a heightened level of anxiety among some of my readers. I have received several requests for comments to the macro post written by Sven Henrich, otherwise known as Northman Trader (Northy). In his post, Time to get real, Part II, Northy laid out the macro view for an impending recession. He correctly pointed out that recessions, which are bull market killers, often occur during the first year of a presidential term. So, with macro data weakening, is a recession just around the corner?

In conjunction to my response to Northy's recessionary post, I thought that it would also be timely to review the message from my Recession Watch indicators.

The full post can be found at our new site here.

Bottom spotting

Mid-week market update: Did you think that a market bottom was going to be this easy? I got worried on Monday when I received several congratulatory messages and high-fives for my weekend tactical bullish call (see Macro weakness: Just a flesh wound?). That rebound seemed a bit too easy. especially when I saw the latest research report from JPM derivatives analyst Marko Kolanovic.

Forget about the usual explanations about rising bond yields, uncertainty over Fed actions or the credibility of the ECB, BoJ, etc. Kolanovic advanced a positioning explanation the market turmoil (via Value Walk):

The stock market needs to move only 1% to 2% lower for volatility to dramatically increase to the downside, as highly leveraged strategies could engage in mechanical selling.

“Given the low levels of volatility, leverage in systematic strategies such as Volatility Targeting and Risk Parity is now near alltime highs,” Kolanovic wrote. “The same is true for CTA funds who run near-record levels of equity exposure.”

When markets are pushed to extremes, the snap-back to normalcy can be hard. Kolanovic notes that record leverage in these strategies could push the market lower and volatility higher. The market might not even need a catalyst to increase volatility, seasonality in September and October could do the trick. When the systematic strategies start to deleverage nearly $100 billion in assets could be pulled from the stock market, Kolanovic projected.

In other words, a number of algo driven strategies, such as CTAs and risk parity funds, got into a levered crowded trade during the period of low volatility. The sell-off on Friday was the trigger for an unwind of that trade. According to Kolanovic, it could be very ugly.

There is some good news and bad news for the bulls. The good news, according to this Dana Lyons historical study, suggests that downside risk is limited at current levels. The bad news is the market is likely to be choppy and volatile for the next few weeks.

With that trading environment in mind, I can offer traders a couple of near sure-fire ways of spotting market bottoms.

The full post can be found at our new site here.

Rate hike vs. rate hike cycle

Recently, there has been a parade of regional Fed presidents calling for a serious consideration of a rate hike:

• Boston Fed's Rosengren, who appears to have becoming more hawkish after being a dove
• Richmond Fed`s Lacker
• San Francisco Fed`s Williams
• Kansas City Fed's George
• Atlanta Fed's Lockhart

The hawkishness of regional presidents is no surprise. Bloomberg reported that the boards of eight of 12 regional Feds had pushed for a rate hike.

The hawkish tone by regional Feds has been offset by more the dovish views of Fed governors. Fed governor Daniel Tarullo told CNBC last week that he was open to rate hikes in 2016, but he wanted "to see more inflation". Today. uber-dove Fed governor Brainard stayed with a dovish tone in her speech stating that the "asymmetry in risk management in today's new normal counsels prudence in the removal of policy accommodation".

The market's intense focus of when the Fed moves rates is the wrong question to ask. Rather than ponder the timing of the next rate hike, the better questions to ask is, "What is the trajectory of rate normalization for 2016 and 2017 and what are the investment implications?"

The full post can be found at our new site here.