Ursus Interruptus

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 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 those email alerts are 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: Bearish*
• 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 the those email alerts is shown here.



Why I turned bullish
A number of readers were surprised by my change of recent change of view (see A rare "what's my credit card limit" buy signal), I had been adopting a cautious tone since August (see Market top ahead? My inner investor turns cautious).

The September to December decline had been highly ambiguous. I believed that unless I could pinpoint the reasoning behind the risk-off episode, it was impossible to call a market bottom. However, US equity prices had already fallen about 20% on a peak-to-trough basis, and the historical evidence indicates that such a decline is already discounting a mild recession. How much worse can it get?

In addition, technical signals such as the Zweig Breadth Thrust (see A rare "what's my credit card limit" buy signal) indicate that psychology is washed-out and turning around. The statistical odds favor high prices over a one-year time frame.

That said, I stand by my assertion of a choppy market for the next few months. Even though the odds are in the bulls favor, key risks remain unresolved and they are likely to weigh on the market in the near term.

• Negative fundamental momentum, in the form of downward earnings revisions and a decelerating macro outlook;
• China and the trade war;
• Trump's likely confrontation with the Democrats may lead to a political risk premium; and
• Credit markets remain unsettled, and monetary policy could put downward pressure on stock prices.

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





A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).

We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).

The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:

• The annual subscription price will rise from US$249.99 to US$356 per year.
• The monthly subscription price will rise from US$24.99 to US$35.60 per month.
• The 24-hour subscription will no longer be offered.
• The embargo period for free content will change from two weeks to four weeks.

Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

The Animal Spirits are stirring

Mid-week market update: In light of Monday`s Zweig Breadth Thrust signal, I thought I would do one of my periodic sector reviews to analyze both sector leadership and the implications for stock market direction.

As a reminder, Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

A review of the latest RRG chart shows a market in a bottoming process, with defensive sector leadership starting to roll over, and selected high beta and cyclically sensitive sectors becoming the emerging market leaders. While defensive sectors such as the Consumer Staples, Healthcare, REITs, and Utilities, are in the leading quadrant, they are losing relative strength. By contrast, Communication Services, led by selected FAANG stocks and high beta names, and Materials appear to be poised to become the next market leaders.

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




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).

We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).

The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:

• The annual subscription price will rise from US$249.99 to US$356 per year.
• The monthly subscription price will rise from US$24.99 to US$35.60 per month.
• The 24-hour subscription will no longer be offered.
• The embargo period for free content will change from two weeks to four weeks.

Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

Will the Fed pause in March?

In the wake of Powell's statements last Friday, the market now expects no changes in the Fed Funds rate this year, with a slight chance of a rate hike.

Contrast those expectations with the dot plot, which has penciled in two rate hikes this year.

The history of Fed policy is slow incremental changes. Has the market gone overboard on the dovish when it expects a change from two hikes to no hikes?

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




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).

We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).

The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:

• The annual subscription price will rise from US$249.99 to US$356 per year.
• The monthly subscription price will rise from US$24.99 to US$35.60 per month.
• The 24-hour subscription will no longer be offered.
• The embargo period for free content will change from two weeks to four weeks.

Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

A rare "what's my credit card limit" buy signal

The Zweig Breadth Thrust (ZBT) is a variant of the IBD Follow-Through day pattern, but on steroids. Steven Achelis at Metastock explained the indicator this way [emphasis added]:

A "Breadth Thrust" occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A "Thrust" indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought.

According to Dr. Zweig, there have only been fourteen Breadth Thrusts since 1945. The average gain following these fourteen Thrusts was 24.6% in an average time-frame of eleven months. Dr. Zweig also points out that most bull markets begin with a Breadth Thrust.

Monday's strong NYSE breadth has pushed the ZBT Indicator into buy signal territory. Call this a "what's the limit on my credit card" buy signal for investors, though not necessarily traders.

Here is how the market has behave after ZBT buy signals. The full post can be found at our new site here.



A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).

We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).

The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:

• The annual subscription price will rise from US$249.99 to US$356 per year.
• The monthly subscription price will rise from US$24.99 to US$35.60 per month.
• The 24-hour subscription will no longer be offered.
• The embargo period for free content will change from two weeks to four weeks.

Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

H1 2019 roadmap: Expect volatility

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 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 those email alerts are 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: Bearish*
• 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 the those email alerts is shown here.



A look ahead to H1 2019
It gives me little pleasure to say "I told you so". But I told you so.

I warned in early December that earnings were going to disappoint in 2019 (see 2019 preview: Winter is coming). Since then, tumbling earnings estimates have been one of the main reasons for the weakness in stock prices.

The recent warning from Apple is just setting the table for further disappointment, and the upcoming Q4 earnings season will be revealing as to how far estimates have to fall. I expect more market sloppiness in Q1 and the first six months of 2019, until the uncertainties surrounding the upcoming growth deceleration and trade war are resolved.

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



A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).

We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).

The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:

• The annual subscription price will rise from US$249.99 to US$356 per year.
• The monthly subscription price will rise from US$24.99 to US$35.60 per month.
• The 24-hour subscription will no longer be offered.
• The embargo period for free content will change from two weeks to four weeks.

Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

A simple decision vs. a decision process

I got some pushback from a reader to my weekend post (see How to spot the bear market bottom) about the FT Alphaville article indicating that former Secretary of Defense Mattis raised concerns about how the White House lacked a decision making process. The reader went on to defend Trump's decisions.

I try very hard to remain apolitical on this site. Everyone is entitled to their own opinion, but there is a distinction between a decision, and a process. Here is an example from the investment realm. Josh Brown recently ranted about people "who called the correction". Click this link if the video is not visible.

Josh Brown's main complaints can be summarized as:

• Anyone can make a market call. If you are wrong, very few people will remember, or you can delete your articles or tweets.
• Managing a portfolio is a much tougher task. Portfolio managers are measured by actual returns. As an example, if you decide to sell out, what is your discipline for buying back in?
• Just because someone doesn't say anything, it doesn't mean that they are unprepared for market volatility. Most firms have compliance guidelines about what individual portfolio managers or advisors can or cannot say or publish. 

Despite my own efforts at transparency (see A 2018 report card) where I have published my track record, and owned up to bad calls, I sympathize with Brown. Josh Brown's rant amounts to distinguishing a decision (market call) to an investment process. A timely market call means little if there is no investment process behind it.

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




A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).

We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).

The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:

• The annual subscription price will rise from US$249.99 to US$356 per year.
• The monthly subscription price will rise from US$24.99 to US$35.60 per month.
• The 24-hour subscription will no longer be offered.
• The embargo period for free content will change from two weeks to four weeks.

Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

How much do the bulls have left in the tank?

Mid-week market update: Happy 2019 to everyone. The post-Christmas period started off with a bang. After bottom out on December 24, the stock market enjoyed four consecutive days of gains - until today when it was spooked overnight by a series of disappointing PMI prints.

The Caixin Manufacturing PMI fell to 49.7 from 50.2 (50.0 expected), indicating contraction. As a reminder, the Caixin PMI differs from China`s official PMI as the Caixin measures mostly the activity of smaller companies, while the official PMI measures the activity of larger SOEs.

Beijing has responded to past episodes of weakness with a stimulus program, but the stimulus announced so far has been underwhelming, as it has consisted mostly of targeted tax cuts. Anne Stevenson-Yang of J-Capital observed that China lacks the debt service ability for another round of shock-and-aw credit-driven stimulus.

The market was further hit by the news of weakness in eurozone M-PMIs, indicating deteriorating European growth. The outlook for the core European countries of France and Germany stand out as particularly problematical.

While the disappointing PMI figures put stock prices under pressure at the open, the bulls must have been encouraged by the intra-day recovery to see the market close only slightly negative on the day.

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



A Special Announcement
We told you so. We told you the market was going down.

Here is the track of Humble Student of the Markets, where we are neither perma-bulls nor perma-bears. Most recently, we have been correctly bullish since the correction of 2015, and turned cautious in August 2018 (see Market top ahead? My inner investor turns cautious, August 5, 2018).

We were also timely at the 2009 bottom. We issued a call to buy beaten up low-priced stocks with high insider buying a week before the ultimate bottom (see Phoenix rising? February 24, 2009).

The out-of-sample record of our model trading portfolio in 2018 was up 42.9%. For more details, see our weekly updates here.

The recent market volatility has brought a flood of new subscribers, and we are announcing a price increase, and a number of other changes in order to better control the growth of our community. However, all subscribers will be grandfathered at their old prices.

The following changes will occur as of March 1, 2019:

• The annual subscription price will rise from US$249.99 to US$356 per year.
• The monthly subscription price will rise from US$24.99 to US$35.60 per month.
• The 24-hour subscription will no longer be offered.
• The embargo period for free content will change from two weeks to four weeks.

Remember, if you subscribe now, you will be grandfathered at the old price - permanently.

How to spot the bear market 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 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 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 those email alerts are 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: Bearish*
• 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 the those email alerts is shown here.

Bottom spotting
The outsized daily swings in the major US equity averages tell the classic story of a bear market. Normal bull markets simply do not experience consecutive multiple daily moves of 2% or more.

The market's panicked price action is highly reminiscent of past panics in 1962, 2002, and 2015. In those cases, the market bounced, and made a lower low several months later. In all cases, stock prices were higher a year later.

My base case scenario calls for an initial  low, rally, followed by choppy price action, and a final  low within 6-8 months. The most recent exception to this rule was 2001-2002, when stock prices cratered in the wake of the 9/11 attack, but made the final low just over a year later. Arguably, the 2002 low was distorted by the 9/11 shock, and the market made a double bottom in 2002 within the space of three months.

At this point, market psychology is becoming its own reality, and psychology may wind up dominating intermediate term market action. This week, I go bottom spotting as I offer a checklist of the signs of a market bottom, and try to estimate the downside risk posed by the current bear market.

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

A 2018 report card

The year is nearly over, and it is time to issue a report card for my investor and trading models. Overall, both had good years, except for the trading blemish at year-end.

My inner investor could not have asked for much more. He was correctly bullish during the run-up from early 2016, and turned cautious at the January top. He turned bullish again as the market corrected in February, and became cautious again in August (see A major top ahead? My inner investor turns cautious).

The cautiousness turned into bearishness in early December when my Ultimate Market Timing Model flashed a sell signal after a 10% drawdown (see A bear market is now underway). As a reminder, the Ultimate Market Timing Model is a very slow turnover model that changes its views only every few years. It was designed for by investors with long term horizons, with the intention of avoiding the worse of equity drawdowns associated with major bear markets:

I am indebted to the blogger at Philosophical Economics who suggested a macro overlay to trend following systems (see Building the ultimate market timing model). Major bear markets generally occur under recessionary conditions. Why not ignore moving average signals until your macro model is forecasting a recession?

This “Ultimate Market Timing Model” is ultimately beneficial for long-term investors. If you could cut off the left tail of the return distribution and avoid the really ugly losses, you could run a slightly more aggressive asset mix and receive a higher expected return with lower risk. For example, if the standard risk-return analysis dictates a 60% stock and 40% bond asset mix, you could change it to a 70/30 mix with this model, and get downside risk similar to the 60/40 portfolio. To be sure, this system isn’t perfect, and anyone using such a model will have to incur “normal” equity risk, and it would not have kept you out of the market in the 1987 Crash.

Little did I expect the market to fall so dramatically after that sell signal, but I can't ask for much more in an asset allocation model, either on an intermediate or long term perspective.

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

What just happened in the stock 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 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 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 those email alerts are 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: Bearish*
• 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 the those email alerts is shown here.



What is the market discounting?
The velocity and ferociousness of the recent US equity market weakness caught even bears like me by surprise. My social media feed has been filled with extreme bearishness. Opinions are now becoming bifurcated. Either the decline is the signal of something big, or the fall in stock prices represent a buying opportunity for fundamentally oriented investors.

It is impossible to make a buy, hold, or sell decision without some understanding of what the market is discounting. In other words, what bet are you making if you decide to buy or sell stocks here?

Further analysis reveals that investors are discounting only a mild US slowdown in 1H 2019, but no recession. From a technical perspective, both the US and global markets have violated well-defined uptrend lines, just as they did in 2015 and 2007. It remains an open question as to whether the trend line breakdowns will result in just a mild pullback, or a deeper bear market. (Please note that the curves and arrows drawn on the charts are only stylized, and do not represent technical projections or targets).

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

A bloodbath on Wall Street

Mid-week market update: I had expected to begin to wind down and relax for the holidays this time of year. Instead, we got a bloodbath in the stock market.

To say that the market is oversold is an understatement. Sure, standard measures indicate oversold conditions, such as the VIX Index had risen above its upper Bollinger Band. Interestingly, the VIX Index failed to rise today despite the carnage in the stock market, which could be a sign of hope for equity bulls.

The Fear and Greed Index is also showing extreme conditions.

Oversold markets can become more oversold. How oversold? This report from UBS puts the velocity of the sell-off into context.

Here is the full chart from UBS:

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

How China and America could both lose Cold War 2.0

In a past post (see Pax Americana or America First?), I showed how the combination of the unequal sharing of productivity gains and the inward looking America First policies were eroding US competitiveness, and raising the fragility of the post-WW II Pax Americana boom.

Even though the US and China appears to be locked into a Cold War 2.0, I would like to demonstrate how both countries appear to be locked into paths that will eventually stall their growth.

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

How this bear market could 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 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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are 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: Bearish*
• 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 the those email alerts is shown here.



What happens after the sell signal?
Last week's publication generated much discussion (see A bear market is now underway). Some of the questions related to the duration and downside target in a bear market. How far can stocks fall? How long will it last? What might be the trigger for a buy signal?

To reiterate my thesis from last week. Poor technical action and a recession forecast for late 2019 or early 2020 prompted the equity sell signal. The recession forecast stems from the combination of near-recession conditions based on conventional US macro indicators, evidence of global weakness in both Europe and China, and the near certainty of a trade war which would further tank global growth.

What might turn this bear thesis around, or put a halt to the bear market? Here are a couple of possible fundamental triggers:

• An end to the trade war
• More stimulus underpinned by the ascendancy of MMT in fiscal policy circles

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

Good and bad news from the sentiment front

Mid-week market update: This market is becoming increasingly jittery. Indeed, the chart below shows that the stock market moves more per dollar traded than usual, indicating a lack of liquidity.

This indicates that volatility is likely going to increase. Such an environment can be both profitable and trying for traders, as I have both good news and bad news from the sentiment front.

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

Pax Americana, or America First?

December is the season for investment advisors and portfolio managers to meet with their clients. Here are some thought on your an allocation framework as you prepare for those meetings. As a cautionary message, let's begin with a "buy and forget" portfolio featured in Fortune in 2000 and how they performed by 2012.

Haha. Experienced portfolio managers and advisors don't make those kinds of mistakes. We all know that diversification is the only free lunch in investing.

For the simple answer on personal investing, I refer readers to a Business Insider article by Chelsea Brennan, "I spent 7 years working in finance and managed a $1.3 billion portfolio — here are the 5 best pieces of investing advice I can give you":

1. Understand your goals
2. Index fund investing is the easiest way to win
3. Be in it for the long term
4. Don't assume you have it all figured out
5. Be prepared for anything

Unfortunately, I see American investors making the diversification mistake, as well as mistakes 4 and 5 again and again. Much of what passes for financial planning in the US is based on the mistaken assumption of a backtest that has severe survivorship problems. This will becoming increasingly evident as American policy changes from the era of Pax Americana to America First.

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

Forget the Powell Put, what about a Trump Put?

I have been engaged in a running debate about the possibility of a Trump Put in the market. My friend believes that Trump is likely to pull back from a full-scale trade war with China, as it would tank the stock market and increase the likelihood of a recession. The Republicans lost the House in 2018 with the unemployment rate at 3.7%. A recession in 2019 or 2020 will not only lose them the White House, but probably both houses of Congress. Trump wants to avoid that scenario at all costs.

The WSJ reported that Trump has been glued to the stock market and therefore highly sensitive to price gyrations:

As the stock market churned this week, President Trump anxiously called advisers both inside and outside the White House looking to ensure that his talks with China were not driving the selloff.

Fresh off what he described as a historic weekend meeting with China’s President Xi Jinping, Mr. Trump has questioned why the markets weren’t reacting more positively to the news of the potential breakthrough with Beijing. In consulting with advisers, he remained convinced that the volatility wasn’t his own doing, but rather, the product of the Federal Reserve’s plan to raise the benchmark interest rate.

As the stock market churned this week, President Trump anxiously called advisers both inside and outside the White House looking to ensure that his talks with China were not driving the selloff...

Fresh off what he described as a historic weekend meeting with China’s President Xi Jinping, Mr. Trump has questioned why the markets weren’t reacting more positively to the news of the potential breakthrough with Beijing. In consulting with advisers, he remained convinced that the volatility wasn’t his own doing, but rather, the product of the Federal Reserve’s plan to raise the benchmark interest rate.

In short, the President's daily mood seems to be sensitive to stock prices:

Wall Street analysts took note of the administration’s comments this week around the trade talks. Analysts at Morgan Stanley declared them indicative of the administration’s “markets-sensitive” approach to policy-making.

Nomura Securities said that it was yet “another indication that President Trump is sensitive to the market and economic disruptions that his trade policies can generate. That sensitivity may suggest that there are limits on how he will push those policies.”

Treasury Secretary Steven Mnuchin, speaking at The Wall Street Journal CEO Council in Washington on Tuesday, said that “the (stock) market is now in a wait and see” moment with regard to China: “Is there going to be a real deal at the end of 90 days or not?”

Is there a Trump Put in stock prices? If the market were to really tank, could a Trump change of heart on China turn the market around?

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

A Bear Market is now underway

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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are 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*
• Trend Model signal: Bearish*
• 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 the those email alerts is shown here.



The Ultimate Timing Model flashes a sell signal
Over the years, I have struggled with the problem of integrating technical analysis into an investment process. Trend following systems that employ one or more moving averages work well longer term, but they have the disadvantages of being slow (by design), and they can produce false positives which whipsaw during trendless periods.

The chart below shows how a simple 200 dma as a buy and sell signal would have worked for the SPX in the last 20 years. The good news is it kept you out of major bear markets, but at the cost of numerous whipsaws, which are circled.

I am indebted to the blogger at Philosophical Economics who suggested a macro overlay to trend following systems (see Building the ultimate market timing model). Major bear markets generally occur under recessionary conditions. Why not ignore moving average signals until your macro model is forecasting a recession?

This "Ultimate Market Timing Model" is ultimately beneficial for long-term investors. If you could cut off the left tail of the return distribution and avoid the really ugly losses, you could run a slightly more aggressive asset mix and receive a higher expected return with lower risk. For example, if the standard risk-return analysis dictates a 60% stock and 40% bond asset mix, you could change it to a 70/30 mix with this model, and get downside risk similar to the 60/40 portfolio. To be sure, this system isn't perfect, and anyone using such a model will have to incur "normal" equity risk, and it would not have kept you out of the market in the 1987 Crash.

Stock prices have been weak for several months. Today, any flavor of moving average system would produce at best a neutral signal, and at worst a sell signal. At the same time, I have been maintain a Recession Watch suite of long leading macro indicators designed by New Deal democrat to spot recessions a year in advance. My latest review (see 2019 preview: Winter is coming) shows that the macro models are flickering red, indicating a slowdown in 2019, but I am not ready to call a recession yet using conventional macro analysis.

However, good modelers also know the limitations of their models, and other factors that are not captured by the Recession Watch indicators are sufficiently negative for me to call for a recession to start in late 2019 or early 2020. The combination of weak stock prices and a recessionary call therefore changes my Ultimate Market Timing Model to a sell signal.

The current drawdown for the SPX from its peak is about 10%, which represents an acceptable level of equity risk for a long-term asset allocation model for patient money. Investment oriented accounts should move to a maximum defensive posture. Tactically, the market is very oversold and poised for a relief rally. Investors should take advantage of any strength to reduce equity risk. Traders may want to position themselves for the anticipated advance into year-end.

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

Curb your (dovish) enthusiasm

Mid-week market update: In the wake of the Powell speech last week and the FOMC minutes, the market implied odds of rate hikes have plunged. While the base case calls for two rate hikes by June, the odds of a once and done policy after a December hike is rapidly increasing, while the probability of three more hikes by June has plunged.

Curb your dovish enthusiasm.

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

Say goodbye to the nostalgia of Trump`s 1950`s America

Last week, Donald Trump tweeted his dissatisfaction with General Motors' decision to close four US plants.

I feel his pain. Indeed, wage growth in Old Economy industries have been stagnant for quite some time.

The WSJ wrote an editorial in response:

President Trump believes he can command markets like King Canute thought he could the tides. But General Motors has again exposed the inability of any politician to arrest the changes in technology and consumer tastes roiling the auto industry.

I agree. Trump's 1950's framework for analyzing the economy has become outdated. The world is moving on, and investors should move on too.

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

2019 preview: Winter is coming

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 the 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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are 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*
• Trend Model signal: Bearish*
• 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 the those email alerts is shown here.



Winter is coming
The market will undoubtedly react positively to the news from Buenos Aires at the market open on Monday. Both sides agreed to a 90-day ceasefire, where the US agreed not to hold off on additional tariffs scheduled for January 1, and China agreed "to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries". The trade war will be back on if both sides don't come to an agreement after 90 days.

Risk on!

Josh Brown had a terrific analogy for the stock market, though he could not claim to be the originator. He characterized the stock market as a untrained and hyperactive Jack Russell terrier leashed to its owner, the economy. Both move in the same general direction, but the dog`s movements are far more erratic and excitable. They don`t have the same temperament and tendencies, but over time, they move in the same direction.

Technical analysis can help with discerning the short-term movements of the dog, and fundamental and macroeconomic analysis gives us insights on the dog handler. Notwithstanding the results of the trade negotiations in Buenos Aires, our analysis of the handler (economy) provides ample evidence that winter is coming.

More ominous is the Morgan Stanley Leading Economic Indicator, which is pointing to a significant deceleration in earnings growth in 2019, even without a trade war.

The only question is whether it will be a mild or harsh winter.

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