Get ready for the year-end rally

Mid-week market update: The Fed delivered a dovish pause today. In addition, Powell was given opportunities to push back with bearish scenarios, such as raising concerns over the recent risk-on rally as a sign that financial conditions are loosening, or the elevated levels of super-core inflation, but he declined to do so. It is becoming more and more evident that the rate hike cycle is over. The market is looking forward to rate cuts and it’s discounting cuts to begin in March and five quarter-point cuts in 2024.

 
Here is a framework for thinking about the Fed’s monetary policy.

The full post can be found here.

The animal spirits are still alive

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 20-Nov-2023)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

A healthy consolidation

The S&P 500 staged a late Friday breakout above 4600 out of a narrow consolidation range. The accompanying hourly chart shows that whenever the 14-hour RSI reaches an overbought extreme of 90 or more, it has retreated to a minimum level of 50, which it has in the latest episode. In light of the powerful momentum exhibited by the Zweig Breadth Thrust buy signal in early November, the market has met the conditions for another bull run in the near future. 

 
I continue to believe that stocks are poised for a rally into year-end. My analysis of market internals shows that the market’s animal spirits are still alive.

 

The full post can be found here.

What happens after the momentum chase?

The Zweig Breadth Thrust buy signal in early November sparked a price surge and a price momentum chase. Already, the S&P 500 made a late-day charge above 4600 for a new recovery high. 

The price momentum factor is defined as stocks that beat the market continue to beat the market. The red line in the accompanying chart shows the difference between the one-month price momentum ETF (FDMO) and the six-month price momentum ETF (MTUM). One-month momentum has rocketed upward against six-month momentum, which is an indication that under-invested funds are scrambling to buy beta and momentum in order to catch up on performance.

In all likelihood, the momentum chase will last until year-end as fast money accounts continue to chase returns into year-end. The key question for investors is what happens after the chase?

 

The full post can be found here.

More sideways consolidation before the Big Event

Mid-week market update: Another day, another sideways consolidation price action in the S&P 500, which is typical of seasonal pattern in the first half of December.

 
Beneath the surface, I am seeing numerous signs that the market is still poised for the year-end rally.

The full post can be found here.

Sell signal set-ups are appearing, but don't panic

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 20-Nov-2023)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

 

Don’t overstay the party

Two weeks ago, I set out a number of bearish trigger warnings for investors (see How Far Can This Market Run?). Two signals have been triggered.

The NYSE McClellan Summation Index saw its weekly stochastic (bottom panel) edge into overbought territory. The NASDAQ McClellan Summation Index, which is not pictured, also reached a similar reading.

 
Don’t panic. These readings are only bearish set-ups and not immediate take-profit signals. Current conditions are consistent with a rally into year-end and possibly early January, but it is a warning not to overstay the party.

 

The full post can be found here.

The market meaning of a gold breakout

Gold bulls became very excited when gold prices tested overhead resistance at the 2000–2100 level. In the past, such tests had been met with selling pressure, but technical analysts would interpret a definitive breakout at these levels as opening the door to significant upside.

Moreover, the bottom panel of the accompanying chart shows that the gold to S&P 500 ratio has been making a multi-year bottom, which argues for the start of a cycle that favours hard assets like gold and commodities over paper assets like stocks and bonds. Before you get too excited, such bottoms can take some time to develop and a hard asset bull market may not appear for several years.

In addition, the long-term bull case for commodities and hard assets is underscored by a regime of chronic underinvestment in capital expenditures in commodity extraction industries.

 

I am no gold bug and I have no strong opinion on the direction for gold prices. I am more interested in the cross-asset implications of this gold rally.

 

The full post can be found here.

A correction in price, or time?

Mid-week market update: I recently pointed out that the S&P 500 was becoming overbought and poised for a consolidation or pullback. The 14-day RSI had reached the overbought zone and the percentage of S&P 500 stocks above their 20 dma exceeded 90%. The market tried to rally today, but failed. Is this the correction?

Corrections can occur in price or time. The market could pull back (price) or the market could consolidate sideways (time).

The full post can be found here.

7 reasons to embrace the melt-up into year-end

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Neutral (Last changed from “neutral” on 14-Nov-2023)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

 

A cup and handle breakout

Much has been made about a nascent cup and handle pattern in the S&P 500 and the NASDAQ 100, which would have strong bullish implications if either index were to stage upside breakouts. While investors wait for those breakouts, here is a cup and handle that has staged a definitive upside breakout on both an absolute basis and relative to the S&P 500. It was made by the NYSE FANG+ Index, which represents megacap growth stocks.

 

 

In light of the strong price momentum exhibited by the stock market in the wake of the Zweig Breadth Thrust buy signal, I believe these are strong indications that investors and traders should embrace a market melt-up scenario into year-end and possibly beyond.

The full post can be found here.

How a global leadership review reveals opportunities

Much has happened since my last global market review. Investors saw a bond market tantrum, followed by a down yield reversal and a risk-on rally in asset prices. Willie Delwiche at Hi Mount Research put the equity price surge into perspective when he observed that 94% of global markets in the MSCI All-Country World Index (ACWI) had exceeded their 50 dma. This is a sign of strong global breadth that shouldn’t be ignored.

 
Drilling down, let’s take a quick trip around the world to spot investing opportunities.
 
The full post can be found here.

Three white soldiers lead the way

Mid-week market update: The “three white soldiers” candlestick pattern is made up of three long white candles, and typically occurs after a falling price trend. It is indicative of strong price momentum after a price reversal. This pattern is evident in the weekly S&P 500 chart shown below.  Usually, the market consolidates sideways after the “three white soldiers”, but the market has continued to advance on the back of the strength of the recent breadth thrust signals. As well, the index faces initial resistance at about 4600, which should be overwhelmed in light of a combination of strong price momentum and the lack of volume resistance (see side bars).

 
This is a timely gift to all investors and traders who observe U.S. Thanksgiving.

The full post can be found here.

How far can this rally run?

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 27-Oct-2023)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

 

 

An extraordinary price surge

The S&P 500 rally off the bottom in late October has been extraordinary. It resolved itself in a Zweig Breadth Thrust buy signal and four price gaps that likely won’t be filled. Classical chartists would characterize them as breakaway gaps indicating strong price momentum.

 
How far can this rally run?

The full post can be found here.

Assessing economic risk through the Biden-Xi meeting lens

The markets took a risk-on tone in the wake of a softer-than-expected CPI report, followed by a tame PPI report and strong retail sales print. Even before these reports, Mohamed El-Erian issued a warning about the goldilocks scenario of lower oil prices and falling bond yields.

Is market psychology in a “bad news is good news” mode that’s discounting weakness ahead? To answer that question, one useful way of seeing the world is through the lens of last week’s meeting between Joe Biden and Xi Jinping on the sidelines of the APEC Summit in San Francisco. The U.S. and China met to stabilize their relationship, but each is coming to the table with deep wounds, which are useful in evaluating potential weakness that could affect the global economy. The actual progress made at the meeting was modest, but it’s less important inasmuch as what it revealed about the vulnerabilities of each economy to the growth risks highlighted by El-Erian.

The full post can be found here.

Too many people are fighting the rally

Mid-week market update: Until yesterday’s market melt-up, it seemed that individual investors were fighting the rally, which is a contrarian bullish sign. I noticed it on the weekend when the level of engagement on my bearish tweets were an order of magnitude higher than my bullish ones. In addition, the New York Fed’s recent consumer expectations survey was having trouble finding equity bulls.

 

The full post can be found here.

Will narrow leadership unravel the ZBT buy signal?

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 27-Oct-2023)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

 

 

 A narrow advance

The recent Zweig Breadth Thrust signal should have been unconditionally bullish. This is a rare signal that has only been generated eight times since Marty Zweig first wrote about it in 1986. The stock market has been up 6 and 12 months later after every single signal. In some cases, stocks continue to rise like a runaway freight train. In three instances, which include the buy signal generated in late March, the market rose but pulled back several months later to re-test the buy signal level.

What category will the latest buy signal fall in?
 

One short-term blemish to the latest buy signal is the problem of narrow leadership. Breadth, as measured by the ratio of S&P 500 to equal-weighted S&P 500 and net new highs, has been abysmal in the latest post-buy signal advance. Leadership has been mainly concentrated in the megacap growth stocks and small and mid-caps haven’t participated in market strength in the same way.

 
Will narrow leadership and bad breadth sink the latest ZBT buy signal?

 

The full post can be found here.

Five bullish reversals you may have missed

The S&P 500 exhibited a surprise price reversal on the weekly chart. After violating an uptrend line that stretches back to the COVID Crash bottom which scared the living daylights out of a lot of investors, the index staged an upside reversal while the weekly stochastic recycled from oversold to neutral, which has been a useful buy signal in the past.

 
In addition to this obvious bullish price reversal on the weekly chart, here are five other risk reversal factors that you may have missed.
 

The full post can be found here.

Time for a ZBT price reset?

Mid-week market update: I have written extensively about the Zweig Breadth Thrust and its bullish implications in the past few days. In case you haven’t seen the numerous historical return studies floating around on the internet, here is one from Ryan Detrick of Carson Group.

 

 
In almost instance, the market cools off for a few days after the ZBT buy signal. Is it time for a temporary ZBT price reset?

The full post can be found here.

Zweig Breadth Thrust: From caution to YOLO

I would like to address the feedback from my recent publication, Nine reasons why this rally has legs. Some readers questioned my change in tone in the interpretation of the Zweig Breadth Thrust buy signal.
As a reminder, the ZBT is a price momentum signal. It is triggered when breadth indicators rise from oversold to overbought within 10 trading days. Breadth thrust price momentum signals usually resolve in a surge. The market triggered a ZBT buy signal on March 31, 2023 and my reaction was cautious (see Why I am fading the latest breadth thrust). This time, the tone is far more bullish and I am inclined to adopt a YOLO (You Only Live Once) to portfolio positioning.

I wrote in early April that I was cautious, but not outright bearish. I was mostly correct. Instead of a price surge, the S&P 500 traded sideways for two months after the buy signal, rallied and topped out in late July, and pulled back to the approximate level of the buy signal in late October.

Here’s what’s different about the latest signal compared to March.

 

The full post can be found here.

Nine reason why this rally has legs

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Bullish (Last changed from “neutral” on 27-Oct-2023)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

 

 

This rally has legs

Last week, I outlined bullish and bearish scenarios and estimated their odds at 70% and 30%, respectively. The bulls won.

A relief rally was more or less inevitable. Once the S&P 500 violated a rising trend line that began at the COVID Crash bottom, it scared the daylights out of the bulls and caused a panic. The weekly slow stochastic touched 10, which has marked either important bottoms or tactical bottoms in the past.

 

I believe the combination of a severely oversold condition, washed out sentiment and the lifting of market concerns will spark a durable rally into year-end. I can think of nine reasons why this rally has legs. The reading of 10 on the weekly slow stochastics is just the first.

 

The full post can be found here.

How the U.S. could be in both a bull and bear market

There was some consternation among equity bulls when the S&P 500 violated its 200 dma as it could have been the signal of a major bearish episode.

 

Technical analysts offered some relief when they pointed out that it’s the slope of the 200 dma that matters. The historical evidence shows violations of the 200 dma when the moving average is just a correction in an uptrend. However, an index that’s trading below a falling 200 dma is a warning flag that a bear market is under way. The arrows in the accompanying chart show the occasions when the S&P 500 fell below a falling 200 dma. Often these signals occurred when the index violated a rising moving average, which later turned down, marked by the red arrows.

 

The bulls may have felt vindicated when the S&P 500 regained its 200 dma late last week. This episode is a lesson for investors to regard similar circumstances as a buying opportunity. But that’s not the entire story as the market is becoming increasingly bifurcated.

This chart shows the S&P 500, NASDAQ 100, Dow Jones Industrials Average, the mid-cap S&P 400 and the small-cap Russell 2000 with their respective moving averages. The good news is the S&P 500 and the Dow regained their 200 dma. While the S&P 500 moving average has been rising, the same isn’t true for the Dow. The NASDAQ 100 is holding above its 200 dma. The bad news is the S&P 400 and the Russell 2000 are below falling moving averages. The strength of the S&P 500 has been held up by megcap growth stocks. In the absence of the effects of megcap growth, the other major U.S. equity averages are signaling bear markets.

How you position yourself in light of this bifurcation in market internals depends on your time horizon and whether you are a momentum or value investor.

The full post can be found here.

The anticipation can be worse than the pain

Mid-week market update: I told you so. As I recently pointed out, psychology had become too stressed to the downside, which opened the door to a relief rally. The NAAIM Exposure Index, which measures the sentiment of RIAs who manage individual investors’ funds, fell sharply last week and below its 26-week Bollinger Band. Historically, theses signals have resolved in a tactical rally in stock prices.

 
Sometimes the anticipation can be worse than the event itself. Coming into the weekend, the market was focused on three sources of possible stress: geopolitical tensions from the Israel-Hamas war, excess supply putting upward pressure on Treasury yields, and Fed policy.  Here’s how those fears have resolved themselves.

The full post can be found here.