What an actual bond market catastrophe looks like

Mid-week market update: Is the bond market tantrum over?

Here is the good news. In the wake of tame PPI and CPI reports this week, the 30-year Treasury yield retreated while in a resistance zone (top panel). In addition, there is nothing worse than a failed breakout. The second panel shows the inflation factor trade, consisting of long TIPS and short long-dated zero coupon Treasuries, which staged an upside breakout and reversed itself.

 

The worse of the yield spike fears may have passed. But that was nothing. As a lesson. Here is an actual case of what a potential bond market catastrophe from uncontrolled debt growth looks like.

The full post can be found here.

A focus on financials

The Q4 earnings reporting season kicks off Wednesday with reports from major banks and financial companies. This is a good opportunity to review the outlook for the financial sector.

 

The full post can be found here.

What's rattling 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 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: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 19-Dec-2024)*

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

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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.

Is the honeymoon over?

What’s rattling the stock market? The S&P 500 has been mired in a trading range that began in early November. It sold off in mid-December and flashed an extremely oversold reading on December 20. Subsequent rally attempts have failed and the index is testing its December lows. A definitive breakdown opens the door to a decline to the 200 dma at 5573.

 

Four weeks ago, I published an article entitled “The Public Embraces the Trump Honeymoon”. Under ordinary circumstances, a relief rally should be well underway by now. Is the honeymoon over? How patient should investors be with the bull case?

The full post can be found here.

A preview of the Sino-American Trade War 2.0

China’s leadership was caught off-guard in 2016 because few people expected Trump to win the election. This time, Beijing has had plenty of warning, and it is far better prepared for Trade War 2.0.
 

The key difference is the divergence in the path of economic growth, as signaled by the bond market. Chinese 10-year yields have plunged below 2%, which is a sign of a dramatic slowdown. By contrast, U.S. 10-year Treasury yields have risen, which reflects concerns over a heightened fiscal deficit and rising inflation.

 
In the face of economic weakness, China seems to be preparing for Trade War 2.0 on a different dimension of belligerence. China has embraced von Clausewitz’s famous quote on war: “War is merely the continuation of politics by other means.”

Investors should prepare for greater newsflow volatility and rising geopolitical risk in the months ahead.

The full post can be found here.

A tale of two markets

Mid-week market update: When we last left the stock market on the weekend, the bulls were given a homework assignment (see A failed Santa rally, what now?).

1. The S&P 500 and Russell 2000 had to stage upside breakout through the falling dotted trend line. While the S&P 500 briefly broke out, it retreated yesterday through the trend line. The Russell 2000 never came close to a breakout.
2. The S&P 500 and Russell 2000 had to break out of their sideways range. Not yet.
3. Small caps should outperform, indicating broadening breadth and better participation in an advance. The bad news is the small cap Russell 2000 is lagging. The good news is the equal-weighted S&P 500 is holding up well on a relative basis, and small caps outperformed yesterday during the market decline.
   

Tuesday's equity pullback was attributable to the rise of the bond market vigilantes, who pushed bond yields up and rattled overall risk appetite. On the other hand, the stock market's own technical internals are supportive of an advance.

 

In other words, it's a tale of two markets.

 

The full post can be found here.

A failed Santa rally, now what?

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: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 19-Dec-2024)*

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

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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.

Santa has left for the year…

As I pointed out last week, the Santa Claus rally window is the last four days of the year and the first two days of the new year, and it’s one of the seasonally bullish periods of the year. History shows that a failed Santa rally often leads to subpar returns for the remainder of the year. The first day of the window was December 24 and the last day was January 3.

Santa has failed to call this year. The S&P 500 and the Dow closed above their respective Santa rally levels, though the Russell 2000 was marginally positive.

 
If adage about the Santa Claus rally is to be believed, the odds favour a subpar year in 2025 for the S&P 500: “If Santa should fail to call, the bears may come to Broad and Wall”. 

 

The full post can be found here.

Trump's messy governing challenges

The year started with a bang. Investor hopes were high on the expectation of the implementation of Trump’s pro-business and pro-growth policies, but stock prices struggled and ended last week in the red.

According to FactSet, the bottom-up aggregated S&P 500 target price for year-end 2025 is 6,678.18. But in the last 20 years, bottom-up analysts have historically overestimated the S&P 500 year-end price by 6.9%. Applying the 6.9% discount we would arrive at an adjusted target of 6,084.19, which represents a price gain of 5.7% for the year.

The FactSet adjusted estimate is roughly in line with my expectation of low single-digit gains. Along the way, however, I expect a higher degree of market volatility during the year as the Trump 2.0 Administration takes office and faces the challenges of governing.

The full post can be found here.

So much for December seasonality

Mid-week market update: I reiterate my belief that while seasonality is informative of climate, it is not a forecast of the weather ahead. 2024 was a difficult year based on seasonal patterns, as depicted by Jeffrey Hirsch of Almanac Trader.

 

Instead, the stock market was weak in the second half of December and small caps leadership did not emerge during that period. That said, the S&P 500 ended to year right at trend line support and the NASDAQ 100 ended the year at 50 dma support.

 

 

 The full post can be found here.

Contrarian bargains among Santa's discards

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: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 19-Dec-2024)*

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

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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.

If Santa should fail to call…

The Santa Claus rally window is the last four days of the year and the first two days of the new year, and it’s one of the seasonally bullish periods of the year. History shows that a failed Santa rally often leads to subpar returns for the remainder of the year. The first day of the window was December 24. So far, the market has performed well this year. 

There is an adage among traders: “If Santa should fail to call, the bears may come to Broad and Wall”. If the advance continues, the risk of a major bear market in 2025 is diminished though.

  
So far, the question of whether Santa Claus will appear this year is a toss-up. It is constructive that Friday’s S&P 500 decline bounced off the 50 dma. While the S&P 500 closed marginally below the December 23 close, which is the Santa Claus rally starting level, both the Dow and Russell 2000 closed above their respective Santa rally levels. 

 

The full post can be found here.

Estimating downside risk

I have warned about excessive valuation before (see 2025 Outlook: Cautious But Not Bearish). The S&P 500 is trading at a forward P/E of 22, which is elevated by historical standards. On one hand, valuation isn’t highly predictive of returns over a one-year horizon. On the other hand, elevated P/E ratios lead to lower returns over a five-year time horizon.

In other words, valuations don’t matter until they matter. As investors look ahead into 2025 against a backdrop of a high P/E market, one key question is: “What’s the downside risk in the event of a bear market?”
 

The full post can be found here.

The darker meaning of the HIndenburg Omen

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: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Neutral (Last changed from “bullish” on 03-Dec-2024)*

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

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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 unusual omen

I recently highlighted the trigger of the ominously named Hindenburg Omen, which describes the condition of a highly bifurcated market undergoing a downside break (see A Hindenburg Omen in an Oversold Market). While Hindenburg Omens often resolve in corrective market action, the current episode occurred against the backdrop of an extremely oversold market with readings reminiscent of the Christmas Eve Panic of 2018, the COVD Crash of 2020, and the October bottom of 2022.

 

The full post can be found here.

Asset return expectations under an alien invasion

Publication note:  There will be no mid-week update next week. The regular publication schedule will resume next weekend.

 

Is ET here?

The holidays are a great time to decompress and think about big picture topics. This year, I focus on the limitations of modeling techniques for long-term asset returns and the risk of discontinuous exogenous events. In case you missed it, there have been numerous stories emerging in the press about unknown flying objects in the New Jersey area (see this NY Times account as one of many examples). The sightings expanded to other parts of the U.S., and they have been spotted in other countries as far away as Iran, Chile, Japan, and the Philippines. 

 

While I am a subscriber to Occam’s Razor, which can be paraphrased as the simplest explanation is the most satisfactory, and these UFOs are of terrestrial origin, it’s a worthwhile exercise to consider asset return expectations under the scenario of an extra-terrestrial alien invasion. 

The full post can be found here.

A Hindenburg Omen in an oversold market

Mid-week market update: What happens when an ominously sounding Hindenburg Omen occurs when the market is oversold? David Keller described the three components of the Hindenburg Omen in an article:

1. The market has to be in an established uptrend;
2. Market breadth becomes highly bifurcated, as measured by the expansion of new highs and new lows; and
3. A downside break in price momentum.

Keller characterized the accuracy of this signal as "ten of the last three market corrections". A single signal hasn't been very useful, but a cluster of signals puts me on notice of a significant risk of a correction. The accompanying chart shows the history of Hindenburg Omens (pink=corrections, grey=false positives). Does the latest episode qualify as a cluster?

 

The full post can be found here.

Could a hawkish rate cut rattle markets?

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: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Neutral (Last changed from “bullish” on 03-Dec-2024)*

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

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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.

Stubborn inflation

Investors heard some good news and bad news from the inflation reports last week. The good news is monetary policy is still too tight. The Fed Funds rate (black line) is too high compared to core inflation metrics and need to fall. The bad news is inflation progress to the Fed’s 2% appears to be stalling. Inflation is facing a last-mile problem of getting to 2%. 

This environment is setting up conditions for a hawkish rate cut at the December FOMC meeting. While the Fed is widely expected to cut rates by a quarter-point, it is also likely to signal a slower pace of future cuts.

 

The full post can be found here.

The public embraces the Trump honeymoon

The latest University of Michigan sentiment survey is out, consumer sentiment surged in the wake of Trump’s victory.

The full post can be found here.

Here comes the end-of-year positioning season

Mid-week market update: We are entering the time of year when investors and traders position themselves for the end of the year. These conditions have made it more challenging for anyone trying to trade based on conventional technical analysis.

 

The most obvious is tax loss selling, when investors harvest losses to offset their (likely) considerable gains of 2024. Another is hedge funds shutting down their books in order to avoid the thin and potentially volatile market environment during the last two weeks of December.

We likely saw some hedge fund profit taking this week when Bespoke observed that winners were being sold and losers were being bought. This is consistent with market-neutral or long-short funds squaring their books for the year.

The full post can be found here.

Bitcoin 100K: Buy or fade the animal spirits?

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: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)*

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

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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.

Crypto leads the stampede

Now that Bitcoin has exceeded the psychologically important 100,000 mark, it is becoming evident that the FOMO risk-on stampede is in full force. The risk-on mood can also be seen in the relative performance of speculative growth stocks, as measured by the Ark Investment ETF (ARKK), which has shown a roughly correlation with Bitcoin. In addition, ARKK has staged an upside breakout from a multi-month base.

 
Is it too late for traders to hitch a ride on the risk-on train or should they fade the rally? Here are the bull and bear cases.

The full post can be found here.

Investing during an era of American Exceptionalism

As 2024 draws to a close, it is becoming clear that the U.S. equities have led the way for most of the year. The accompanying chart shows the relative returns of equities by major region against the MSCI All-C ountry World Index (ACWI). The U.S. has been the only safe-haven of growth as the economies of other regions sputtered.

 
This was the year of TINA (There Is No Alternative) for American equities. Can it continue into 2025?

The full post can be found here.

Seasonal weakness ahead?

Mid-week market update: Jeffrey Hirsch of Almanac Trader recently indicated that the first part of December sees a period of seasonal weakness, followed by small cap leadership into year-end.

I regard seasonality as informing me about the climate, while the weather can vary day-to-day. Here is my assessment of the weather ahead.

The full post can be found here.

Stock market clues from the bond market

Preface: Explaining our market timing models 

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

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

 

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

  

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)*

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

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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.

Clues from the bond market

The S&P 500 made a marginal all-time high last week and pulled back. However, investors may find insights about the near-term outlook for equities from the bond market.

The accompanying chart shows how the VIX Index (middle panel, red dotted line, inverted scale) and MOVE Index (middle panel, black line, inverted scale), which is the VIX of the Treasury market, have mostly normalized their episode of pre-election anxiety. However, MOVE hasn’t fully normalized compared to VIX. We interpret this to mean that there is more room for Treasury yields to fall (bottom panel), which would be supportive of equity valuation.
 

The combination of sentiment returning to pre-election levels and the S&P 500 remaining in a well-defined uptrend leads us to believe that stock prices can continue to rise into year-end.

 

The full post can be found here.