Sunday, May 22, 2022

Washed out enough?

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: 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Different fears for different folks
Is the market sufficiently fearful yet? There is no single sentiment indicator. The market consists of different constituents and different types of investors can be bullish or bearish at any single point in time. While conventional surveys such as Investors Intelligence shows continued levels of extreme bearishness, other indicators can tell different stories.


The full post can be found here.

Saturday, May 21, 2022

From FOMO to GIDOT (Glad I Don't Own That)

Legendary investor John Templeton once said:
Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
Where are we in the market cycle? From a long-term perspective, the S&P 500 is wildly oversold on the monthly MACD histogram, but the 14-month RSI has retreated to a neutral reading. Market psychology has shifted from FOMO (Fear of Missing Out) to GIDOT (Glad I Don't Own That).



The full post can be found here.

Wednesday, May 18, 2022

Is the bounce over?

Mid-week market update: One of the concerns I had after last Friday's market turnaround was that a bounce had become the consensus view. Virtually every technical analyst was calling for a bear market rally, followed by further weakness. It sounded too easy. Either the bounce was going to fail, or the market was going to roar to new highs.

The market followed through Friday's strength with a 2% gain in the S&P 500 yesterday (Tuesday), but managed to give it all back and more today. The hourly S&P 500 chart exhibited a possible upside breakout through an inverse head and shoulders pattern, which was thwarted by today's weakness. While there is nothing worse than a failed breakout, it could be argued that the market is in the process of forming the last shoulder of the formation. 


In light of today's market action, is the bounce over?

The full post can be found here.

Sunday, May 15, 2022

The crypto contagion risk to 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*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


A crypto bank run
I had voiced my reservations about the cryptocurrency ecosystem in the past (see The brewing Lehman Crisis in Crypto-Land) and the risks manifested themselves in the last week. To briefly recap the problem, cryptocurrencies are mainly traded in the offshore market. A crypto trader can exchange USD for crypto, but banks do not allow direct access to crypto exchanges, with some exceptions. The crypto trader can exchange his USD for a stablecoin, which is a token that is theoretically backed 1 for 1 to the USD. He then exchanges his stablecoin to buy cryptocurrencies and back when he sells. When he wants USD in his account, he instructs the stablecoin provider to convert his stablecoin into USD, which is deposited to his onshore USD account.

The important piece of the crypto ecosystem plumbing is confidence in the stablecoin system. Stablecoins are supposed to be like money market funds, they shouldn't be trading below par. Last week, the TerraUSD stablecoin, also known as UST, broke its USD peg and sparked a crisis of confidence. Within the space of a few days, the value of LUNA had evaporated to zero. Crypto traders began a virtual bank run on stablecoins. Tether, the largest stablecoin, broke its peg last week, While prices have partly recovered and stabilized, Tether is still trading slightly below 1.



The crypto bank run set off a stampede of selling in cryptocurrencies and other speculative risk assets. 


The big question for investors is whether the crypto meltdown will have a long-lasting effect on global risk appetite and risk aversion leak into the equity market. Was the Crypto meltdown last week the new LTCM moment for asset markets?

The full post can be found here.




Sale in May
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Saturday, May 14, 2022

The commodity canary in the coalmine is falling over

One of the main elements of my Trend Asset Allocation Model is commodity prices as a real-time indicator of global growth. As well, John Authers recently wrote, "The commodity market is a real-time attempt to assimilate geopolitical developments, growth fears, and shocks to supply and demand, so it’s an important place to look for the next few weeks." So far, commodities have been elevated even as the global economy showed signs of slowing. The divergence is attributable to supply shocks.



We all know the recent story of supply shocks. The COVID-19 pandemic disrupted global supply chains and caused both a supply shock. As the virus first emerged in China, Beijing responded by shutting down the economy and its industrial capacity came to a virtual halt. Just as the world began to recover from the COVID Crash, the Russia-Ukraine war sparked another supply shock, this time in energy and agricultural products. 

Despite the supply pressures, commodity prices have finally started to fall. In particular, the cyclically sensitive industrial metals have rolled over.


Here is what it all means.

The full post can be found here.




Sale in May
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Wednesday, May 11, 2022

A market bottom checklist update

Mid-week market update: For several weeks, sentiment surveys such as AAII and Investors Intelligence have signaled extreme levels of bearishness seen at past market bottoms. However, some observers have played down the sentiment surveys because indications of positioning are inconsistent with extreme fear. As an example, funds are still pouring into the Cathie Wood's Ark Investment ETFs even as the speculative growth vehicles tank. That's not the sort of behavior seen at washout bottoms. On the other hand, I have received a flood of emails and other messages of concern about the stock market indicating growing fear and panic.


To resolve the dilemma, my publication "How to spot a market bottom" published on March 19, 2022 offered a useful checklist that I'll go through.

The full post can be found here.



Sale in May
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Sunday, May 8, 2022

Making sense of the H&S breakdown

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*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Head and shoulders intact
The head and shoulders breakdown of the S&P 500 remains intact. The index surged to test neckline resistance last week when Powell took a three-quarter rate hike off the table, but the bears regained the upper hand the next day.


How much should you trust the head and shoulders breakdown and its downside measured objective of about 3830? The 5-week RSI is already oversold. How much more downside is left?

Here are the bull and bear cases.

The full post can be found here.




Sale in May
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Saturday, May 7, 2022

Profit opportunities from the coming global recession

Welcome to the coming global recession. We can debate all day about the global growth outlook, but consider this: Global Manufacturing PMI has fallen to 48.5, indicating contraction. It's the first negative reading since the COVID Crash of 2020.


The full post can be found here.




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Wednesday, May 4, 2022

FOMC reaction: I told you so

Mid-week market update: Happy Price Stability Day to you!

Ahead of the FOMC meeting, I had been pounding the table that market expectations were unrealistically hawkish. The market was discounting strong rate hikes well beyond the Fed's stated median neutral rate of 2.4%, according to the March Summary of Economic Projections.


The full post can be found here.



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Monday, May 2, 2022

A sentiment preview of FOMC week

Since the publication of my weekend trading update (see Will the Fed rally or tank markets?), a number of additional sentiment readings have come to light that may be relevant to traders and investors. The historic almost off-the-chart levels of bearishness of the AAII weekly sentiment survey has been known for several days, but there's more.



The full post can be found here.





Sale in May
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Sunday, May 1, 2022

Will the Fed rally or tank markets next week?

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 price. 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 bsoe 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*
  • Trend Model signal: Bearish*
  • Trading model: Neutral*
* 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Another test of the 2022 lows
Here we go again. The S&P 500 tested its 2022 lows on Friday while exhibiting a positive 5-day RSI divergence. Selected sentiment readings are at off-the-charts levels. Both the bond and stock markets are poised for a relief rally, and the FOMC meeting Wednesday could be the catalyst.



The full post can be found here.



Sale in May
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Saturday, April 30, 2022

Peak hawkishness = Risk-on?

The Economist is becoming known as a source of the contrarian magazine cover indicator. As the world holds its collective breath for the FOMC decision next week, the recent cover of the magazine begs a number of important questions for investors.
  • How far beyond the inflation-fighting curve is the Fed?
  • What are the likely policy implications?
  • Is this a case of peak hawkish expectations for the market and what does that mean for asset prices?



The full post can be found here.

Wednesday, April 27, 2022

The bulls attempt a goal line stand

Mid-week market update: As the S&P 500 tests the lows for 2022, the question for investors and traders is whether support will hold. The analysis of the large-cap S&P 500, the mid-cap S&P 400, and the small-cap Russell 2000 presents a mixed picture. While large and mid-caps appear to be holding support, small-caps look wobbly.


A violation of support would open up considerable downside potential and this is the equivalent of the bulls' goal-line stand. Will they be successful?

The full post can be found here.

Monday, April 25, 2022

Pairs Monitor: Correlations converging to 1?

I recently suggested a number of long/short pair trades as a way of achieving performance in an uncertain and choppy market. Inflation hedge vehicles have begun to underperform, and the subsequent performance of the pairs is revealing of the factors driving the current market environment.

The full post can be found here.

Sunday, April 24, 2022

Sentiment: This time is different

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 price. 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 bsoe 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*
  • Trend Model signal: Bearish*
  • Trading model: Neutral*
* 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


About that AAII sentiment...
It's confirmed. The AAII weekly sentiment data was not a blip. While bullish sentiment advanced slightly from the previous week, it remains weak and the bull-bear spread is still below -20, which is a contrarian buy signal. While bullish sentiment did crater, bearish sentiment did not spike to levels indicating panic.


While conventional sentiment analysis would conclude that these represent tactical buy signals, I beg to differ. This time is different, and here's why.

The full post can be found here.

Saturday, April 23, 2022

How to time the recession stock market bottom

Recession fears have arrived on Main Street. From a statistical perspective, Google searches for "recession" have spiked.


From an anecdotal perspective, recession talk has emerged as the talk of the party.


These conditions beg three crucial questions for investors:
  • Will there be a recession?
  • If so, how much of the slowdown is in the market?
  • When will the recessionary stock market bottom?
The full post can be found here.

Wednesday, April 20, 2022

Cyclicals catch a bid, but...

Mid-week market update: Cyclical industries have caught a bid in the last week. That's not a big surprise as they have been badly clobbered relative to the market. Transportation stocks exhibited impressive strength as they regained relative support turned resistance level. However, the relative performance of all of the other industries was either below relative support or in a relative downtrend (retailers). The cyclically sensitive copper/gold ratio also rebounded, but in the context of a broad sideways pattern (bottom panel).


Don't be fooled. Fade the rally.

The full post can be found here.

Sunday, April 17, 2022

The canaries in a bifurcated coalmine

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 price. 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 bsoe 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*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


A bifurcated market
As the S&P 500 struggles to hold its 50 dma, an unusual condition is occurring in the US equity market. The intermediate-term technical outlook is decidedly bearish, but the survey sentiment has reached a crowded short condition, which is contrarian bullish. This week, I offer some canaries in the coalmine as a way to resolve the wildly differing views of the market.



The full post can be found here.

Saturday, April 16, 2022

US equity investors are playing with fire

In bull markets, valuation generally doesn`t matter very much unless it reaches a nosebleed extreme, such as the NASDAQ Bubble. In bear markets, valuation defines the downside risk in equity prices.

As the Powell Fed has signaled it is dead set on a hawkish policy that does not preclude inducing a recession, valuation will matter soon. The 10-year Treasury yield stands at 2.8% and the S&P 500 forward P/E is 19.0. The last time the 10-year reached these levels was 2028 when the forward P/E traded mostly in a range of 15-16 but bottomed at a panic low of 13.6. The previous episode of a similar 10-year yield was in H2 2013 when the forward P/E was in the range of 13.5-15. 


All else being equal, this implies downside risk of -15% to -30% for the S&P 500. That's why US equity investors are playing with fire.

The full post can be found here.

Wednesday, April 13, 2022

Another Omen warning

Mid-week market update: In case you missed it, the market recently flashed a Hindenburg Omen last week. The criteria for the Omen was succinctly explained by David Keller as:

  • The market is in an established uptrend;
  • A sharp expansion in both new highs and new lows, indicating indecision; and
  • A momentum break.


To be sure, Hindenburg Omens aren't bearish until we see a cluster of Omen signals within a short period. Since last week's Omen was a singular event, we should only treat it as a warning and not an actionable signal.

The full post can be found here.