Don't learn the wrong lesson from 2011

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: Neutral*
• 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 History Lesson from 2011

The last time the U.S. faced a serious debt ceiling impasse was 2011. The S&P 500 skidded 

-8.2% in the weeks leading up to x-date, or the estimated day that the U.S. Treasury would run out of funds. Both sides came to an agreement two days before x-date, and the market fell further after the deal.

While history doesn’t repeat itself but rhymes, we fear that some analysts have learned the wrong lesson from 2011. The post-deal market weakness was mainly attributable to the Greek Crisis in which the very existence of the euro currency was threatened. It’s unclear how much of that sell-off can be traced to a “buy the rumour, sell the news” reaction to a debt ceiling deal.

This time is indeed different. Here’s why. 

The full post can be found here.

Back to a focus on technicals

 As at the time of writing, the White House and the Republican-led House haven’t come to a debt ceiling deal yet, though both sides are getting closer to a deal. But you only die once, and focusing on the fear of a catastrophe isn’t very useful. Hedging only works if there is someone you can collect from on your hedge, and obsessing over a U.S. default only gets you so far. Instead, I will focus on getting back to the technical structure of the market by assuming that all parties agree to step back from the brink.

From a longer-term perspective, the narrow leadership of the S&P 500 is disturbing. Remember Bob Farrell’s Rule #7: “Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names”. As the S&P 500 tests its 50 dma, the equal-weighted S&P 500, the mid-cap S&P 400 and the small-cap Russell 2000 have already violated their 50 dma.

How much does bad breadth matter?

The full post can be found here.

Ignore the noise and focus on the main event

Mid-week market update: Have you ever seen any technician publish the short-term analysis of the stock market just before a key event with a binary outcome, such as an FOMC decision, NFP report, or CPI report? How much confidence would you place in such a forecast?

As we await the outcome of the debt ceiling negotiations in Washington, the market is left to guessing the direction of stock prices. Analysts wind up focusing on indicators that have little or no value, such as the size of (former) Fed Chair Alan Greenspan's briefcase. While negotiations are at an apparent impasse, we are left to guessing how much of the statements from each side is real and how much is bluff., or even the exact timing of X-date, or the day the U.S. Treasury runs out of money It's highly likely a deal will be reached and the U.S. will not default on its debts, at this point it's all noise as the S&P 500 remains in a trading band.

While we don't know whether there will be a deal, some analysis of sentiment can yield some clues as to the degree of market reaction once the results of the binary event is known.

The full post can be found here.

European bull of 2023 = FANG bull of 2008?

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: Neutral*
• 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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.

 

 

Dissecting the sources of European strength 

As investors wait for the resolution of the debt ceiling talks, I would like to pivot away from the U.S. market and focus on the sources of underlying European strength. As regular readers are aware, we have been bullish on European equities for some time (see The market leaders hiding in plain sight). 

Here is the major reason I am bullish. The Euro STOXX 50 staged a relative breakout from a long base in early 2023. France has been the leader among the major core and peripheral European countries, along with Italy and Greece. However, Germany has been the laggard, testing a key relative resistance level.

 

 

I analyzed the sources of European equity strength and show why the latest move is sustainable. The possibility exists that this could be the start of a major bull leg in Europe, much like how the U.S. FANGs led global markets in 2008.
 

The full post can be found here.

 

How the G7 meeting exposes the risks for 2024

Two weeks ago I highlighted how history shows that the stock market only bottomed after recessions have begun (see How to spot the stock market bottom) and a recession is likely on the way in H2 2023. If that is the case, U.S. equities should bottom at some point this year and a recovery should be in full swing by 2024. 

However, the agenda of G7 Summit in Hiroshima highlights the geopolitical risks to the 2024 recovery and the threat to global growth in 2024 and beyond.
 

 

The full post can be found here.

Being bearish is too obvious

Mid-week market update: I am publishing this before the market close on Wednesday because I have an appointment just before the close so many of the charts won't have Wednesday's closing prices. The market structure continues to be bearish, and I continue to believe that the intermediate-term trend is down. Nevertheless, it's too obvious to be bearish, so I'm resisting that urge.

Case in point. Market breadth looks terrible. Even as the S&P 500 remains in a narrow trading range, there are negative divergences everywhere I look.

The full post can be found here.

How the market could break up to a blow-off top

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: Neutral*
• 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 tight trading range

The S&P 500 has been mired in two trading ranges for several weeks. The smaller range is defined by 4050–4180 (grey zone), and the larger one is defined by 3800–4180. Neither the bulls nor the bears have been able to break through.

I outlined the intermediate-term bearish market structure exhibited by the market last week and I stand by those remarks (see What market structure tells us about where we are in the cycle). While this is not my base case, I am starting to warm to the scenario of an upside breakout to a blow-off top, followed by a market collapse soon afterwards. As they say, don't sell a dull market short.

The full post can be found here.
 

A pause isn't a pivot

Now that the market has had over a week to absorb the implications of the last Fed rate decision and incoming data since the meeting, here is where we stand.

The Fed made an important change in its statement that hinted it was preparing to pause interest rate increases. Even though the Fed raised rates by 25 basis points at the May meeting, it made an important change in its language from the March meeting, which stated:

The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.

The May meeting statement allowed for a pause in rate hikes, with the usual nod to data dependency.

The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time,

Since the conclusion of the May meeting, the April Jobs Report came in mixed. While the headline increase in non-farm payroll employment was ahead of expectations, the figures for the previous two months were dramatically revised downward. The April CPI report came in slightly softer than expected. Headline YoY fell from 5.0% to 4.9%, which was below market expectations, while core CPI was unchanged from the previous month at 5.5%. As well, PPI came in softer than expected. Overall, inflation has been slowly decelerating. The target Fed Funds rate of 5.00–5.25% is now above the core PCE rate of 4.2%. Historically, the Fed has kept the Fed Funds rate above its preferred inflation metric of core PCE whenever inflation has been above its 2% target.
 

Is it time for a pause? Under what conditions would the Fed pivot to cutting rates? 

The full post can be found here.

Still stuck in a trading range

Mid-week market update: The S&P 500 remains mired in a trading range, and neither the bulls nor the bears can gain the upper hand.

 

Here are the bullish and bearish reasons why the market can't break out of that range.

 

The full post can be found here.

 

What market structure tells us about where we are in the cycle

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: Neutral*
• 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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.

 

 

Sell in May?

It’s that time of the year again. As April turns into May, market prognosticators everywhere ponder the wisdom of the “sell in May and go away” adage. In reality, history shows that the six months that begin in May only experienced subpar returns and it isn’t actually bearish. In fact, the May to October period has shown relatively strong returns since 2009.

Rather than obsess over the implications of May seasonality, a more practical focus is the analysis of market structure and what it’s telling us about where we are in the cycle.
 

The full post can be found here.

How to spot the stock market bottom

Is the U.S. economy headed into recession? The signs are all there.

Even though a recession isn’t part of the Fed’s official forecast, Fed Chair Jerome Powell conceded during the May post-FOMC press conference that the Fed’s staff economists were calling for a mild recession. Carl Quintanilla of CNBC also reported that the overwhelming consensus from a JPMorgan investor survey was for a recession to begin in H2 2023.

Here’s why the recession question matters. The historical record shows that the stock market only bottomed after recessions have begun (shaded areas are recessions). If the economy does enter a recession, chances are, investors haven’t seen the bottom of the current bear market yet. That doesn’t mean, however, that NBER has to declare a recession before the stock market bottoms as NBER tends to be glacial in its evaluation of economic data and slow to react. 

 

If a recession is ahead, here are some ways to spot the market bottom.

The full post can be found here.

 

It'll feel like a tightening every meeting

Mid-week market update: As expected, The Fed raised rates by a quarter-point and hinted that it will pause rate hikes at the next meeting, but underlined its conviction that it will not cut this year. Fed Funds expectations are largely unchanged after the meeting. The market is expecting a pause and cuts later this year.

The gulf between the market's expectations and the Fed's messaging isn't closing. As we proceed into summer and early fall, every meeting that the Fed doesn't cut and maintains its higher for longer narrative will amount to a tightening of expectations for the market. And that's not equity bullish.

The full post can be found here.

My case for a correction

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: Neutral*
• 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 possible stall

The stock market was choppy on earnings season-induced volatility last week, but a case is being formed for a correction. Even as the S&P 500 tested overhead resistance Friday, it exhibited several negative divergences, which is a signal that the market rally is poised for a stall.

 

Here are the bull and bear cases.

The full post can be found here.

 

The final Fed rate hike?

The main events in the coming week will be the interest rate decisions by Federal Reserve on Wednesday and the ECB on Thursday. Both are widely expected to raise rates. However, market expectations for the trajectory of the U.S. Fed Funds rate is a 25-basis-point hike at the May meeting, a pause, and rate cuts later in the year. By contrast the ECB is expected to continue hiking.

On the other hand, the ECB path is more hawkish and its rate hike cycle does not appear to be complete. The governing council is reportedly split between a 25-basis point and a 50-basis point hike at the May meeting. ECB board member Isabel Schnabel told Politico in an interview that underlying inflation, which filters out volatile food and energy prices, shows very strong momentum and it was not clear that it would peak “very soon”. Belgium’s central bank head and ECB setting governing council member Pierre Wunsch told the Financial Times in an interview: “We are waiting for wage growth and core inflation to go down, along with headline inflation, before we can arrive at the point where we can pause.”

The Fed hates to surprise markets. A 25-basis-point rate hike is a virtual certainty. Unless it doesn’t plan to pause increases after the May meeting, it will signal its intention next week, subject to the usual caveats about data dependency. The challenge for investors is how to position themselves should the Fed pause.

The full post can be found here.

Market correction signals

Mid-week market update: Subscribers received an alert on Monday that my trading model had turned bearish. Despite the positive reaction to the Microsoft earnings report, which is holding up the NASDAQ today, there are plenty of signs beneath the surface that the stock market is weakening.

 

The failure of the S&P 500 to hold its MSFT led gains today is disconcerting. Three of the four defensive sectors are either in relative uptrends or staged upside relative breakouts, which is an indication that the bears are seizing control of the tape.

 

There are other cautionary signs.

 

The full post can be found here.

 

Making sense of the Mona Lisa 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: Sell equities*
• Trend Model signal: Neutral*
• 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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.

 

 

The Mona Lisa market

The Economist aptly characterized the current circumstances like the Mona Lisa:

What is the Mona Lisa doing? At first glance the subject of the world’s most famous painting seems to be smiling. Look again and her smile fades. When it next reappears, it is a different sort of smile. Leonardo da Vinci achieved this ambiguous effect with the use of sfumato, where he blurred the lines around Mona Lisa’s face. No matter how many times you look, you are unsure quite what is happening.

The post-pandemic economy is like the Mona Lisa. Each time you look, you see something different. After chaos in the banking industry, many analysts are now convinced that the world economy is heading for a “hard-landing” recession. Few seem to expect a “no-landing” scenario, in which the economy remains untroubled by rising interest rates—a fashionable opinion just weeks ago, and one which itself supplanted a common view late last year that a mild recession was certain.

Even though the stock market isn’t the economy, it’s also beset by a series of cross-currents that are difficult to interpret, much like the Mona Lisa.

 

Starting with earnings season, which is in full swing. It began with a series of strong reports from large banks, but one key test came last week when about 50% of regional banks, which were at the epicentre of the latest banking crisis, reported. Equity bulls breathed a sigh of relief when the KBW Regional Banking Index held technical support.

 

 

Even though the regional banks held support, the bulls face a series of obstacles to overcome, and it isn’t clear at all whether they’ll succeed.

The full post can be found here.

Why I'm not overly bullish or bearish

As the S&P 500 stalls at overhead resistance while exhibiting negative divergences, here are some reasons why you shouldn’t be overly bullish or bearish on U.S. equities.

 

The full post can be found here.

Words of warning for equity bulls

Mid-week market update: I am publishing this note slightly early today as I have an appointment just after the market close and the prices shown in the charts will not reflect today's closing prices.  As the S&P 500 struggles with overhead resistance, I would like to offer some words of warning for equity bulls. The VIX Index has returned to levels not seen since November 2021, before the market topped out. Is that a sign of complacency, or normalization?

As a reminder, November 2021 was just before the onset of the omicron variant, and the retirement of the transitory language by the Federal Reserve. While this doesn't mean that the market will necessarily fall immediately, it does indicate a possible precarious backdrop and an accident waiting to happen.

 

The full post can be found here.

The market leaders hiding in plain sight

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: Neutral*
• 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. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 mystery chart

As investors search for evidence of market leadership, here is a mystery chart of constructive patterns of a closely related group. The chart shows patterns of either upside breakouts or pending breakouts out of long multi-year bases.

 

 

Can you guess what they are?

 

The full post can be found here.

How to position for the coming growth slowdown

The International Monetary Fund published its latest World Economic Outlook. It cut its global GDP growth estimate by 0.1% from 2.9% in January to 2.8%. More ominously, it issued a warning about a growing risk of recession in the advanced economies from financial instability risk from bank failures: “A hard landing — particularly for advanced economies — has become a much larger risk”
 

 

In light of the risks of a substantial slowdown, how should investors position themselves?

The full post can be found here.