Monday, August 19, 2019

Peak Brexit panic?

The Brexit headlines look dire and Apocalyptic. The Sunday Times published the leak of Operation Yellowhammer, which was the UK government's base case plan for a no-deal Brexit.


Britain faces shortages of fuel, food and medicine, a three-month meltdown at its ports, a hard border with Ireland and rising costs in social care in the event of a no-deal Brexit, according to an unprecedented leak of government documents that lay bare the gaps in contingency planning.

The documents, which set out the most likely aftershocks of a no-deal Brexit rather than worst-case scenarios, have emerged as the UK looks increasingly likely to crash out of the EU without a deal.
The newspaper went on to reported that up to 85% of truck "may not be ready" for French customs, and disruption may last up to three months. In addition, the government is preparing for a hard border at the Irish border, as current plans to maintain the Irish backstop are unrealistic and unsustainable.

In other words, it's going to be ugly, especially when Prime Minister Boris Johnson has vowed to take the UK out of the EU by October 31, with or without a deal.

The full post can be found here.

Sunday, August 18, 2019

Peering into 2020: New decade, new paradigm

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

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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



The latest signals of each model are as follows:
  • Ultimate market timing model: 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 the those email alerts is shown here.



The remarkable FAANG run
Technology stocks, and FAANG in particular, have had a remarkable run in the last decade. The chart below reveals the level of dominance.

The top panel shows the relative performance of the NASDAQ 100 (NDX) in the last 15 years (blackline). Not only is the NDX dominating the market, the NDX has also been steadily beating the equal-weighted NDX (green line), indicating that large caps within that index have outperformed small caps. The bottom panel also shows the relative performance of large cap technology (black line) and small cap technology (green line) against their respective indices. Both have led the market in the past decade.



As we peer into 2020 and the next decade, numerous signs are appearing that this cycle of technology and FAANG leadership may be coming to an end.

The full post can be found here.

Wednesday, August 14, 2019

Audit your trading the way pros do it

Traders are always interested in improving their techniques. Today, I would like to offer a framework for thinking about your trading, using the way fund sponsors evaluate investment managers, called the 5 Ps.
  • People: Who are you, and what's your experience and training?
  • Performance: How have the returns been, and what kind of risk did you take to achieve those results?
  • Philosophy: What makes you think you have an edge?
  • Process: How do you implement the edge you have on the market?
  • Portfolio: Does your portfolio reflect what you are saying about philosophy and process?
With the preface that there are never any single right answer in investing and trading, I will focus on "philosophy" and "process".

The full post can be found here.

Tuesday, August 13, 2019

A White Swan market

Mid-week market update: I am writing my mid-week update a day early because of the extraordinary volatility in the stock market.

My wife and I took a few days to go on a Danube river cruise. As we arrived in Vienna, we spied a white swan swimming beside our ship. The white swan seems to be an  apt metaphor for today's market, which is a market of known risks.



The full post can be found here.

Sunday, August 11, 2019

A correction, or trade war meltdown?

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

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bearish (downgrade)*
  • Trading model: Bearish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.


Welcome to the Q3 tantrum
The stock market has enjoyed a terrific run in the first six months of 2019. Welcome to Q3, as the challenges become more evident. The Sino-American trade war is flaring up again and threatens to escalate into a currency war. While the Fed has turned dovish, it is becoming apparent that rate cuts are no panacea to the problem of slowing growth and a loss of business confidence.

For investors, the question of the day is, "Is this an ordinary correction, or the start of a recession and bear market?"

The full post can be found here.

Wednesday, August 7, 2019

Ripe for a counter-trend rally

Mid-week market update: My trading model has turned bullish, and there are plenty of signs that the market is ripe for a relief rally. There was the CNBC Markets in Turmoil program Monday, which as SentimenTrader pointed out, tends to mark short-term bottoms.


The full post can be found here.

Monday, August 5, 2019

USDCNY at 7? It's not you, it's me

The market has adopted a risk-off tone today because the Chinese yuan rose above the rate of 7 to 1 to the USD. The move was positioned as retaliation for Trump`s new tariffs. In addition, China has halted all purchase of American agricultural goods.


What did you expect? The controlled depreciation of CNY is not unexpected. The chart below of the Chinese yuan ETF shows that it had been unusually strong compared to the trade weighted dollar. Viewed in this context, the PBOC devaluation in 2015 was fully justified. Today's fall is reflective a decision by the PBOC to stop leaning against the market winds.



To put it differently, the broader problem isn't CNY weakness, but USD strength.

The full post can be found here.

Sunday, August 4, 2019

Powell's dilemma (and why it matters)

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

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



What Powell couldn't say
The message from Jerome Powell's post-FOMC press conference was confusing. The overall economic outlook was positive, but the Fed was nevertheless cutting the Fed Funds target rate by a quarter-point. It was advertised as an "insurance" cut. Powell went on to spook the markets by stating that it was not the start of an easing cycle, but walked that partially back by holding out the possibility of more cuts.

What is going on?

Josh Barro, writing in the New York Times, read between the lines and outlined what Powell couldn't say. The Fed was reluctant to cut rates, but it believed that monetary policy was forced to offset the negative effects of the trade war.
One of the key factors the Fed must respond to is the specific economic mess Trump creates when he upsets the global trade regime, and the size of that mess requires a qualitative assessment. Powell can’t say “We’ll cut rates in September if Trump threatens Xi Jinping seven times on Twitter, but not if he only does it five times”; he’s going to have to make a judgment call about where we stand with trade (and about how businesses and investors are responding based on their own assessments about where we stand with trade) when the time comes.

“I would love to be more precise, but with trade, it is a factor that we have to assess in a new way,” Powell said, diplomatically. “It is not something that we have faced before and we are learning by doing,” he said at another point.
 Powell also made it clear that the Fed is staying neutral and not taking sides in the trade war:
“We play no role in assessing or evaluating trade policies other than as trade policy uncertainty has an effect on the U.S. economy in the short and medium term,” he said. “We are not in any way criticizing trade policy; that is really not our job.”
The two dissenting votes against the rate cut was evidence of the reluctance of Fed policy makers to ease interest rates. In addition, former New York Fed president Bill Dudley, who was able to speak more freely, wrote in Bloomberg Opinion that he believed that only one cut was necessary.

The full post can be found here.

Wednesday, July 31, 2019

A (deceptive) long-term buy signal

Mid-week market update: It is month-end, and the day after an FOMC meeting. Regular readers may recall that I have been monitoring the monthly MACD indicator for a long-term buy signal. Troy Bombardia recently highlighted what happens when the SPX flashes a long-term buy signal. Subsequent one-year returns have been almost all positive.


The verdict is in, the index has flashed a long-term MACD buy signal.



While the signal is constructive for the long-term outlook, let me temper your enthusiasm.

The full post can be found here.

Monday, July 29, 2019

A hawkish cut ahead?

As we look ahead to the July FOMC meeting this week, market expectations of additional rate cuts have moderated. The market is discounting a 100% chance of a quarter-point cut this week. It also expects an additional quarter-point cut at the September meeting, and a third rate cut by year-end.


The better than expected Q2 GDP report just made the Fed's job a lot more complicated.

The full post can be found here.

Sunday, July 28, 2019

Is this how a currency war begins?

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

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



Sleepwalking into a currency war?
As we look ahead to the FOMC meeting next week, it may be the start of a synchronized global easing cycle. The ECB signaled a dovish tone last week at its meeting. The EURUSD exchange rate weakened, and the USD Index strengthened. From a technical perspective, the USD is exhibiting bullish patterns on multiple time frames. The index staged an upside breakout on an inverse head and shoulders formation on the daily chart, with an upside measured upside target of about 99.10. Conversely, EURUSD has broken down in a head and shoulders, with a downside target of about 110.



It is also forming a possible bullish cup and handle pattern on the weekly chart, with an upside target of 107.70 to 108.00 on a breakout.



In addition, the trade weighted USD has also formed a possible cup and handle pattern that stretches back to 2002, with bullish implications.


The global nature of the seemingly coordinated central bank easing begs the question of whether monetary policy is inadvertently starting a cycle of competitive devaluation. Is this how a currency war starts?

We examine this thesis from the viewpoints of the three main currency and trading blocs, Europe, China, and the US.

The full post can be found here.

Wednesday, July 24, 2019

Caution: Upside potential limited

Mid-week market update: Even as the bears were all lined up to push prices down last Friday, the bulls managed to make a goal-line stand and retain control of the tape. The index is tracing out a triangle pattern and testing resistance, while exhibiting negative RSI divergences.



In addition, other cautionary signs can be found elsewhere. While I would not necessarily discount an upside breakout to further fresh highs, current conditions argue for limited upside potential.

The full post can be found here.

Sunday, July 21, 2019

Will stock prices surge on a Fed rate cut?

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

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



A well-telegraphed rate cut
As we look forward to the FOMC meeting on July 30-31, the market is discounting a 100% chance of a rate cut, with the probability of a half point cut at 22.5%.



Analysis from Ned Davis Research reveals that an initial rate cut and no recession has historically lit a rocket under stock prices.


What will happen this time? Should investors be piling into equities in anticipation of a market surge?

The full post can be found here.

Wednesday, July 17, 2019

A market on a knife edge

Mid-week market update: Regular readers know that I have been tactically cautious on stocks in the last two weeks, but I don't want to give the impression that I am wildly bearish. In fact, the SPX is on the verge of a long-term buy signal, marked by the positive monthly MACD reading. Should the index close at or close to current levels by month-end, it will have flashed a buy signal that has shown to be highly effective for intermediate and long term investors.



Before anyone becomes wildly bullish here, some caution may be warranted.

The full post can be found here.

Tuesday, July 16, 2019

Questions for Judy Shelton and gold standard supporters

President Trump has nominated Judy Shelton as one of the candidates for the open seats on the Federal Reserve's Board of Governors. While Shelton is a controversial nominee, she is less problematical than the previous two, Herman Cain and Stephen Moore.

While I certainly understand the reasoning behind a gold-backed currency, which is a way to control inflation, I have some difficult questions for Shelton and other supporters of a gold standard.



The full post can be found here.

Sunday, July 14, 2019

The path to a European Renaissance

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

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



In search of the eurozone buy signal
I had a number of discussions with readers in the wake of last week's publication, Europe: An ugly duckling about to be a swan. The topics revolved mainly around further justification for buying into Europe, when US equities had performed so well in the last 10 years. In short, the questions were:
  • What is the valuation for Europe, and
  • Finding a bullish catalyst for their relative revival.
As to the first question, I offer the following chart from Robeco Asset Management.


The gulf in valuation, as measured by the Cyclically Adjusted P/E ratio (CAPE), provides some clear reasoning for American investors to diversify outside their home country. As well, European stocks look cheap relative to their own history. But that is not the entire story.

The full post can be found here.

Wednesday, July 10, 2019

Stay cautious

Mid-week market update: I highlighted a tactical trading sell signal from the VIX Index on the weekend. The VIX had fallen below its lower Bollinger Band,, indicating an overbought market, and mean reverted above the band last Friday.



As a reminder, the historical study of such episodes since 1990 show negative returns bottom out roughly a week after the signal, which would be this coming Friday.


The full post can be found here.

Monday, July 8, 2019

The limits of central bank powers

With interest rates at or close to the zero lower bound, here are a couple of examples of limits to the power of central bankers.
  • The Federal Reserve: Will it still cut rates after the strong jobs report?
  • The European Central Bank: What are the limits and price of monetary stimulus?


Will the Fed cut rates?
Let us begin with the Fed. After the blow-out Jobs Report, the bond market reacted violently and there were murmurs as to whether the Fed will still cut rates. Let me lay the first concern to rest. Historically, the Fed has telegraphed its interest rate decisions. With the market expectations of at least a quarter-point cut at the next FOMC on July 30-31, the Fed is unlikely to surprise the market.


The full post can be found here.

Sunday, July 7, 2019

Europe: An ugly duckling about to be a swan?

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

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

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



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy 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 and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.



Buy the ugly duckling?
In the past few weeks, these pages have been all trade war, all the time. While that was not the original intent of this publication, headlines have conspired to turn the focus on the Sino-American relationship. Now that an uneasy truce is in place, it is time to switch gears and turn the spotlight on other unexplored parts of the market.

Finance literature since the Great Financial Crisis has been filled with the imagery of swans. Black swans. White swans. Grey swans. What is missing is the ugly duckling that grew up to be a swan. More importantly, what if an investor could identify an ugly duckling before it becomes a swan?

I have identified such a candidate. The chart below shows the relative performance of US stocks against the MSCI All-Country World Index (ACWI) in black, and the Euro STOXX 50 against ACWI in green. While there is no question that US stocks have been the winners, eurozone equities are in the process of making a broad saucer based relative bottom, and may be poised for a period of outperformance. The relative bottoming process is especially remarkable in light of the current environment of global trade uncertainty, which may be a signal of investor capitulation and the inability to respond to bad news.



The full post can be found here.

Wednesday, July 3, 2019

New highs are bullish, but...

Mid-week market update: It is said that there is nothing more bullish a stock or an index can do other than to make new highs. Both the DJIA and the SPX made fresh all-time highs today. While that may appear to be bullish, there are plenty of warning signs beneath the surface that this advance may not be entirely sustainable.

One of the missing ingredients in this rally is momentum. The SPX is exhibiting a negative 5-day RSI divergence, indicating flagging momentum even as the index made new highs. In addition, the VIX Index fell below its lower Bollinger Band, indicating an extremely overbought condition.


The full post can be found here.