Debunking VIXmageddon, and other bear myths

Mid-week market update:  I would like to address a number of bearish themes floating around the internet in the past few weeks, they consist of:

• A low volume stock market rally
• Extreme low volatility (remember the VIXmageddon of early 2018)
• The closing stock buyback window during Earnings Season, which removes buyback support for stocks

None of these factors are likely to sink stock prices. Here are some reasons why.

The full post can be found here.

Can the market advance continue? Watch China!

The US equity market has risen more or less in a straight line since the Zweig Breadth Thrust buy signal of January 7, 2019 (see A rare "what's my credit card limit" buy signal). Technically, breadth thrusts are extremely rarely long-term bullish signals. How far can stock price rise from here?

Chris Ciovacco made a recent video which studied the market behavior of breadth thrusts that came to a bullish conclusion. He defined a breadth thrust as % of stocks above their 200 dma rising from 10% to over 70% in a short period. This has happened only twice in the last 15 years. The first time was the rally off the Lehman Crisis bottom of 2009, and the next time was the eurozone Greek Crisis of 2011.

Ciovacco pointed out that the current breadth thrust occurred more rapidly than either 2009 or 2011, which is a sign of bullish price momentum.

He went on to outline the bullish market performance in the wake of these breadth thrusts (warning, N=2).

Can history repeat itself? Do current fundamentals support further market strength?

Here is an "out of the box" answer to the question of further market strength: Watch China.

The full post can be found here.

How "patient" can the Fed be?

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: Bullish*
• 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 the those email alerts is shown here.



What are the limits to "patience"?
The credit market may be setting up for an unpleasant surprise. According to the CME's Fedwatch Tool, the market mainly expects no change in the Fed Funds rate for the rest of this year, with the possibility of a cut later in the year. It is not expecting a rate hike. Politico reported that Trump's economic advisor Larry Kudlow went even further: "I don't think rates will rise in the foreseeable future, maybe never again in my lifetime."

The minutes of the March FOMC meeting tells a different story. Since the Fed made the U-turn and adopted the policy of "patience", the Committee is not expecting any changes in rates for the rest of 2019:

A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.

However, some members would not rule out another increase in interest rates this year. The strength in the labor market could raise economic growth in the months ahead, though not as rapidly as last year.

Underlying economic fundamentals continued to support sustained expansion, and most participants indicated that they did not expect the recent weakness in spending to persist beyond the first quarter. Nevertheless, participants generally expected the growth rate of real GDP this year to step down from the pace seen over 2018 to a rate at or modestly above their estimates of longer-run growth.

There was also some uneasiness over the use of the word "patient" as it could be viewed as handcuffing future actions if the time came to raise rates:

Several participants observed that the characterization of the Committee's approach to monetary policy as "patient" would need to be reviewed regularly as the economic outlook and uncertainties surrounding the outlook evolve. A couple of participants noted that the "patient" characterization should not be seen as limiting the Committee's options for making policy adjustments when they are deemed appropriate.

Who is right? The market or the Fed? If the bond yields start to rise, what does that mean for stock prices?

The full post can be found here.

Selections for a new bullish impulse

Mid-week market update: Numerous signs of a new bullish impulse are appearing.

• The American economy has sidestepped a recession;
• Sentiment is not excessively bullish; and
• Price momentum is strong.

It is a truism in investing that you should buy when blood is running in the streets. The latest update of NDR's Global Recession Model shows the probability of a global recession, which is defined as sub-3% growth, at 96.63%.

One application of that rule is to buy risky assets when a recession is evident to the public. It seems that we have reached that point, what should we buy?

The full post can be found here.

Making sense of Trump's pressure on the Fed

I am somewhat at a loss of why Trump is putting so much pressure on the Federal Reserve. In a recent CNBC interview, CEA chair Kevin Hassett projected that growth would rise again to 3% later this year. “Everything we see right now is teeing us up to have a year like last year - Q1 around 1.5% or 2%, then Q2 goes way north, carries you into a 3% year.”

After the BLS reported a strong than expected March Jobs Report last Friday, Donald Trump repeated his assertion that the Fed should shift to an easier monetary policy (via CNBC):

President Donald Trump said Friday the U.S. economy would climb like "a rocket ship" if the Federal Reserve cut interest rates.

Commenting after a strong jobs report for March, Trump said the Fed "really slowed us down" in terms of economic growth, and that "there's no inflation."

"I think they should drop rates and get rid of quantitative tightening," Trump told reporters, referring to the Fed's policy of selling securities to unwind its balance sheet, a stimulus put in place during the financial crisis. "You would see a rocket ship. Despite that we're doing very well."

The full post can be found here.

An unexpected sweet spot for equities

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: Bullish*
• 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 the those email alerts is shown here.



Opportunities from uncertainty
Now that stock prices have recovered to within 2% of their all-time highs, what's next for the stock market? To be sure, stock prices are no longer cheap. FactSet reports that the market is trading at a forward P/E ratio of 16.7, which is just above its 5-year average of 16.3 and well above its 10-year average of 14.7.

Should investors throw in the towel? Not yet. While valuations are not compelling, equities remain in a sweet spot as cautious long-term sentiment readings can drive prices higher.

Strategas published a terrific analysis showing how forward US equity returns have historically been higher when global policy uncertainty is high. While the sample size for this study is small, it is consistent with the contrarian principle of buying when blood is running in the streets.

Indeed, the latest reading of global policy uncertainty shows that it remains at an elevated level.

Despite the elevated valuation, equities find themselves in an unexpected sweet spot. There is still room for stock prices to rise as tensions and risk levels fade.

The full post can be found here.

A "green shoots" rally ahead?

Mid-week market update: Even as the slowdown gloom overtook the market in the past few weeks, stock prices did not break down. Now, the storm seems to be passing as green shoots of growth are starting to appear.

For equity investors, the most notable change was the reversal in forward 12-month EPS estimates, which bottomed and begun to rise again. This is an indication of the return of bullish fundamental momentum.

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The combination of an unexpected growth turnaround and excessively cautious positioning is sparking a "green shoots" risk-on rally.

The full post can be found here.

A March Jobs Report preview

I have two thoughts ahead of the March Jobs Report that investors should consider. Let's start with the tactical picture of what Friday's reports might bring.

Recent jobs data has been distorted by the effects of the federal government shutdown, which can make the reported figures nonsensical. Now that the effects of the shutdown are mostly over, we can get a better idea of the overall trend.

One clue comes from the weekly initial jobless claims data, which is reported on a timely basis. As the chart below shows, the week of the February Jobs Report survey coincided with an unusually strong initial claims print, which may have contributed to the shocking miss in the February NFP report of 20K jobs. Initial claims for the March survey week weakened to a level consistent with January's. In light of the strong January NFP print of 304K jobs, which was later revised to 311K, this suggests that an in line or beat result for March headline NFP estimate of 175K.

Notwithstanding the tactical trading considerations of the March Jobs Report, a new development is likely to affect how the Fed views employment data, which could affect thinking on future policy.

The full post can be found here.

Could a unicorn cull tank the economy and 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 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: Bullish*
• 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 the those email alerts is shown here.



Unicorn cull ahead?
As we bid adieu to the Q1 2019, there has been increasing angst about the possibility of a recession, though I have expressed my view that a number of internals cast doubt about the usefulness of the inverted yield curve signal (see How the market could melt up and Why the yield curve panic is a buying opportunity).  Notwithstanding my skepticism, I would like to explore what happens in a recession.

Recessions are cathartic processes that unwind the excesses of the past expansion cycle. The most obvious excess in this cycle has been the rise of Silicon Valley unicorns, private companies with valuations in excess of $1 billion.

The enthusiasm that greeted the Lyft IPO has raised angst among some investors about the herd of unicorns stampeding towards the IPO door, Bloomberg sounded a warning about a possible unicorn IPO mania:

Should these and others make it to the stock exchange, 2019 could prove to be one of the biggest years on record for the amount of money raised in U.S.-listed IPOs. The total will reach $80 billion this year, double the yearly average since 1999, Goldman Sachs Group Inc. predicted in November—an estimate that may prove low. And there’s no arguing that peaks in IPOs have occurred near major tops in the stock market and close to the onset of recessions. Both 1999 and 2007 were unusually strong years for IPOs that were swiftly followed by nasty bear markets in stocks and downturns in the economy.

Could a stampede of unicorns mark a market top, and their subsequent cull sink the American economy?

The full post can be found here.

Some clarity from a "show me" week

Mid-week market update: I had characterized this week as a "show me" week for the market, though I had a slight bullish bias (see How the market could melt up). While I remained tactically bullish, a number of unanswered questions remained in light of the yield curve related sell-off that began late last week.

Some of those questions are getting answered. The bulls are still have control of the tape, though the control remains tenuous. The most positive sign is the SPX is holding a resistance turned support zone at about 2800. The market advance last summer was characterized by a series of "good overbought" readings on RSI-5, and pullbacks were halted when RSI-14 reached the neutral zone. The same pattern seems to be occurring today, which is constructive.

The full post can be found here.

Why the yield curve panic is a buying opportunity

There was some confusion from readers in response to my bullish pivot in yesterday's post (see How the market could melt up). Much of the confusion was attributable to the bear porn that has been floating around since last Friday from the inverted yield curve when the 10-year Treasury yield fell below the 3-month.

One example came from Ben Carlson at A Wealth of Common Sense, though Carlson did qualify his analysis that the timing of a stock market pullback has varied:

The timing of these market corrections varies widely. In late 1980 and early 2000, the inverted yield curve signaled a quickly approaching stock market peak. In the other three instances, it was almost two years until stocks broke down.

Troy Bombardia has also weighed in with his own analysis of past inversions.

I beg to differ. The underlying mechanism of this inversion is very different from previous episodes, and that's why I don't think a recession is in the cards.

The full post can be found here.

How the market could melt-up

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: Sell 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.



Melt-up ahead?
While this is not my base case scenario, there is a decent chance that the stock market may melt-up in light of the Fed's extraordinarily dovish statement last week. One parallel to the market hiccup of late 2018 would be 1998, when the Fed stepped in to rescue the financial system in the wake of the Russia Crisis.

A melt-up in the current environment would be supported by the combination of loose monetary policy and easy fiscal policy.

The full post can be found here.

Sector selection guide for sentiment, momentum and contrarian investors

Mid-week market update: The instant market reaction on FOMC day can often be deceptive. Instead of a general market comment, I will focus instead on analyzing sectors using sentiment, momentum, and contrarian approaches. As a measure of sentiment, John Butters at FactSet recently analyzed sectors by the number of buy, hold, and sell rankings.

The sector with the most buy ratings is Energy, but I am going to set aside Energy and Materials from this analysis as commitments to those sectors amount to a bet on commodity prices, which has historically been inversely correlated to the USD. As the chart below shows, the USD Index has been range bound since November, and so has the relative performance of Materials. The relative performance of Energy to the market has also been range bound for 2019, despite the rally in oil prices.

The full post can be found here.

FOMC preview: Peak dovishness?

The big market moving event this week on this side of the Atlantic is the FOMC meeting, which concludes on Wednesday with a statement, followed by a press conference by Fed chair Jerome Powell. Ahead of that event, let us consider what market expectations are for Fed policy.

The CME's Fedwatch Tool shows that the market does not expect any rate hikes for the remainder of 2019, and a slight chance of a cut by the December meeting.

What about the size of the balance sheet? Callum Thomas conducted an unscientific Twitter poll last week that asked respondents when they expect the Fed to pause quantitative tightening, or QT. The biggest response was Q2, followed by answers in Q3 and Q4 later this year.

As we approach the FOMC meeting, investors have to be prepared for excessively dovish expectations from Fed policy.

The full post can be found here.

Recession jitters: The new fashion?

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: Sell 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.



More recession jitters
I have been warning about the possibility of weakness in Q2 in these pages. Recently, I am seeing more and more evidence of recession jitters come across my desk. The respected UCLA Anderson Forecast issued a statement last week stating that economic growth is likely to slow in 2019 to 1.7% and to near recessionary conditions in 2020:

In his outlook for the national economy, UCLA Anderson senior economist David Shulman notes that while the global economy started out strong in 2018, signs of its weakening will likely be everywhere by year’s end. “The weakness is being amplified by the protectionist policies being employed by the Trump administration and the uncertainties associated with Brexit,” he writes. “This economic weakness has triggered a major contraction in global interest rates, making it difficult for the Fed to conduct its normalization policy, and has put a lid on long-term interest rates.

“After growing at a 3.1 percent clip on a fourth-quarter-to-fourth-quarter basis in 2018, growth will slow to 1.7 percent in 2019 to a near-recession pace of 1.1 percent in 2020,” Shulman adds. “However, by mid-2021, growth is forecast to be around 2 percent.” Payroll employment growth will decline from its monthly record of 220,000 to about 160,000 per month in 2019 and a negligible 20,000 per month in 2020, with actual declines occurring at the end of that year. In this environment, the unemployment rate will initially decline from 3.9 percent in January to 3.6 percent later in the year and then gradually rise to 4.2 percent in early 2021.

Antonio Fatas, the Portuguese Council Chaired Professor of European Studies and Professor of Economics at INSEAD, rhetorically asked in a blog post if low unemployment is sustainable. In other words, this is as good as it gets for unemployment and the economy? Past turns in the unemployment rate have been followed by recession.

The full post can be found here.

The secret of crytocurrencies revealed!

For the longest time, I never "got" crytocurrencies. I never bought into the idea of an urgent need for a currency that is outside the control of the "authorities", or how you ascribe value to something that had no cash flow. If it has no cash flow, then how do you calculate a DCF value? Here is the perspective from Morningstar:

As with copper ingots, seashells, peacock feathers, and gold before it, cryptocurrency is a medium of exchange, rather than something that creates wealth on its own. It can be used to purchase cash--but it does not earn it. Try as you wish, your bitcoin receipt won't trigger dividend checks, any more than will a sheaf of peacock feathers or a mountain's worth of copper.

Assessing cryptocurrencies by calculating the value of their future payments is therefore a dead end. If cyber coins can be appraised, even tentatively, another approach must be found.

That cryptocurrencies do not generate cash does not mean that they lack worth. Seashells and peacock feathers don't go very far these days, but throughout history and across societies, gold has reliably been prized. So, too, have been rare gems.

How do you keep it safe? One of the functions of a bank, which exists within the formal financial system, is to keep you money safer than stuffing it under the mattress. Banks are there to mitigate situations of the apocryphal story of the Bitcoin pioneer who put a token $100 into BTC during its early days. Several years later, he realized he was a millionaire but he lost his password.

This also brings up the issue of the role of money and banking in managing a medium of exchange that functions as a store of value.

The full post can be found here.

From oversold to overbought to...

Mid-week market update: In my last post, I suggested that the stock market is headed for a corrective period, though a short-term bounce was possible this week because of its oversold condition (see Correction ahead: Momentum is dying). The market has staged a remarkable recovery this week by surging to test a key resistance level and readings are now overbought.

The key question then becomes, "Is the correction thesis dead?"

The full post can be found here.

Correction ahead: Momentum is dying

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: Sell 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.



Momentum is dying
I have been cautious on the near-term equity market outlook for several weeks (see Here comes the growth scare and Still bullish, but time to reduce risk). I reiterate my point for being bullish and bearish over different time frames. While I believe stock prices will be higher by year-end, investors should be prepared for some turbulence over the next few months.

We are now seeing definitive technical evidence of a softer market in the near-term. Momentum is dying, and across a variety of dimensions. One key technique that I use to monitor momentum is the behavior of different moving averages. If the shorter moving average starts to roll over while the longer moving average continues to rise, that's a sign of fading price momentum.

The chart below depicts the weekly S&P 500 chart, with a MACD histogram on the bottom panel. Note how MACD, while still strongly positive, is starting to roll over. I find that the weekly chart is useful for intermediate term price moves while filtering out the noise from daily fluctuations.

In the past, such episodes have resolved themselves with either a sideways consolidation or market downdraft. I expect that the most likely outcome is a correction that will last 1-3 months, followed by a resumption of the bull market.

The full post can be found here.

Consolidation or correction?

Mid-week market update: I have been cautious about the US equity market outlook for some time, and the market seems to be finally rolling over this week. The SPX violated an uptrend while failing to rally through resistance.

In the short rim, stock prices are likely to experience difficulty advancing. However, such episodes of trend line breaches can either resolve themselves through a sideways consolidation or a correction. What is the more likely scenario?

The full post can be found here.

An EM warning

For several months, the BAML Fund Manager Survey shows that global institutions have been piling into emerging market equities.

The purchase of EM equities has been a smart move, as they have been leading the market upwards. However, their time in a leadership role may be coming to an end owing to a series of disappointments. EM started to top out against the MSCI All-Country World Index (ACWI) in early February, and relative performance has been rolling over ever since.

The full post can be found here.