Sunday, January 29, 2023

What the bull case looks like

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: 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. 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.



Positive or negative divergence?
Several readers pointed out to me that while the short-term breadth indicators like the percentage of S&P 500 above their 20 and 50 dma are exhibiting negative divergences, the longer-term percentage of S&P 500 above their 200 dma has been far more resilient. In fact, the strength of the percentage above 200 dma is a signal of underlying strength.


Is the market showing positive or negative divergences?

The full post can be found here.

Saturday, January 28, 2023

FOMC preview: Party now, pay later

As investors look ahead to the FOMC decision on February 1, the market is expecting two consecutive quarter-point rate hikes, followed by a plateau, and a rate cut in late 2023.



The rate hike path and subsequent pause are consistent with the Fed's communication policy. Already, the Bank of Canada raised rates by a quarter-point last week and signaled a conditional pause in order to assess the lagged effects of past rate hikes. Expectations of falling rates later this year are contrary to the Fed's forward guidance. I am struck by a key sentence from the December FOMC minutes: "No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023,"

While there will be no dot plot published at the conclusion of the February FOMC meeting, the Fed's intentions can't be any clearer. There will be no cuts this year. In that case, what are the circumstances that could alter the Fed Funds trajectory?

The full post can be found here.

Wednesday, January 25, 2023

What I am watching during Q4 earning season

Mid-week market update: As we enter Q4 earnings season, the macro backdrop looks grim. The Economic Surprise Index, which measures whether economic releases are beating or missing expectations, is weakening.


The full post can be found here.

Sunday, January 22, 2023

Is the dip a gift from the breadth thrust gods?

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: 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. 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.



Do you believe in breadth thrusts?
Technical analysts recently became very excited when price momentum signals began to flash buy signals. Walter Deemer highlighted a simultaneous case of breakaway momentum and Whaley breadth thrust. Ryan Detrick analyzed the 10-day NYSE advance-to-decline ratio and found strong historical results.


Should you trust the historical evidence of breadth thrusts? Opinions are varied.

The full post can be found here.

Saturday, January 21, 2023

Will the soft landing green shoots be trampled?

The stock market began 2023 with a rally based on the "green shoots" narrative of a Fed pivot and optimism about the effects of China reopening its economy. Since then, the S&P 500 rose to test resistance as defined by its falling trend line and pulled back. Similarly, the equal-weighted S&P 500, the mid-cap S&P 400, and the small-cap Russell 2000 all tested and failed at overhead resistance.



Are the "soft landing" green shoots being trampled? Here are the bull and bear cases.

The full post can be found here.

Wednesday, January 18, 2023

The hidden schism in the BoA Fund Manager Survey

Mid-week market update: BoA published its monthly Global Fund Manager Survey (FMS) this week and the results were not a big surprise. In the last few months, the FMS had increasingly become a price momentum indicator whose readings were fairly predictable based on recent market trends. Respondent risk appetite was turning up after bottoming out in late 2022 and global managers were buying risk again.


Within their global equity allocations, managers were buying emerging markets (read: China) and eurozone equities and selling US equities, which is consistent with what I have observed in my relative return analysis.



Hidden beneath these obvious headlines is a far more cautious asset allocation positioning that are inconsistent with the macro outlook implied by the risk-on nature of the recent equity stampede. A schism is appearing between the how the asset allocators view the market and how equity managers view the market.

The full post can be found here.

Sunday, January 15, 2023

Key tests at resistance ahead of earnings season

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 test at trend resistance
The S&P 500 has rallied up to trend line resistance at about the 4000 level and it faces key tests.



Can the bulls stage a breakout? Here are the bull and bear cases.

The full post can be found here.

Saturday, January 14, 2023

Time to revisit the question: How investable is China?

There were some questions raised about the investability of China last year as regulatory uncertainty rose amidst some market turmoil. Fast forward to today, The MSCI Asia Pacific Index rose 20% from its October low and technically entered a new bull market. Enthusiasm is rising on the prospect of China's abandonment of its zero COVID policy and reopening its economy.

Emotions can run to extremes. Now that many investors are bulled up again, it's time to revisit the China investable question.


The full post can be found here.

Wednesday, January 11, 2023

The bulls cross their fingers for January

Mid-week market update: The bulls are nervously getting ready for a party. Jeff Hirsch of Almanac Trader pointed out that two of his January indicators are positive. When all three are positive, the rest of the year tends to lean bullish. 

This year, the market has eked out a 0.8% gain for its Santa Claus rally. The returns in the first five days has been positive. The only indicator left is a positive return for the month of January.


Will the bulls succeed? Here are the challenges they face.

The full post can be found here.

Sunday, January 8, 2023

New year, new fears

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.



Waiting for clarity from earnings season
As the New Year dawns on investors, fresh concerns are bubbling up for the US equity outlook. The most immediate is the approaching Q4 earnings season reports, which begins in earnest when the banks report earnings this coming Friday. Already, forward 12-month EPS are rolling over across the board for large, mid, and small-cap stocks. Upcoming corporate guidance will determine the degree of valuation pressure stocks will face in the coming weeks and months.


The full post can be found here.

Saturday, January 7, 2023

Three questions investors need to ask in 2023

IMF Managing Director Kristalina Georgieva recently said in a CBS Face the Nation interview that the IMF expects "one third of the world economy to be in recession". She went on to outline the differing outlooks for the three major trading blocs in the world, the US, EU, and China, plus emerging market economies.
For most of the world economy, this is going to be a tough year, tougher than the year we leave behind. Why? Because the three big economies, U.S., E.U., China, are all slowing down simultaneously. The US is most resilient. The U.S. may avoid recession. We see the labor market remaining quite strong. This is, however, mixed blessing because if the labor market is very strong, the Fed may have to keep interest rates tighter for- for longer to bring inflation down. The E.U. very severely hit by the war in Ukraine. Half of the European Union will be in recession next year. China is going to slow down this year further. Next year will be a tough year for China. And that translates into negative trends globally. When we look at the emerging markets in developing economies, there, the picture is even direr. Why? Because on top of everything else, they get hit by high interest rates and by the appreciation of the dollar. For those economies that have high level of that, this is a devastation.
That said, the stock market isn't the economy and looks forward past the IMF forecast, which is very similar to the consensus view of the global economy. From a relative performance viewpoint, US equities have skidded badly in the last two months, while European equities have soared. While the Chinese and Japanese Asian markets have staged relative rebounds in the same time frame, they remain range bound on a relative basis, and so does EM ex-China.



As investors bade goodbye to 2022 and look to 2023, here are some key questions to consider:
  • Can Europe, which the IMF considers to be in recession, maintain its leadership role?
  • How will China's economy behave in light of it reopening initiatives? Global investors can't get their Fed policy call right without getting the reopening trade call right/
  • Will the US enter into recession? The stock and bond markets are in disagreement. Stocks are expecting a soft landing, while bond yields have peaked and discounting substantial economic weakness.
The full post can be found here.

Wednesday, January 4, 2023

If Santa should fail to call...

Mid-week market update: Wall Street has many adages. One concern is the Santa Claus rally: "If Santa should fail to call, bears may come to Broad and Wall". The Santa Claus rally window began the day after Christmas and ended today, two days into the new year. The S&P 500 has been range-bound since mid-December. Are the bears coming to the NYSE, which is located at Broad and Wall?



Let's start with the good news...

The full post can be found here.

Sunday, January 1, 2023

A 2022 report card

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.



Some hope for the future
Every market cycle is different, but all bear markets share some common elements, namely that asset prices fall. 2022 was unusual inasmuch as both stock and safe haven Treasury prices fell together. Nevertheless, there is some hope for the future.

Nine years ago, Jesse Livermore found that forward 10-year equity returns were inversely correlated to household equity positioning. The equity bear market has sent household equity exposure skidding. I would further argue that the normalized position is actually lower. Normally, bond prices rise during equity bear markets, which raise bond allocations and depress stock allocations. When stock and bond prices fell in tandem in 2022, the diversification effect was lost. Household equity allocations should have been lower in a "normal" bear market (see The hidden story of investor capitulation).


As investors bid goodbye to 2022, here is how my models performed during a difficult year.

The full post can be found here.

Saturday, December 24, 2022

What to expect when you're expecting (a recession)

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 difficult 2022
2022 has been a difficult year for equity and bond investors. Both stock and bond returns have been abysmal this year.


As investors bid good riddance to 2022, here is what the market is expecting for 2023.

The full post can be found here.

Wednesday, December 21, 2022

How the BOJ disturbed my vacation

Mid-week market update: I know that I said that I wouldn't publish a mid-week market update during my vacation, but the actions of the BOJ managed to disturb my R&R time, so this is just a brief note.

The BOJ's announcement of a retreat from yield curve control by allowing the 10-year JGB yield to rise from 0.25% to 0.50% shocked markets. The widowmaker trade of shorting JGBs finally worked, but it happened when a lot of traders had shut down their books and went on holidays. The move cratered the JGB market, pulled down other major bond markets around the world, and sent the Japanese stock market reeling. Other equities markets fell in sympathy, but the contagion effect was limited as the bond rout steadied and stock markets rebounded.

My usually reliable S&P 500 Intermediate-Term Breadth Momentum Oscillator (ITBM) had flashed a sell signal on December 7, 2022 when its 14-day RSI recycled from overbought to neutral. I wrote that a reasonable exit strategy is to either wait for the 14-day RSI or the Zweig Breadth Thrust Indicator to become oversold. Coincidentally, both were triggered just before the BOJ announcement.


The full post can be found here.

Sunday, December 18, 2022

In praise of the bond market

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

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




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




The latest signals of each model are as follows:
  • Ultimate market timing model: 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. 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.



Time for bonds to shine
Last week, I highlighted how bond prices were reviving. The close positive correlation between stock and bond prices is breaking. This is the phase of the market cycle when recession fears grow, bond yields fall and bond prices rise, and the stock market weakens. 



The full post can be found here.

Saturday, December 17, 2022

Wall Street is fighting the Fed, should you join in?

Fed Chair Jerome Powell made it clear at the post-FOMC press conference. The Federal Reserve is nowhere close to ending its campaign of rate increases. While last two CPI reports show "a welcome reduction in the monthly pace of price increases...It will take substantially more evidence to have confidence that inflation is on a sustained downward path."

Moreover, the "dot plot" showed a median Fed Funds rate of 5.1%, which is above market expectations. In the aftermath of the FOMC meeting and press conference, Fed Funds expectations barely budged. The terminal rate stayed the same at just under 5%, though the expected path of rate cuts was pushed out by a month from the September to the November meeting.


Wall Street is fighting the Fed. Should you join in? Here are the bull and bear cases.

The full post can be found here.

Wednesday, December 14, 2022

All that's left to do is to wait for Santa Claus

Mid-week market update: Let's begin with an administrative note. In the absence of severe market volatility, this will be the last mid-week market update until the new year. I plan on taking a few days off at the end of the year. I plan to publish the usual two comments this weekend, follow by single comments each weekend after that.

It's always difficult to make definitive market comments on FOMC day, as initial market moves are often reversed on the next day. We can say that the bulls were disappointed by the market reaction to the soft CPI report. The S&P 500 rallied up to test the falling resistance trend line but failed. While the bulls fell short of pushing the index about resistance at 4100, the bears were also unable to push the market below support at 3900. Tactically, all that's left is to wait for the Santa Claus rally.



2022 has been a difficult year for investors. The silver lining is this environment conducive to tax-loss selling. When the tax-loss sales abate, it becomes a setup for the Santa Claus rally, which begins the day after Christmas and ends the second day of the new year.

The full post can be found here.

Sunday, December 11, 2022

Mr. Bond, I expected you to die

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: 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. 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 rejection and a breakout from resistance
Last week, I highlighted the key technical tests that the S&P 500 was about to undergo as it breached its 200 dma and it was nearing a falling trend line. Ultimately, the stock market failed at resistance and pulled back to a key support level. Long Treasury prices, which had been highly correlated with stock prices in 2023, underwent a similar technical test but staged an upside breakout. 




The stock/bond ratio is now weakening. Anyone who expected Mr. Bond to die in the face of hawkish Fed policy must be disappointed.

The full post can be found here.

Saturday, December 10, 2022

The stealth change in market leadership you may have missed

It's time to conduct one of my periodic market leadership reviews. The review will be done through different viewpoints, starting from the top from an asset lens, a global equity lens, and finally through a factor, or style, lens.

The primary tool for my analysis is the Relative Rotation Graph, or RRG chart, which is a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotate to lagging groups (bottom left), which change to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again. All of the RRG analysis is conducted in USD and therefore includes all currency effects in the returns.

The benchmark for the asset RRG analysis is the Vanguard Balanced Index Fund (VBINX). It shows leadership by virtually all equities except China. Non-US bonds are in the improving quadrant. EM equities are only in the improving quadrant, dragged down by China in the lagging quadrant, which also contains US large-cap growth and Treasuries.


The full post can be found here.