My hits and misses of 2015

As 2015 draws to a close, this would be a good time to review how I did during the year. As regular readers know, I have two personas, my inner investor and my inner trader. My inner investor had a decent year, while my inner trader had a year that he would rather forget.

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The reason why the bulls should be cautious about a January hangover

In my last post, I wrote about the possible appearance of a rare Zweig Breadth Thrust buy signal this week (see The 2016 macro surprise that no one talks about). Tuesday was the last day in the 10 day window for the ZBT buy signal to be triggered. Alas, it doesn't seem to have happened.

So where does that leave us? The near term outlook for the bulls is still constructive, as the market has rallied through a key downtrend line (shown above). Moreover, we are still in a period of seasonal strength.

However, bullishly oriented traders should be wary about overstaying their welcome. The Santa Claus rally was nice but the party is starting to get out of hand. The neighbors have called the cops and they are due to arrive very soon.

The full post is at our new site here.



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If you signed up for the notification of our Early Bird Special Offer but did not receive it, I have had some reports that they got classified as spam so please check your spam folder. Otherwise you can email me at cam at humblestudentofthemarkets dot com and I will send you the link.

As well, I would like to remind readers that we will cease to accept new subscribers as of January 15, 2016 as a way to better control the growth of our new community. Hurry, the deadline is coming up faster than you think.

The 2016 macro surprise that no one talks about

Trend Model signal summary
Trend Model signal: Neutral
Trading model: Bullish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.

Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.


The boy who cried wolf
We all remember the story of the boy who cried wolf. The villagers got one false alarm after another, which made them increasingly annoyed. When the wolf finally came, his warnings were ignored and he suffered the consequence.

I want to tell a more modern story of the boy who cried wolf. In this case, the wolf is inflation. In the wake of the Great Financial Crisis (GFC), there was a cacophony of voices (myself included) who warned that all the QE and money printing would eventually result in runaway inflation and USD devaluation. Even Warren Buffett was caught up in that frenzy when he penned his "unchecked greenback emission" NY Times Op-Ed in 2009:

Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Despite these dire forecasts of doom,  the USD has rallied in the wake of the GFC and gold prices are roughly flat from that period. That thesis of secular runaway inflation turned out to be wrong.

Today, a different kind of inflationary wolf pack stalks the landscape. Instead of the specter of secular runaway inflation, the cyclical inflationary wolves are gathering. When they descend on the flock in 2016, it will be the macro surprise that almost no one is talking about.


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If you signed up for the notification of our Early Bird Special Offer but did not receive it, I have had some reports that they got classified as spam so please check your spam folder. Otherwise you can email me at cam at humblestudentofthemarkets dot com and I will send you the link.

As well, I would like to remind readers that we will cease to accept new subscribers as of January 15, 2016 as a way to better control the growth of our new community. Hurry, the deadline is coming up faster than you think.

Is Warren Buffett losing his touch?

How would you evaluate a manager with this kind of 10-year investment performance? Terrific? Or Meh!

It depends on when you got in. Sure, the 10 year numbers look terrific, but he is roughly flat with the benchmark over five years and he had a difficult 2015.

What if I told you this track record was none other than the legendary Warren Buffett? The chart represents the relative performance of Berkshire Hathaway B (BRKb) against the market.

The full post is at our new website here.



Site Notice
If you signed up for the notification of our Early Bird Special Offer but did not receive it, I have had some reports that they got classified as spam so please check your spam folder. Otherwise you can email me at cam at humblestudentofthemarkets dot com and I will send you the link.

Do you believe in Santa Claus?

Trend Model signal summary
Trend Model signal: Neutral
Trading model: Bullish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.

Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.



Hitting the Exacta
Regular readers know that I have been bullish on stocks for a couple of months now. While I had expected a seasonal Santa Claus rally, Santa hasn't been around and stock prices have been weakening. In one way, Old St. Nick may have left a present for the bulls under the tree as the recent sell-off has left the market oversold. As a result, two of my Trifecta Bottom Model indicators have flashed a buy signal. I call this hitting the Exacta.

My Trifecta Bottom Model (which was described in a past post Sell Rosh Hashanah?) consists of the following three conditions, which must occur closely (within a week) of each other:

1. VIX term structure (VIX/VXV ratio) inversion
2. NYSE TRIN more than 2
3. My favorite intermediate term overbought-oversold model, which is the ratio of % of SPX stocks over their 50 day moving average (dma) / % of SPX stocks over their 150 dma less than 0.5

Each of these conditions, by themselves, are indicators of high levels of market fear. When used in conjunction with each other, they have been uncanny at calling short-term market bottoms. The chart below shows past instances of the market has hit the Trifecta (vertical red lines, triggered all three conditions) or the Exacta (blue vertical lines, two of three) in the last three years. The only failure of this model was the sell-off in August 2015, where an oversold market became more oversold. In all other instances, the market have rallied off these buy signals.

Trifecta Bottom Model

Last week, the market hit the Exacta again as the VIX term structure inverted and TRIN spike to over 2 within a week of each other. The question is whether this is August 2015 all over again, or a run-of-the mill instance of a short-term bottom.

The complete post is at our new site here.


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Why the next recession will be very ugly

In a recent post, I was relatively upbeat about the near term market outlook but warned that the next recession could be very ugly (see A major bear market in 2016?). To explain, I have found three possible time bombs that are set to go off at the next recession:

• The Fed's balance sheet;
• A possible financial crisis in China because of her inability to re-balance its economy fast enough; and
• Possible blowups lurking in the global financial system.

The full post is at our new website here.






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If you signed up for the notification of our Early Bird Special Offer but did not receive it, I have had some reports that they got classified as spam so please check your spam folder. Otherwise you can email me at cam at humblestudentofthemarkets dot com and I will send you the link.

Climate science as a case study in quant modeling

As we ponder the upcoming FOMC decision and statement, I have little or nothing to add that I haven't said before. However, I would like to offer the following case study as a lesson in the kinds of decisions that policy makers, whether at the Fed or elsewhere, make when facing important decisions.

The full post is at our new site here.

A major bear market in 2016?

As stock prices have recently weakened, I have received some comments regarding the start of a bear market in 2016. To put it into context, bear markets start for one of three major fundamental reasons:

1. War or revolution leading to a permanent loss of capital (think Confederate war bonds, or German panzers smashing through French lines on their way to Paris in 1940);
2. An overly aggressive central bank tightening and tipping the economy into recession (you have got to be kidding me); or
3. An economic recession.

Since the first two points are highly unlikely to cause a bear market in the near future, I will focus on the likelihood of a recession. My framework of analysis is examine the economies of the three major trade blocs in the world, namely the US, Europe and Greater China.

The full post is at our new website here.

The only market indicator that matters in 2016

Trend Model signal summary
Trend Model signal: Neutral
Trading model: Bullish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.

Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.


The Dollar and euro's most excellent adventure
I had expected that the markets might become little sloppy as we approached the FOMC meeting (see Waiting for the whites of their (oversold) eyes), but I didn't expect the kind of risk-off tone seen last week. Despite the market weakness, I could tell you that:

• Fundamentals, such as forward EPS revisions, remain constructive
• The US economy remains strong with no sign of a recession on the horizon
• The market is oversold
• Sentiment is showing a crowded short reading, while insiders are buying
• Seasonality is bullish for stocks

None of that matters very much, as the signals from the Federal Reserve next week will set the market tone, not just for the rest of the year, but for most of 2016. If I had to focus on one key market indicator coming out of FOMC meeting, it would be the reaction of the US Dollar to the Fed decision.

The full post is at the new website here.

What's wrong with South Africa?

The study of emerging markets is a useful exercise in examining our assumptions about economies and markets because they sometimes operate by different rules than developed economies. As an example, Bloomberg reported today that the markets are freaking out over the firing of the finance minister:

South African markets were thrown into turmoil after President Jacob Zuma fired the finance minister, strengthening his grip on power amid differences over government spending.

The rand weakened for a sixth day in the longest streak of losses since November 2013 and bond prices dropped the most on record, pushing yields to their highest levels since July 2008. The country’s bank stocks tumbled the most in more than 14 years following the dismissal late on Wednesday of Finance Minister Nhlanhla Nene. The cost of insuring South African debt against default rose to the highest in more than 6 1/2 years.

As the chart below shows, South African assets are indeed tanking. The top panel shows the South African ETF (EZA), which is priced in USD. The bottom panel shows the relative performance of the South African Rand relative to the Aussie Dollar, which is another commodity currency.

What's wrong with South Africa?


The complete post at our new site here.

Waiting for the whites of their (oversold) eyes

I received a couple of comments to my last weekend post that it was somewhat lacking in a short-term trading outlook (see 2016: Time to get bearish and go "Zero Hedge"?). As my previous view that the US equity market would grind up until year-end hasn't worked out, it would be appropriate to update the short-term stock market conditions.

Full post at the new website here.

2016: Time to get bearish and go "Zero Hedge"?

Trend Model signal summary
Trend Model signal: Neutral
Trading model: Bullish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.

Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.


My worries for 2016
As the above chart shows, I have been pretty bullish on equities since the market bottomed in September. However, as I peer into 2016, ominous signs are starting to appear. For my inner investor, the key question is whether to go full "Zero Hedge" and turn bearish on the outlook for 2016. Here is my list of worries:

The full post is at the new site here.





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A surprise from rotational analysis

One of my tools in my market analysis toolbox is leadership analysis. In particular, I found that in bull phases, it pays to buy the market leaders (see Momentum + Bull market = Chocolate + Peanut butter). I was playing around with Relative Rotation Graphs, or RRG, the other day and what I found was a surprise.

The full post is at our new site here.



Blog notice
We are experiencing some glitches with our payment system at our new site and we are unable to process new subscribers at this time. In the meantime, all content is free. We will make an announcement when these problems are resolved and the site is open for business.

Readers can still register for the Early Bird discount offer of 14 months for the price of 12 at USD 199.99. You can get on the list for that offer at this link here. (If you have already emailed me in the past or responded through my previous survey, you are already on the list there is no need to do so again.)

Media, press professionals and blog aggregators with email domains confirming their affiliations are invited to apply for free subscription access (cam at humblestudentofthemarkets dot com).

Welcome to our new home

Welcome to the new home of Humble Student of the Markets. We are experiencing some glitches with our payment system and we are unable to process new subscribers right now. We will have that fixed ASAP. In the meantime, all content is free and here are my pledges for the new site:

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