Sunday, April 3, 2016

The trend is your friend (breadth, seasonality and sentiment too)

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 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 the trading 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. Past trading of this model has shown turnover rates of about 200% per month.

The signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.

The trend is your friend
My trading model turned bullish on stocks on February 28, 2016 (see the above chart of out-of-sample trading model signals and The market bottom 2-step: 1 forward, 1 back). Since then, the stock market has been rising and I see few reasons for investors to deviate from a bullish position.

The Trend Model analyzes global stock markets and commodity prices to see how risk appetite is evolving. This week, I take my readers for a tour around the world to show how risk appetite is improving. In addition, I find that improving breadth, positive seasonality and skepticism about the rally are also supportive of further market gains.

The full post is available at our new site here.

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