Wednesday, December 28, 2016

A correction on the horizon?

Mid-week market update: It's always nice to take a few days off during the holidays, except all that I got for Christmas was a cold. The stock market doesn't seem to be doing too much better as it tests the bottom of a narrow trading range during what should be a period of positive seasonality.


None of the other major indices, such as the DJIA, NASDAQ, or Russell 2000, have broken support. The one exception is the Dow Jones Transports.



My inner trader has a number of tactical concerns as we look ahead into January.

The full post can be found at our new site here.

Monday, December 26, 2016

The bear case: How Trumpnomics keeps me awake at night

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 the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. 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 the trading model has shown turnover rates of about 200% per month.



The latest 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 mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Trumponomics: The bear case
In last week's post (see How Trumponomics could push the SPX to 2500 and beyond), I laid out the bull case for stocks under a Trump administration and how stock prices could appreciate 20% in 2017, assuming everything goes right. This week, I outline the bear case, or how Trumponomics keeps me awake at night.

Candidate Trump has said many things on the campaign trail, some of which are contradictory. President-elect Trump's cabinet is taking shape and we are now getting some hints about policy direction. Nevertheless, there are a number of contradictions in his stated positions whose unexpected side-effects that could turn out to be equity bearish:
  • Legislative tax cut disappointment 
  • A contradiction in fiscal policy vs. trade policy
  • Geopolitical friction with China
  • Rising geopolitical risk
  • Loss of market confidence
  • A possible collision course with the Federal Reserve
In this post, I will discuss each of these points, and I will end on how I believe these contradictions are likely to be resolved by the market.

The full post can be found at our new site here.

Wednesday, December 21, 2016

Santa Claus rally, or round number-itis?

Mid-week market update: As the Dow approaches the magic 20,000 mark, the question for traders is: Will Santa Claus be coming to town this year, or will the market advance stall as it catches "round number-itis"?



Here is what I am watching.

The full post can be found at our new site here.

Sunday, December 18, 2016

How Trumponomics could push the S&P 500 to 2500+

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 the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. 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 the trading model has shown turnover rates of about 200% per month.



The latest 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 mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Trumponomics: The bull case
It's nearing year-end and prognostication season. Rather than just gaze into my crystal ball and make a forecast for 2017, I will write a two-part series on the likely effects of the new president on the stock market. This week, I focus on the bull case.

Since the recent upside breakout, point and figure charting is pointing to a SPX upside target of 2523, which represents a gain of 11.7% from Friday`s close. I show how that figure is easily achievable under the Trump proposals - and more.


The full post can be found at our new site here.

Wednesday, December 14, 2016

Some perspective on the new dot plot

In my post written last weekend (see Watch the reaction, not just the Fed), I suggested that the key to future stock market trajectory was not just the FOMC statement, but the reaction to the statement and subsequent press conference:
  • What happens to the dot plot?
  • How will the market react to the Fed's message? Will the current market expectations of about two more rate hikes in 2017 change?
  • How will Donald Trump react to the likely quarter-point rate hike?
I had expected a stand pat Summary of Economic Projections (SEP), otherwise known as the "dot plot". Instead, the FOMC shaded up the dot plot, which suggests that 2017 will see three quarter point rate hikes instead of two (chart via Business Insider).


The market reaction was understandably negative. Stock prices fell. Rates rose across the board, but the 2/10 yield curve steepened, which indicated market expectations of better growth.

Here is my perspective on the new dot plot and subsequent market reaction.

The full post can be found at our new site here.

FOMC preview, part II

Further to my last post (see Watch the reaction, not just the Fed), I got a number of questions that asked if there are any factors or nuances from the FOMC statement or subsequent press conference to watch for.

Firstly, I reiterate my point that the reaction to the Fed is far more important to the future direction of stock prices than the Fed statement itself. I expect that the Fed will try very hard to remain apolitical and refuse to react to any possible changes in fiscal policy until they are actually announced. Nevertheless, I will be watching if the committee makes any references to:
  • The strength of the US Dollar; and
  • Any possible changes in the projected path of inflation.
How the Fed views these factors will influence affect the pace of interest rate normalization in 2017.

The full post can be found at out new site here.

Sunday, December 11, 2016

Watch the reaction, not just the Fed

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 the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. 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 the trading model has shown turnover rates of about 200% per month.


The latest 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 mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


All eyes on the Fed
As market activity starts to wind down for the holiday season, the major event next week will be the FOMC meeting. The Fed's policy move has been well telegraphed and a quarter-point rate hike will be a foregone conclusion. Bond yields have been rising, and so have inflationary expectations, but that's not a surprise. Sometimes the best part of watching a play where you already know the plot is to watch the audience`s reaction.


Even as bond prices got clobbered, equities have soared. Major US indices achieved new record highs last week. At this rate, the SPX may achieve its point and figure target of over 2500 in the not too distant future.


To stay ahead of the markets, here is what I will be watching next week in the wake of the FOMC announcement:
  • What happens to the dot plot? 
  • How will the market react to the Fed's message? Will the current market expectations of about two more rate hikes in 2017 change?
  • How will Donald Trump react to the likely quarter-point rate hike?
Watch the audience, not just the show.

The full post can be found at our new site here.

Wednesday, December 7, 2016

A tale of two markets

Mid-week market update: It was the best of times, it was the worst of times. Stock prices continue to surge ahead, while the bond market *ahem* is having its difficulties.

The Dow Jones Industrials Average made another record high, followed by the Transportation Average. The combination of the dual all-time highs constitutes a Dow Theory buy signal.



By contrast, investors are fleeing the bond market. Moreover, the yield curve is steepening, which means two things. First, long dated yields are rising higher than short yields, which means that investors at the long end of the maturity curve got hurt more. In addition, a steepening yield curve has historically been the bond market's signal of better growth expectations.



How are we to interpret these differing patterns in stocks and bonds? Have stocks gone too far? Are bonds ready for a comeback?

The full post can be found at our new site here.

Tuesday, December 6, 2016

Do you have what it takes to succeed in finance? (Dani Rodrik trilemma edition)

Dani Rodrik of the Harvard Kennedy School has outlined a trilemma of the global economy.


The Economist explained the trilemma this way:
Dani Rodrik of Harvard University is the author of the best-known such critique. In the late 1990s he pointed out that deeper economic integration required harmonisation of laws and regulations across countries. Differences in rules on employment contracts or product-safety requirements, for instance, act as barriers to trade. Indeed, trade agreements like the Trans-Pacific Partnership focus more on “non-tariff barriers” than they do on tariff reduction. But the consequences often run counter to popular preferences: the French might find themselves barred from supporting a French-language film industry, for example.

Deeper integration, Mr Rodrik reckoned, will therefore lead either to an erosion of democracy, as national leaders disregard the will of the public, or will cause the dissolution of the nation state, as authority moves to supranational bodies elected to create harmonised rules for everyone to follow. These trade-offs create a “trilemma”, in Mr Rodrik’s view: societies cannot be globally integrated, completely sovereign and democratic—they can opt for only two of the three. In the late 1990s Mr Rodrik speculated that the sovereignty of nation states would be the item societies chose to discard. Yet it now seems that economic integration may be more vulnerable.
In practice, it is difficult to integrate global trade without the harmonization of standards and business practices. While that sounds fine in theory, here is an example of what happens when the rubber meets the road.

The full post can be found at our new site here.

Sunday, December 4, 2016

Trump makes stocks great again (for now)

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 the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. 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 the trading model has shown turnover rates of about 200% per month.



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


Remember the Audacity of Hope?
Does anyone remember Obama's "Audacity of Hope" campaign that won him the White House? As a reminder, here is a video clip from eight years ago which depicted an Obama supporter who believed that the new administration would pay for her gas and mortgage. Fast forward to today, Obama's legislative legacy is far less impressive than what his enthusiastic supporters expected from St. Barack of Chicago.


While the jury is still out on what the political expectations are for Donald Trump's win, market expectations are getting positively giddy, which may be setting itself up for disappointment. Here is what Ed Hyman of ISI Evercore observed from his survey of institutional clients:


Will the legacy of Trump's "Make America Great Again" be similar to Obama's "Audacity of Hope"? While it's far too early to make any kind of judgment, I made the point last week that the fundamentals for the current market rally have been in place before the election (see The start of a new Trump bull?), the electoral results seemed to have awakened the market`s animal spirits.

There is much to get enthusiastic about. Evidence of a reflationary turnaround had been brewing since the summer. Many of the stated business friendly policies of the Trump administration are also reasons to get bullish on stocks. However, excess bullishness can carry the risk of the bulls' demise. Jeffrey Gundlach recently warned that the rally was losing steam:
The strong U.S. stock market rally, surge in Treasury yields and strength in the U.S. dollar since Trump's surprising Nov. 8 presidential victory look to be "losing steam," Gundlach, who oversees more than $106 billion at the Los Angeles-based investment management firm, said in a telephone interview.

"The bar was so low on Trump to the point people were expecting markets will go down 80 percent and global depression - and now this guy is the Wizard of Oz and so expectations are high," Gundlach said. "There's no magic here."

Gundlach had warned last month that federal programs take time to implement, rising mortgage rates and monthly payments are not positive for the "psyche of the middle class and broadly," and supporters of defeated White House candidate Hillary Clinton are not in a mood to spend money.

"There is going to be a buyer's remorse period," said Gundlach, who voted for Trump and accurately predicted in January the winner of the presidential election.
Has Trump made stocks great again? Should you get cautious? Here is how I would play the market as I peer into 2017.

The full post can be found at our new site here.




Announcing our Black Friday/Anniversary promotion!
We are making a limited number of discounted annual subscriptions available at a price of US$199.99, which is US$50 off the regular price of US$249.99, for the first year. This offer is open to the first 100 subscribers, or until December 15, 2016, whichever comes first. Click on this link to subscribe and use the code anniversary2016 at checkout to get the discount.

We only have a handful of discounted annuals subscriptions left. Hurry before they're all gone!