Sunday, January 1, 2017

The cloudy side of Trump

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 (downgrade)*
* 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.

Is the Trump honeymoon over?
Bloomberg had a marvelous article that captures the market's mood right now. It is entitled "The sunny side of Trump:There’s reason for short-term optimism. Then he has to deal with his policy contradictions".

How long will this honeymoon last? For American business, the positive scenario is that Trump appoints sensible people, matures in office, and puts most of his considerable energy into the pro-growth parts of his agenda. The negative scenario is that he goes back to being the inciter who flew off the Twitter handle so much during the campaign that his people temporarily seized control of his account.
The bull case, which I laid out two weeks ago (see How Trumponomics can push the SP 500 to 2500+), is well known. Since the election, the stock market has embraced the prospect of a global cyclical upturn, anticipated fiscal stimulus, and buyback gains from a tax holiday fueled repatriation of offshore corporate cash. I went on to outline the bear case as the second part of my series the following week (see The bear case: How Trumponomics keeps me awake at night).

As Inauguration Day approaches, acts such as the appointment of Peter "Death by China" Navarro as trade czar has begun to unnerve the bulls. Market psychology is starting to turn from greed to fear. Concerns are rising that new Trump edicts may see parallels to this scene from Woody Allen`s 1971 comedy, Bananas (click this link if the video is not visible).

To be sure, bullish sentiment has surged in the short-term. Stock prices may have run ahead of themselves and a corrective period is likely. The bigger question is how will the bull and bear case resolve themselves in the longer term? I address that question this week with a scenario analysis that has some surprising results.

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

No comments: