Sunday, July 23, 2017

What would a contrarian do?

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 the 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.

What's the contrarian class?
Being a contrarian is a lonely life. You don't hang out with the popular kids. You are probably the nerd in the class. You get picked last in team sports. You don't get invited to any of the parties. And even if you do, everyone laughs at you.

Over at Macro Man, he put us in a contrarian state of mind by asking, "What's the unloved asset class?"

The question was not in the context of a trade, such as short FAANG, but an asset class that you buy and hold for the next few years. Going down the list, he rejected US equities for the reasons of high valuation.

He also rejected developed market fixed income, as well as all forms of credit. The cap rates on commercial real estate isn't offering great value either.

Private equity? Just look at the cash on the sidelines waiting for deals.

At the end, he concluded, "Hmm, cash and gold seem to check a lot of boxes." No wonder contrarians don't get invited to parties.

Cash? Gold? While I believe that it's still a little early to get overly bearish on equities, but here is how a scenario that favors cash, gold and other commodities may develop.

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

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