Saturday, November 18, 2017

2018 outlook: The last charge of the bulls

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: Bullish*
  • 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.

The outlook for 2018 
It`s that time of year, when investment strategists look ahead to the following year. I favor the analytical framework of New Deal democrat, who views the economy through the prism of coincident, short leading, and long leading indicators. I agree with NDD`s latest assessment that the short term outlook is very strong. While NDD scores the long term outlook as neutral, long leading indicators have been gradually deteriorating. A continuation of the Fed tightening cycle could see downward pressure to equities from either valuation or recessionary warnings by mid-year.

Enjoy the party for now. The global economy is undergoing a reflationary surge, and the outlook for Q1, and possibly Q2, is bright. Consequently, equity bulls are responding with one last charge.

Be warned, however, that the early part of 2018 could be as good as it gets for this cycle. Chris Puplava observed that consumer confidence is nearing the 90th percentile level going back to 1967.

Such readings have seen stock prices perform poorly over a 1-2 year time horizon. The latter half of 2018 could therefore be very bumpy.

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

No comments: