Sunday, February 25, 2018

No, Mr. Bond, I expect you to die

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. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • 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 receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Focusing on the wrong bond?
"No, Mr. Bond, I expect you to die!"

That was the classic line from the film Goldfinger, which is aptly named considering today's conditions. The market is concerned about rising inflation expectations, which is bullish for inflation hedge vehicles like gold, and bearish for bond prices (click on this link for video if the clip is not visible).

Just as James Bond escaped the perils he faced in many films, bonds may be able to escape their perceived risks. That's because the market may be focused on the wrong bond. The top panel of the following chart shows the yield 10-year Treasury note, which has violated a trend line that stretches back to 1990, and the yield of the 30-year Treasury, which has not.

As market anxiety over inflation has picked up, the spotlight has turned to the 10-year yield. As experienced market analysts know, excess focus on a benchmark could lead to the invalidation of that benchmark.

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

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