A trader's guide to spotting market bottoms

Now that the SPX flirted with the combination of the 2700 level and its lower Bollinger Band (BB), it's time to see if the market is ready to bottom on a short-term and intermediate basis.

Let`s analyze outlook from the perspective of breadth, momentum, and sentiment.

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

4 reasons why the bull is still alive

Mid-week market update: In light of the recent market turmoil, I thought I would publish my mid-week market update early. The Shanghai Index moved into bear market territory by declining 20% on a peak-to-trough basis overnight. The SPX is testing its 50 day moving average (dma). Europe is struggling as both the FTSE 100 and Euro STOXX 50 have violated near-term support levels.

Is this a warning that the bull is dying?

I have some good news and bad news. The good news is the bull market is still alive. The SPX is undergoing a correction, but it remains in an uptrend within a range-bound consolidation that began in February.

The bad news is traders need to expect more short-term pain.

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

How Trump's midterm strategy heightens market risk

A recent Axios story featured an interesting political perspective on Trump's possible strategy for the midterm elections:

An odd paradox in defining this moment in politics: The more President Trump does, says and tweets outrageous things, the more his critics go bananas and the better he does in the polls.

Indeed, Gallup's tracking poll of presidential approval has been steadily rising for much of this year. CNBC also reported that a majority of Americans approve of Trump's handling of the economy for the first time.

Axios went on to state that this strategy is risky because it is entirely dependent on energizing his support base:

The rise in Trump’s numbers, and the shrinking Democratic advantage in House races, are reinforcing Trump’s worship of his own instincts on policy.

• Except many of these choices may make his reelection even more dependent on his worshipful base, and less appealing to swing voters.
• It’s a circular political strategy that relies on ignoring independent voters, and assuming they won’t turn out.
• It creates a narrow, treacherous path to reelection.

Call it a short-term gain for medium term pain electoral approach that creates significant market risk.

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

How close are we to a recession?

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: 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 receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.


Dueling recession forecasts
A minor scuffle erupted in the blogosphere last week. Fed watcher Tim Duy took issue with David Rosenberg's recession call with an article entitled "No, A Recession Is Not Likely In The Next Twelve Months. Why Do You Ask?". While Duy acknowledged that Fed policy is likely to be the trigger for the next recession, he disputed Rosenberg's contention that a recession is about to begin.

I buy the story that the Fed is likely to have a large role in causing the next recession. Either via overtightening or failing to loosen quickly enough in response to a negative shock...

But the timeline here is wrong. And timing is everything when it comes to the recession call. Recessions don’t happen out of thin air. Data starts shifting ahead of a recession. Manufacturing activity sags. Housing starts tumble. Jobless claims start rising. You know the drill, and we are seeing any of it yet.

For a recession to start in the next twelve months, the data has to make a hard turn now. Maybe yesterday. And you would have to believe that turn would be happening in the midst of a substantial fiscal stimulus adding a tailwind to the economy through 2019. I just don’t see it happening.

Duy does not believe that Fed policy is tight enough to cause a recession in the near future:

As far as the Fed is concerned, I don’t think we are seeing evidence that policy is too tight. The flattening yield curve indicates policy is getting tighter, to be sure. But as far as recession calls are concerned, it’s inversion or nothing. And even inversion alone will not definitively do the trick. I think that if the Fed continues to hike rates or sends strong signals of future rate hikes after the yield curve inverts, then you go on recession watch.

With inflation still tame, however, the Fed may very well flatten the yield curve with two more hikes and then take a step back. To be sure, it will be hard to stand down or even reverse course on the yield curve alone. After all, the yield curve is a long leading indicator. It will be the outlying data. But there is a reasonable chance the Fed will not tempt fate in the absence of a very real inflationary threat.

Who is right? Tim Duy or David Rosenberg? In the past, every recession has been accompanied by a bear market.

Is a recession just around the corner?

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

What you may not know about small cap stocks

This is one in an occasional series of articles highlighting the hidden investing factor exposures, starting with small cap stocks. Small caps have been on an absolute tear lately, both on an absolute basis and relative to large caps.

Does that mean you should jump on the small cap momentum train?

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

Is the trade war correction over?

Mid-week market update: The fate of this market is becoming highly news dependent. Ed Yardeni recently stated in on CNBC that he has never seen a "president this bullish and bearish at the same time". The market wants to go up on earnings, but it has been held back by Trump`s protectionism.

Will stock prices rise or fall? Is the trade war correction over?

Unfortunately, my time machine is in the shop getting fixed. However, we can rely on technical and sentiment analysis to give us some clues. First and most encouraging was the market price action overnight. The Shanghai market stabilized and showed a minor gain after the horrendous drop Tuesday. The stock markets of China's major Asian trading partners also showed signs of recovery, and the markets in Hong Kong, South Korea, and Singapore successfully tested key support levels.

In addition, I had highlighted a technical pattern on June 10, 2018 (see Can America still lead the world?) indicating that the market had broken down out of a series of bearish wedges. Each breakdown was accompanied by either the VIX breaching or touching its lower Bollinger Band. Subsequent corrections have lasted roughly two weeks, and each pullback have been increasingly shallow, which is intermediate term bullish.

If history is any guide, and notwithstanding more trade war jitters, the market's weakness should end this week. Tactically, it is less clear whether we have seen the actual bottom of this correction just yet.

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

What Trump never told you about the price of a trade war "win"

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: 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 receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.


War is hell
War is hell, even trade wars. The world is again at risk of lurching into a global trade war. Last Friday, Trump announced the imposition of 25% tariffs on $34 billion in Chinese exports, with another proposed list totaling $16 billion that is subject to public comment and review. China has responded with retaliatory tariffs on $34 billion in American exports, mostly in agricultural commodities and automobiles.

Under these circumstances, it is useful to revisit my analysis written in January of the possible fallout under such a scenario (see Could a Trump trade war spark a bear market?). I had highlighted analysis from the Peterson Institute in 2016 modeling the effects of a full blown and abortive trade war on the US economy. The economy would lapse into a mild recession in the former case, but sidestep a recession in the latter case. However, the results did appear anomalous as I pointed that that the observation of (then) New York Fed President Bill Dudley that the economy fell into recession whenever unemployment rose 0.3% to 0.4%, as it would in the modeled result of the abortive trade war.

President Donald Trump tweeted in the past that "trade wars are good, and easy to win". What if he is right, and trade partners either backed down from retaliatory tariffs, or only imposed limited tariffs?

How would "winning" a trade war look like? Let's put on our rose colored glasses and take a look.

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

Things you don't see at market bottoms: Giddiness revival edition

The last time I published a post in a series of "things you don't see at market bottoms" based on US based investor enthusiasm was in January. That's because market exuberance had significantly moderated since the January top. Guess, what, the giddiness is baack!

As a reminder, it is said that while bottoms are events, but tops are processes. Translated, markets bottom out when panic sets in, and therefore they can be more easily identifiable. By contrast, market tops form when a series of conditions come together, but not necessarily all at the same time. My experience has shown that overly bullish sentiment should be viewed as a condition indicator, and not a market timing tool.

Past editions of this series include:

• Things you don't see at market bottoms, 23-Jun-2017
• Things you don't see at market bottoms, 29-Jun-2017
• Things you don't see at market bottoms, bullish bandwagon edition
• Things you don't see at market bottoms, Retailphoria edition
• Things you don't see at market bottoms, Wild claims edition
• Things you don't see at market bottoms, No fear edition
• Things you don't see at market bottoms, Paris Hilton edition
• Things you don't see at market bottoms, Halloween edition
• Things you don't see at market bottoms, CFD edition
• Things you don't see at market bottoms: Rational exuberance edition
• Things you don't see at market bottoms: Retail stampede edition
• Things you don't see at market bottoms: China edition

I reiterate my belief that this is not the top of the market, but investors should be aware of the risks where sentiment is getting increasingly frothy.

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

How far can this rally run?

Mid-week market update: Since early May, it has been evident that the bulls have regained control of the tape (see The bulls are back in town). Not much can faze this market. Even today's hawkish Fed rate hike left the market down only -0.4% on the day. The question for investors then becomes how far this rally can go.

From a technical perspective, the answer was surprising. Applying point and figure chart on the SPX yielded a target of 2609 using the parameters of daily prices, and the traditional box size and 3 box reversal. Extending the time horizon to weekly prices, the target was 2549, and monthly prices, 2579.

This analysis implies that the market has overshot its target. But varying the parameters using a % box size told a different, and more bullish, story.

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

Can America still lead the world?

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: Bullish*
• 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.


A question of leadership
A picture is worth a thousand words. In light of the visible divisions at the G7 meeting, the question of whether America can continue to lead the world sounds out of place.

The question takes on a different context from an equity investor's viewpoint. The chart below shows that US stocks have been the only source of market leadership, which begs the question, "Can global stocks achieve new highs with only US stocks?" The chart below compares US, international developed markets (EAFE), and emerging market (EM) equities to the MSCI All-Country World Index (ACWI). US equities have been tracing out a saucer shaped base on a relative basis. EAFE have been weak in the past year, and they are testing a key relative support level. EM relative performance began to falter in late 2017, and relative strength has been rolling over.

Put it another way, can the other regions recover some of their mojo in order to propel global equities to new all-time highs? To answer that question, we take a tour around the world and analyze the macro and equity market outlooks of the three major trading blocs, the US, Europe, and China.

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

What June swoon?

Mid-week market update: Sell in May? June swoon? Not so far! As the SPX convincingly staged an upside breakout above the 2740 resistance level, the bull case is easy to make. We have seen fresh all-time highs this week from the following:

• NASDAQ Composite
• Russell 2000 small caps
• NYSE Advance-Decline Line
• NASDAQ Advance-Decline Line

I probably forgot a few, but you get the idea. In addition, the metrics of risk appetite, such as the ratio of high beta to low volatility stocks, is exhibiting a positive divergence.

Hold the celebrations! While I have been bullish throughout this corrective episode, I am very aware that the bulls still have some short-term challenges to overcome.

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

2 contrarian trades that will make you uncomfortable

Do you really want to be a contrarian investor? Most of the time, being contrarian means that your investment views are far from the crowd, and you will feel very isolated and uncomfortable.

With that preface in mind, I offer two uncomfortable contrarian trades, based purely on technical analysis.


Fading a NAFTA breakdown
Let's start with the latest developments in Trump's trade policy of imposing aluminum and steel tariffs on major allies. Canada's prime minister Justin Trudeau responded in a Meet the Press interview by characterizing the tariffs, which were imposed on national security grounds, as "frankly insulting".

The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat? Our soldiers who had fought and died together on the beaches of World War II... and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.

The reaction isn't just restricted to Canada. The latest G7 communique of finance ministers and central bankers was, well, more like a communique from the G6 plus one.

Addressing Global Risks and Promoting a More Level International Playing Field
Ministers and Governors had a frank exchange on the benefits of an open rules-based trading system and many highlighted the negative impact of unilateral trade actions by the United States. Ministers and Governors agreed that this discussion should continue at the Leaders’ Summit in Charlevoix, where decisive action is needed. The aim of this should be to restore collaborative partnerships to promote free, fair, predictable and mutually beneficial trade.

Trump hit back with this latest tweet.

How would you feel about fading trade fears, starting with the fears of a NAFTA breakdown?

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

Revealed: The market timers' dirty little secret

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: Bullish*
• 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.


What market timers won't tell you
Market timers have a dirty little secret that they won`t tell you, "Bottoms are easy to call, but tops are hard."

Consider the use of the NAAIM exposure index just as a typical example of a contrarian indicator. In the last 10 years, episodes when the NAAIM fell below its Bollinger Band (blue vertical line) have been good trading buy signals. While oversold markets can become more oversold, buy signals have marked periods of low downside risk. On the other hand, sell signals when NAAIM rose above its upper BB have not worked well.

The perspective is totally different from a business viewpoint. What market timers won't tell you that it's the doom and market crash narratives that get the clicks and the views. Mark Hulbert revealed that "bear markets and heightened volatility are good for business" of newsletter writers. In the two years leading up to the January top, stock prices went straight up:

Who needs a market timer during conditions like those? One leading stock-market timer I monitor told me that during the market’s blow-off stage between last November and the late-January peak, he lost 18% of his subscribers. He added that he’d never before experienced a drop in subscribers of similar magnitude — much less over so short a period.

Glenn Neely, editor of the NeoWave market-timing service, said 2016 and 2017 were some of the most difficult he’s experienced in a 30-year career.

With those factors in mind, I analyze some of the scare stories that have come across my desk in the last few weeks and show why they should not be reasons for panic:

• Eurozone crisis: Italy and Spain
• A looming junk bond Apocalypse
• A crowded long position in the equity bull trade 
• Signs of complacency at the Fed

As the Wall Street adage goes, "Bottoms are events, while tops are processes." Ignore "this will not end well" warnings with no obvious bearish trigger. Don't be fooled by the clickbait stories of doom.

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