Sunday, November 25, 2018

A 2015 or 2011 style hiccup, or something worse?

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 hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bearish*
  • 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 smorgasbord recession?
Callum Thomas has a terrific chart depicting the scope of the global stock market weakness. At the end of October, roughly 13% of global indices were above their 200 day moving averages (dma). Such readings are normally seen at intermediate term lows, or as part of a broad based bear market.

If this is indeed an intermediate low like 2015, or even 2011, investors should buy with both hands. On the other hand, if this is the start of a recession-induced bear market, investors should continue to de-risk their portfolios.

At this point, the lights on my panel of long leading recessionary indicators are currently flickering, but not bright red. Paul Krugman recently postulated;
Right now there doesn’t seem to be one big thing setting us up for a crisis – not like the housing bubble before 2008, or the tech bubble of the late 1990s. But there are several smaller things: trouble in emerging markets, some softening of housing, commercial real estate, corporate debt. So we could have a “smorgasbord” recession like 1990-91, with several factors coming together. This could be a problem, because interest rates are still low and there’s not much room to cut.

Could we see a "smorgasbord recession" in the near future?

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

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