Sunday, November 18, 2018

What is Mr. Market saying about Powell's "global slowdown"?

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: 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.

Global slowdown?
In a speech last week, Fed chair Jay Powell stated that while the American economy was performing well, he raised concerns about the effects of a global slowdown. His remarks highlights the importance of non-US markets, and it would be useful to take a brief tour around the world to see what Mr. Market thinks of the "global slowdown".

A comparison of global equity market (top panel) and US equities (middle panel) shows some differences and similarities.

We can make a number of observations from this chart:
  • Both global and US equities are in downtrends, defined as each index trading below its 200 day moving average (dma), but US stocks are stronger as the SPX is only just below its 200 dma.
  • Both indices are forming possible inverse head and shoulders formations which may resolve bullishly. As good technicians know, these patterns are not confirmed until the neckline breaks. 
  • One key difference stands out if upside breakouts were to occur. The measured upside target for global stocks is below the January all-time highs, while the measured target for the SPX is over 3000, which would represent a fresh high for that index.
  • Market leadership may be pausing and waiting for direction. The bottom panel shows that for much of this year, US stocks have been outperforming global stocks, as measured by the MSCI All-Country World Index (ACWI), but relative performance of US, EAFE, and EM equities have flattened out since September. 
What follows is a more detailed review of global markets as we take a quick tour around the world.

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

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