Could a unicorn cull tank the economy and market?

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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). 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: 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.



Unicorn cull ahead?
As we bid adieu to the Q1 2019, there has been increasing angst about the possibility of a recession, though I have expressed my view that a number of internals cast doubt about the usefulness of the inverted yield curve signal (see How the market could melt up and Why the yield curve panic is a buying opportunity).  Notwithstanding my skepticism, I would like to explore what happens in a recession.

Recessions are cathartic processes that unwind the excesses of the past expansion cycle. The most obvious excess in this cycle has been the rise of Silicon Valley unicorns, private companies with valuations in excess of $1 billion.

The enthusiasm that greeted the Lyft IPO has raised angst among some investors about the herd of unicorns stampeding towards the IPO door, Bloomberg sounded a warning about a possible unicorn IPO mania:

Should these and others make it to the stock exchange, 2019 could prove to be one of the biggest years on record for the amount of money raised in U.S.-listed IPOs. The total will reach $80 billion this year, double the yearly average since 1999, Goldman Sachs Group Inc. predicted in November—an estimate that may prove low. And there’s no arguing that peaks in IPOs have occurred near major tops in the stock market and close to the onset of recessions. Both 1999 and 2007 were unusually strong years for IPOs that were swiftly followed by nasty bear markets in stocks and downturns in the economy.

Could a stampede of unicorns mark a market top, and their subsequent cull sink the American economy?

The full post can be found here.