Monday, April 29, 2019

A stampede you can front run

You may think that institutional money managers run in herds, but that is not necessarily true. Different managers have different mandates that color their views. As well, their geographical base can also create differences in opinions in how their view their world and markets. I analyze institutional sentiment by segmenting them into four distinct groups, each with their own data sources:
  • US institutions, whose sentiment can be measured by Barron’s semi-annual Big Money Poll
  • Foreign and global institutions, as measured by the BAML Fund Manager Survey (FMS), which is conducted on a monthly basis;
  • RIAs, as measured by the NAAIM survey, conducted weekly; and
  • Hedge funds, as measured by option data and the CFTC futures Commitment of Traders data, though hedge funds are partly represented in the BAML FMS sample, and other sources.
While "institutions" do not always agree, current conditions are pointing an unusual consensus of opinion, and traders can profit by front running the institutional stampede.

The full post can be found here.

Sunday, April 28, 2019

Sell in May? The bull and bear debate

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.



Sell in May and go away?
The stock market has made a strong V-shaped recovery since the Christmas Eve bottom. The SPX, NASDAQ 100, and NASDAQ Composite have all rallied to all-time highs last week. As we approach the seasonally weak six months of the year, should you sell in May and go away?



Here are the bull and bear cases.

The full post can be found here.

Wednesday, April 24, 2019

Buy or fade the breakout?

Mid-week market update: The market strength this week was no surprise to me based on my seasonal analysis I published on the weekend (see Will a volatility collapse lead to a market collapse?). Last week was option expiry (OpEx) week, and OpEx weeks have historically been bullish for stocks. In particular, Rob Hanna at Quantifiable Edges found that April OpEx week was one of the most bullish ones of the year.


However, last week saw the SPX edge down -0.1%, and my own analysis found that April post-OpEx weeks that saw market declines tended to experience strong rallies (red bars). By contrast, the market had a bearish tilt after strong April OpEx weeks (green bars).


This historical study was conducted from 1990, and the sample size of losing April OpEx weeks was relatively small (N=8). Here is the same analysis for all post-OpEx weeks. The conclusion is the same. Strong OpEx weeks were followed by market weakness, and vice versa, though the magnitude of the effect was not as strong.


Could this week's upside breakouts of the major indices be attributable to an OpEx effect? If so, could the breakout be a fake-out?

The full post can be found here.

Monday, April 22, 2019

A Healthcare rebirth? And broader market implications

It is Easter Monday, a day when Christians focus on the theme of rebirth and resurrection, Healthcare stocks just underwent a near-death experience when the market panicked over the prospect of a Democrat victory in 2020, and the potential negative effects of the implementation of a Medicare-For-All policy.

To be sure, there are costs to be taken out of the system. The US spends more than any other industrialized country on health care, with a lower life expectancy.


Indeed, the political winds are starting to shift. Axios reported that Republicans are becoming more open to the idea of passing a bill that will lower drug prices:
The White House and top lawmakers from both parties think a bill to lower drug prices has a better chance of becoming law before the 2020 election than any other controversial legislation.

Between the lines: Republican politics on drug prices have changed rapidly. The White House has told Democrats it has no red lines on the substance of drug pricing — a position that should leave pharma quaking.
We have seen these kinds of scares before.

The full post can be found here.

Sunday, April 21, 2019

Will a volatility collapse lead to a market collapse?

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.



The calm before the volatility storm?
In the past week, there have been a lot of hand wringing about the collapse in volatility across all asset classes. Equity investors know that the VIX Index has fallen to a 12-handle, and past episodes of low VIX readings have resolved themselves with market corrections.



The MOVE Index, which measures bond market volatility, has also fallen to historic lows.


Low volatility has also migrated to the foreign exchange (FX) market.


As a sign of the times, Bloomberg reported that Europe will soon see a new short-volatility corporate debt ETF.
The 50 million euros ($56 million) product, ticker TVOL, aims to deliver steady gains so long as markets demand a higher cushion for price swings on speculative-grade debt compared with what comes to pass, or the volatility-risk premium.

This dynamic -- selling volatility when it’s high and waiting for it to deflate -- has spurred the post-crisis boom in financial instruments tied to shorting equity swings. Now it offers ETF traders income in the potentially more-stable world of fixed-income options.

“The premium available has been relatively persistent over the last 10 years,” Michael John Lytle, chief executive of Tabula, said in an email. “Most of the time it has also been larger in credit than in equity.”

The Tabula product tracks a JPMorgan Chase index that simulates the returns of selling a so-called options strangle on a pair of credit-default-swap indexes referencing high-yield markets. The underlying index has returned an average 2.9 percent over the past five years but has posted losses over the past 12 months, a period that coincided with the fourth-quarter meltdown in risk assets.
This ETF launch is a classic case of investment bankers feeding the ducks when they're quacking. What could possibly go wrong?

Is this the calm before the volatility storm? What's next? The answer was rather surprising.

The full post can be found here.

Wednesday, April 17, 2019

Debunking VIXmageddon, and other bear myths

Mid-week market update:  I would like to address a number of bearish themes floating around the internet in the past few weeks, they consist of:
  • A low volume stock market rally
  • Extreme low volatility (remember the VIXmageddon of early 2018)
  • The closing stock buyback window during Earnings Season, which removes buyback support for stocks


None of these factors are likely to sink stock prices. Here are some reasons why.

The full post can be found here.

Monday, April 15, 2019

Can the market advance continue? Watch China!

The US equity market has risen more or less in a straight line since the Zweig Breadth Thrust buy signal of January 7, 2019 (see A rare "what's my credit card limit" buy signal). Technically, breadth thrusts are extremely rarely long-term bullish signals. How far can stock price rise from here?



Chris Ciovacco made a recent video which studied the market behavior of breadth thrusts that came to a bullish conclusion. He defined a breadth thrust as % of stocks above their 200 dma rising from 10% to over 70% in a short period. This has happened only twice in the last 15 years. The first time was the rally off the Lehman Crisis bottom of 2009, and the next time was the eurozone Greek Crisis of 2011.



Ciovacco pointed out that the current breadth thrust occurred more rapidly than either 2009 or 2011, which is a sign of bullish price momentum.

He went on to outline the bullish market performance in the wake of these breadth thrusts (warning, N=2).


Can history repeat itself? Do current fundamentals support further market strength?

Here is an "out of the box" answer to the question of further market strength: Watch China.

The full post can be found here.

Sunday, April 14, 2019

How "patient" can the Fed be?

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.



What are the limits to "patience"?
The credit market may be setting up for an unpleasant surprise. According to the CME's Fedwatch Tool, the market mainly expects no change in the Fed Funds rate for the rest of this year, with the possibility of a cut later in the year. It is not expecting a rate hike. Politico reported that Trump's economic advisor Larry Kudlow went even further: "I don't think rates will rise in the foreseeable future, maybe never again in my lifetime."


The minutes of the March FOMC meeting tells a different story. Since the Fed made the U-turn and adopted the policy of "patience", the Committee is not expecting any changes in rates for the rest of 2019:
A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.
However, some members would not rule out another increase in interest rates this year. The strength in the labor market could raise economic growth in the months ahead, though not as rapidly as last year.
Underlying economic fundamentals continued to support sustained expansion, and most participants indicated that they did not expect the recent weakness in spending to persist beyond the first quarter. Nevertheless, participants generally expected the growth rate of real GDP this year to step down from the pace seen over 2018 to a rate at or modestly above their estimates of longer-run growth.
There was also some uneasiness over the use of the word "patient" as it could be viewed as handcuffing future actions if the time came to raise rates:
Several participants observed that the characterization of the Committee's approach to monetary policy as "patient" would need to be reviewed regularly as the economic outlook and uncertainties surrounding the outlook evolve. A couple of participants noted that the "patient" characterization should not be seen as limiting the Committee's options for making policy adjustments when they are deemed appropriate.
Who is right? The market or the Fed? If the bond yields start to rise, what does that mean for stock prices?

The full post can be found here.

Wednesday, April 10, 2019

Selections for a new bullish impulse

Mid-week market update: Numerous signs of a new bullish impulse are appearing.
  • The American economy has sidestepped a recession;
  • Sentiment is not excessively bullish; and
  • Price momentum is strong.
It is a truism in investing that you should buy when blood is running in the streets. The latest update of NDR's Global Recession Model shows the probability of a global recession, which is defined as sub-3% growth, at 96.63%.


One application of that rule is to buy risky assets when a recession is evident to the public. It seems that we have reached that point, what should we buy?

The full post can be found here.

Monday, April 8, 2019

Making sense of Trump's pressure on the Fed

I am somewhat at a loss of why Trump is putting so much pressure on the Federal Reserve. In a recent CNBC interview, CEA chair Kevin Hassett projected that growth would rise again to 3% later this year. “Everything we see right now is teeing us up to have a year like last year - Q1 around 1.5% or 2%, then Q2 goes way north, carries you into a 3% year.”

After the BLS reported a strong than expected March Jobs Report last Friday, Donald Trump repeated his assertion that the Fed should shift to an easier monetary policy (via CNBC):
President Donald Trump said Friday the U.S. economy would climb like "a rocket ship" if the Federal Reserve cut interest rates.

Commenting after a strong jobs report for March, Trump said the Fed "really slowed us down" in terms of economic growth, and that "there's no inflation."

"I think they should drop rates and get rid of quantitative tightening," Trump told reporters, referring to the Fed's policy of selling securities to unwind its balance sheet, a stimulus put in place during the financial crisis. "You would see a rocket ship. Despite that we're doing very well."


The full post can be found here.

Sunday, April 7, 2019

An unexpected sweet spot for equities

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.



Opportunities from uncertainty
Now that stock prices have recovered to within 2% of their all-time highs, what's next for the stock market? To be sure, stock prices are no longer cheap. FactSet reports that the market is trading at a forward P/E ratio of 16.7, which is just above its 5-year average of 16.3 and well above its 10-year average of 14.7.


Should investors throw in the towel? Not yet. While valuations are not compelling, equities remain in a sweet spot as cautious long-term sentiment readings can drive prices higher.

Strategas published a terrific analysis showing how forward US equity returns have historically been higher when global policy uncertainty is high. While the sample size for this study is small, it is consistent with the contrarian principle of buying when blood is running in the streets.


Indeed, the latest reading of global policy uncertainty shows that it remains at an elevated level.


Despite the elevated valuation, equities find themselves in an unexpected sweet spot. There is still room for stock prices to rise as tensions and risk levels fade.

The full post can be found here.

Wednesday, April 3, 2019

A "green shoots" rally ahead?

Mid-week market update: Even as the slowdown gloom overtook the market in the past few weeks, stock prices did not break down. Now, the storm seems to be passing as green shoots of growth are starting to appear.

For equity investors, the most notable change was the reversal in forward 12-month EPS estimates, which bottomed and begun to rise again. This is an indication of the return of bullish fundamental momentum.

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The combination of an unexpected growth turnaround and excessively cautious positioning is sparking a "green shoots" risk-on rally.

The full post can be found here.

Tuesday, April 2, 2019

A March Jobs Report preview

I have two thoughts ahead of the March Jobs Report that investors should consider. Let's start with the tactical picture of what Friday's reports might bring.

Recent jobs data has been distorted by the effects of the federal government shutdown, which can make the reported figures nonsensical. Now that the effects of the shutdown are mostly over, we can get a better idea of the overall trend.

One clue comes from the weekly initial jobless claims data, which is reported on a timely basis. As the chart below shows, the week of the February Jobs Report survey coincided with an unusually strong initial claims print, which may have contributed to the shocking miss in the February NFP report of 20K jobs. Initial claims for the March survey week weakened to a level consistent with January's. In light of the strong January NFP print of 304K jobs, which was later revised to 311K, this suggests that an in line or beat result for March headline NFP estimate of 175K.


Notwithstanding the tactical trading considerations of the March Jobs Report, a new development is likely to affect how the Fed views employment data, which could affect thinking on future policy.

The full post can be found here.