Sunday, May 26, 2019

Peak fear, or Cold War 2.0?

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: Neutral*
  • 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.

An unusual market
Ever since Trump's weekend tweet cratered the trade talks three weeks ago, the stock market has behaved in an unusual way.

First, it is unusual in that this trade tension induced pullback has been very shallow. Stock prices are less than 5% from their all-time highs despite the heightened trade tension. In addition, the market has been trading in an unusual way. The chart below depicts the returns of the market since the above Trump tweets. While the index (black line) is down -4.1% since that day, the open-to-close return, which shows the returns during the day (blue line), was actually a positive 1.7% during this period. The spread is an astounding -5.8%. During this period, the market had reacted negatively to overnight and weekend news, while strengthening during daytime trading hours.

This is the part one of a two part publication, designed to address the following questions:
  1. What are the fundamental, macro, and technical factors that are supporting market prices during normal market hours?
  2. How do we talk about the elephant in the room, namely the risk of a trade war, and how it might turn into Cold War 2.0?
The full post can be found here.

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