Wednesday, October 2, 2019

How deep a pullback?

Mid-week market update: Regular readers will know that I have been relatively cautious on the stock market outlook for several weeks, and my inner trader has been short the market since September 13, 2019 when the SPX was over 3000. The index violated the 50 dma, broke support at 2960 and filled the gap at 2940-2960 yesterday. The decline was sparked by a miss on ISM Manufacturing PMI, which Jeroen Blokland pointed out is closely correlated to stock prices.

Lost in the bearish stampede was the observation of IHS Markit economist Chris Williamson that Markit M-PMI had been strong; ISM had overstated growth during the 2016-18 period; and ISM is maybe understating growth now.
Divergence is possibly related to ISM membership skewed towards large multinationals. IHS Markit panel is representative mix of small, medium and large (and asks only about US operations, so excludes overseas facilities)

Is this just an over-reaction, or the start of a major pullback?

The full post can be found here.

Our trading track record
As a reminder, we correctly flashed a "sell short" signal on September 13, 2019. Just to show that the signal was not just an isolated incident, the chart below depicts the out-of-sample record of our trading model (see this link for the complete calculation methodology).

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