Wednesday, May 27, 2020

Knife fight at the 200 dma

Mid-week market update: For the last two days, the SPX tested the 3000 level and its 200 day moving average levels and finally broke up today. However, market breadth presents a mixed picture. Fresh 52-week highs have been understandably strong for NASDAQ stocks, as they have been the recent leadership. However, new highs for both large and small caps are less than impressive, which calls into question the sustainability of this rally.


Who wins the knife fight at the 3000 and 200 dma? Here are bull and bear cases.

The full post can be found here.

Sunday, May 24, 2020

Waiting for the inflection point

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 Asset Allocation 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: Sell equities*
  • Trend Model signal: Neutral*
  • 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.


Don't count on the Fed
There is a belief among the bullish contingent that Fed intervention can solve everything that's wrong with the stock market. While liquidity injection can boost equity prices, they do not represent a permanent solution. Otherwise, the Japanese and European markets would have been the clear leaders in the past decade.


Instead, the recent surge in stock prices has created a mini-bubble which is at risk of bursting.

The full post can be found here.

Saturday, May 23, 2020

What gold tells us about confidence

How badly has the pandemic affected the global economy? The United Nations Development Programme (UNDP) has some answers in a recent report. It expects global human development to decline for the first time this year, and EM economies will bear the brunt of the impact. The International Labour Organization (ILO) estimates that up to half of global workers could lose their jobs.
New UNDP estimates Global human development – as a combined measure of the world’s education, health and living standards – is on course to decline this year for the first time since the concept was developed in 1990. The decline is expected across the majority of countries - rich and poor - in every region.
  • Global per capita income is expected to fall four percent. The World Bank has warned that the virus could push between 40 and 60 million into extreme poverty this year, with sub-Saharan Africa and South Asia hardest hit.
  • The International Labour Organization (ILO) estimates that half of working people could lose their jobs within the next few months, and the virus could cost the global economy US$10 trillion.
  • The World Food Programme says 265 million people will face crisis levels of hunger unless direct action is taken.
While the human development is falling this year, the market's perceived decline of confidence did not begin with the COVID-19 pandemic. Last week, I highlighted a comment by Joe Wiesenthal at Bloomberg when he focused on the stock/gold ratio as a barometer of optimism and pessimism (see Checking the small business economic barometer). I would go further to characterize the ratio as a barometer of investment confidence in human ingenuity.
It's such a pure and simple expression of optimism versus pessimism. When you bet on stocks you're betting on humans endeavoring to do productive things. When you bet on a shiny inert metal you're betting on a shiny inert metal.
The chart of the stock/gold ratio surprisingly revealed that it peaked in the summer of 2018 and it has been falling ever since. Since that 2018 peak, both stock and gold prices have climbed, but gold has outpaced stocks. The decline in the stock/gold ratio is worrisome for long-term equity investors.



The stock/gold ratio outside the US, as represented by the MSCI World xUS Index, looks even worse. The MSCI World xUS Index never recovered its pre-GFC peak. Gold, as priced in euros, has reached all-time highs. The post-GFC equity market recovery is entirely attributable to the outperformance in the US.



What is the market telling us about optimism and pessimism, and global investment confidence?

The full post can be found here.

Wednesday, May 20, 2020

Healing?

Mid-week market update: Is the market exhibiting signs of froth, or is the economy healing? There are signs of both. As Fed chair Powell indicated, the economy has encountered a health related shock, and the Fed can only do so much to stabilize markets. It cannot provide a cure.

Some of the market based indicators of covid related anxiety are showing signs of healing.


The full post can be found here.

Monday, May 18, 2020

Earnings Monitor: Digging in for the long haul

We are continuing our coverage of earnings season during these turbulent times. With 90% of the index having reported, this will be the final earnings monitor of the Q1 earnings season. This week, we are seeing greater additional signs of stabilization, but companies are digging for the long haul.

Let's begin with the big picture. FactSet reported that the bottom-up consensus forward 12-month estimate fell -0.64% last week (vs. -1.4% the previous week), and -20.0% since downgrades began nine weeks ago. The EPS and sales beat rates were both below their 5-year historical averages.


The full post can be found here.

Sunday, May 17, 2020

The bulls are losing control, what's next?

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 Asset Allocation 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: Sell equities*
  • Trend Model signal: Bearish*
  • Trading model: Neutral*
* 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.


A sideways pattern
Stock prices have been chopping sideways and gone nowhere in the past month. After a strong rally off the March low, the rally stalled repeatedly at the 61.8% Fibonacci retracement level while the stochastic recycled from an overbought condition. It is becoming evident that the bulls have lost control. That doesn't mean, however, that the market is ready to go down. Instead, the sideways consolidation could continue for some time.


What's next? Will we see further chop sideways, or have the bears seized control of the tape?

The full post can be found here.

Saturday, May 16, 2020

Checking the small business economic barometer

During past major market bottoms, the outperformance of small cap stocks has coincided with economic rebounds. The relative returns of small and microcaps appear to be trying to bottom. It is time to check in on how these stocks are doing.


One way to monitor the progress of these stocks is to check in on the health of small businesses. Small businesses are the backbone of the economy. According to the Small Business Administration, US small businesses provide 47% of private sector employment. Equally important to the check-up is the poor bargaining power of small firms, as they act as a sensitive barometer of economic health.

The full post can be found here.

Wednesday, May 13, 2020

The start of a new bear leg?

Mid-week market update: Is this market starting a new bear leg? There are numerous signs that may be happening. The SPX violated the trend line of a rising channel while the stochastic recycled from an overbought reading, which is a sell signal. The chart of the equal weighted index, which filters out the effects of heavyweight leadership, looks worse as that index tests a key support level.



The market's narrow leadership is evidenced by the concentration of the current leadership of technology, healthcare, and communication services, which is nearing the highs set during the Tech Bubble.


Narrow leadership and high concentration are high risk "this will not end well conditions". Could the latest pullback be the bearish trigger?

The full post can be found here.

Tuesday, May 12, 2020

FIFO: Can China save global growth (again)?

Remember the Great Financial Crisis (GFC)? As the GFC engulfed the global economy, China stepped up with a shock-and-awe campaign of fiscal and monetary stimulus that stabilized not only the Chinese economy, but global growth. Can China save global growth again?

China recently reported surprisingly strong export growth for April, but the closely watched early May trade figures from South Korea badly missed expectations. Exports plunged -46.3% YoY. Exports to China fell -29.4%, which is hardly the picture of a robust economic revival.


Since China was the first major economy to enter the pandemic crisis, what does that mean for the world, based on a first-in-first-out principle?

The full post can be found here.

Monday, May 11, 2020

Earnings Monitor: Stabilization and hope

We are continuing our coverage of earnings season during these turbulent times. Last week, we highlighted the disconnect between earnings expectations and valuation (see Earnings Monitor: Reality bites). This week, we are seeing greater signs of stabilization, and hope for the future.

Let's begin with the big picture. FactSet reported that the bottom-up consensus forward 12-month estimate fell -1.4% last week (vs. -1.9% the previous week), and -19.5% since downgrades began eight weeks ago. The EPS and sales beat rates were both below their 5-year historical averages.


The full post can be found here.

Sunday, May 10, 2020

Setting up to climb a Wall of Worry?

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 Asset Allocation 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: Sell equities*
  • Trend Model signal: Bearish*
  • Trading model: Neutral*
* 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 AAII crowded short?
Why is AAII sentiment so bearish? Is that contrarian bullish?

Jason Goepfert at SentimenTrader highlighted how the latest American Association of Individual Investors (AAII) weekly sentiment survey, which showed that bearish sentiment had spiked despite the stock market rally. Readings have become sufficiently net bearish that subsequent returns are bullish.


What's going on? Is the market climbing the proverbial Wall of Worry?

The full post can be found here.

Saturday, May 9, 2020

What's the next market narrative?

This crisis has so far gone through two phases of market psychology. The first phase was panic, as it became apparent that COVID-19 had become a global pandemic, and economies around the world were shutting down. Stock prices rebounded during the hope phase, supported by a flood of fiscal and monetary stimulus, and the hope that reopening the economy might bring some semblance of normalcy.


What's the next phase of the market's narrative, and how should investor position themselves?

The full post can be found here.

Wednesday, May 6, 2020

A clash of sentiment

Mid-week market update: What should one make of sentiment readings? Credit Suisse reported that long/short hedge funds are now in a crowded long position:
One result of April’s latter month short covering is an all-time high net long exposure among equity long/short managers globally, albeit on a historically low gross exposure.

That's contrarian bearish, right? Yes, but that snapshot isn't the whole story.

The full post can be found here.

Monday, May 4, 2020

Earnings Monitor: Reality bites

Now that we are slightly over halfway through Q1 earnings season, it would be useful to see what we have learned, and how market expectations have developed through this pandemic period.

Let's begin with the big picture. FactSet reported that the bottom-up consensus forward 12-month estimate fell -1.9% last week, and -18.3% since downgrades began seven weeks ago. I have been monitoring the evolution of forward 12-month EPS for several years, and this level of revision is extraordinarily high. In the past, the magnitude of weekly revisions was usually about 0.1%, and swings of 0.2% would be considered high. Now, revisions are an order of magnitude higher at 1% or more. In addition, estimates have been falling while stock prices have been rising.



Companies gave little in the way of earnings guidance during this earnings season. In fact, 47 companies withdrew their 2020 EPS guidance for the full year as management as uncertainty rose. However, there is a remedy for investors looking for greater clarity on the earnings outlook.

The full post can be found here.

Sunday, May 3, 2020

Buy the dip, or sell the rip?

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 Asset Allocation 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: Sell 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.


Buy or sell?
Looking to the week ahead, the recent market action presents a mixed picture. The SPX, DJIA, and NYSE Composite all broke above their 50 day moving averages (dma), which are positives. But they remain under the broken rising trend lines, which are signs that the bulls have lost control of the tape.


Should traders be buying the dips, or selling the rips? Here are the bull and bear cases.

The full post can be found here.

Saturday, May 2, 2020

The recovery scenario

The San Francisco Fed recently created a Daily News Sentiment Index, which is derived 16 major newspapers. In the space of a few weeks, market psychology has turned from "the market is going to retest the March lows" to "the Fed is supporting prices, valuation doesn't matter, the economy is recovering, - Buy".



Regular readers are well aware of my increasing cautiousness about taking equity risk (see The 4 reasons why the market hasn't seen its final lows and The bull case and its risks). While the economic recovery thesis is emphatically not my base case scenario, its' time to conduct a review for investors and traders who would like to take that walk on the Dark side. How should investors position for an environment driven by Fed liquidity, and improving COVID-19 news. Even if you are cautious, these recovery candidates offer signposts of the market's perception of the economic recovery theme.

The full post can be found here.

Wednesday, April 29, 2020

Looking through the FOMC meeting noise

Mid-week market update: It is always to discern short-term market direction on the day of an FOMC meeting, but a number of trends have developed that can support a short-term risk-on tone.

The most notable is the possible change in leadership. For quite some time, the trends of US over global stocks, growth over value, and large caps over small caps have been the leadership in the past bull market. I am starting to see signs of possible reversals.


In the past, changes in market leadership have marked market bottoms, and the emergence of new bull markets. This interpretation comes with the important caveat that leadership changes are usually necessary, but not sufficient conditions for major bullish reversals.

The full post can be found here.

Monday, April 27, 2020

Do earnings even matter anymore?

FactSet reported last week that bottom-up aggregated earnings estimates have been skidding rapidly for both 2020 and 2021.


Forward 12-month EPS estimates are falling even as stock prices rose.


Do earnings matter anymore?

The full post can be found here.

Sunday, April 26, 2020

Factor review: Narrow leadership and its implications

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 Asset Allocation 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: Sell 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.


A factor review
The past few weeks have seen much market volatility and confusion among market participants. One way of cutting through the noise is to see what market factors are leading and lagging.

Our primary tool is the Relative Rotation Graph (RRG). As a reminder, Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership of different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

The chart of recent factor leadership is shown below.


The full post can be found here.

Saturday, April 25, 2020

Why this volatility isn't unprecedented

I have heard comments from veteran technical analysts who have become bewildered by the market's action. The word "unprecedented" is often used.

I beg to differ. The violence of the sell-off, and subsequent rebound is not an unprecedented event. Recall the NASDAQ top of 2000. The NASDAQ 100 fell -39.8% from its March 2000 high, and rebounded 40.1% to its 61.8% Fibonacci retracement level in just four months. The index proceeded to lose -49.7% in that year, and ultimately -80.8% at the 2002 bottom, all from the July reaction high.



I am not implying that the NASDAQ pattern in 2000 represents any market analog to today's action. Barring some other unforeseen catastrophe, such as the Big One taking down California and decimating Silicon Valley, the market is not going to fall -80% from the reaction high.

In the past, I outlined my concerns about the stock market (see The 4 reasons why the market hasn't seen its final lows). This week, I register additional concerns, mainly from a technical analysis perspective.

The full post can be found here.

Wednesday, April 22, 2020

Making sense of the oil crash

Mid-week market update: How should investors interpret the crash in oil prices and its effect on the stock market? The most simplistic way of looking at it is to observe that stock and oil prices have diverged. Either oil has to rally hard, or stocks have to fall down - a lot.



That's a basic tactical view. While it may be useful for traders, correlation isn't causation. These gaps in performance can take a lot longer than anyone expects to close.

It certainly isn't the entire story.

The full post can be found here.

Sunday, April 19, 2020

Back to normal?

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 Asset Allocation 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: Sell 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.


Returning to normal?
SentimenTrader highlighted a surge in media stories with a "back to normal" theme. He added that "Many of these stories are from the same people calling for another market crash at the bottom in late-March".


He also observed that hedgers (not HF speculators) are long equity futures up to their eyeballs. Past episodes have been resolved with market rallies. However, I would note that there is a catch. Past signals have either been coincident with market bottoms, or slightly late.


Is the market back to normal, or are we just late in the reflex rally?

The full post can be found here.

Saturday, April 18, 2020

The bull case (and its risks)

In the past few weeks, a number of investors and strategists have turned bullish. I would like to address the reasoning for the bull case for equities, and the risks to the reasoning. History shows that recessions are bull market killers, and bear markets do not resolve themselves this quickly without a prolonged period of adjustment.


Here are the bullish arguments:
  • The lockdowns are ending.
  • A possible drug treatment breakthrough.
  • The Fed is coming to the rescue.
  • Investors are looking ahead to 2021, and 2020 is a writeoff.
The full post can be found here.

Wednesday, April 15, 2020

Don't forget about the recession

Mid-week market update: Back on March 9, 2020, which seems like a lifetime ago, I declared a recession (see OK, I'm calling it). The call was based on the combination of a coronavirus epidemic in China that disrupted supply chains that began to spread to other countries, and tanking oil prices due to a Saudi-Russia price war. Since then, stock prices cratered, and recovered to stage a strong rally on the back of fiscal and monetary stimulus.

During this rally, what the market seems to have forgotten about is the recession, which has historically been bull market killers. Moreover, recessionary bear markets take a considerable amount of time to resolve themselves.



In the short run, a number of worrisome divergences and risks have begun to appear during the course of the latest stock market rally.

The full post can be found here.

Monday, April 13, 2020

Fun with analogs and breadth thrusts

There was an amusing joke tweet that circulated, which overlaid the 2020 market experience over the 2008 bear market and projected a downside target of 125 for SPY. If anyone saw that, it was a joke and not intended to be serious analysis.



Nevertheless, analogs can be useful in analyzing markets, but with a caveat. As the adage goes, history doesn't repeat itself, but rhymes. Traders who use analogs often expect the market to follow every single squiggle of the historical analog, which is unrealistic.

The full post can be found here.




Sunday, April 12, 2020

A "dash for trash" countertrend rally

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 Asset Allocation 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: Sell 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.


A dash for trash
The recent rally off the March bottom has been impressive and could be nearing an inflection point. The SPX and NDX saw their rebounds pause at their 50% retracement levels.


Andrew Thrasher characterized the rally as a "dash for trash", an anti-momentum rally where the worst performing stocks led the advance.


The internals of the "dash for trash" rally has a number of important implications for technical analysts, and could color conventional analysis and lead to erroneous conclusions.

The full post can be found here.

Saturday, April 11, 2020

The 4 reasons why the market hasn't seen its final low

Stock prices raced upwards last week on the news that the COVID-19 outbreak is improving in New York and other parts of the US, and on the news that the Fed unveiled another $2.3 trillion bazooka of liquidity. Despite these positives, I am not convinced that this bear market has seen its lows yet. Here are the reasons why.

The first is long-term investor psychology. In the past few weeks, I have received numerous questions from readers to the effect of, "I am a long-term investor, should I be putting some money to work in the stock market here?"

If we were to change our viewpoint from an anecdotal to a more formal data perspective, the New York Fed conducts a regular survey of consumer expectations. One of the survey questions asks if respondents expect higher stock prices in the next 12 months. Instead of fear, investors are exhibiting signs of greed. Investor psychology just doesn't behave that way at major market lows.


Mark Hulbert made a similar point about his sample of market timing newsletter writers in a WSJ article. While market timers were fearful at the end of the March quarter, their fear level was nowhere near the levels seen at past market bottoms.


This is not time to relax. The bear market is not over.

The full post can be found here.

Wednesday, April 8, 2020

Don't press your bullish bets

Mid-week market update: After yesterday's downdraft and red candle, the bears must be disappointed that there was no downside follow through. Yesterday's pullback halted at support, which was a relief for the bulls, but I would warn that the current environment is very choppy, and traders should not depend on price trends to continue.

At a minimum, the bulls should not press their bullish bets.

The full post can be found here.

Sunday, April 5, 2020

Time to sound the all-clear?

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 Asset Allocation 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: Sell equities*
  • Trend Model signal: Bearish*
  • 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.


Has market psychology turned?
Urban Carmel made an interesting point last Friday. Despite a string of ugly macro news, the market has not made new lows.


Does that mean it's time to sound the all-clear for the stock market?

The full post can be found here.

Saturday, April 4, 2020

From V to L: What will the recovery look like?

I suppose I should be used to it by now. Last week's initial jobless claims spiked to 6.6 million, and the March headline Non-Farm Payroll printed at a dismal -701K. The unemployment rate would have been even worse had the participation rate not fallen and depressed the size of the labor force. My desk has been flooded with bear porn.

Wall Street economists are racing to downgrade their Q2 GDP growth forecasts. Among many, Goldman Sachs last week reduced their already downbeat forecast to an annualized -34% from -24%, and unemployment to reach an astounding 15%.


Even more astonishing is the latest White House announced goal of reducing the number of COVID-19 deaths to a range of 100,000 to 240,000.



Rather than just wallow in more unnecessary bearishness, a more useful exercise is to consider how the economy might evolve from BC (Before Coronavirus) to AD (After the Disease). What will the recovery look like? There is a wide continuum of recovery shapes from V to L.

The full post can be found here.

Wednesday, April 1, 2020

The bear market rally stalls

Mid-week market update: The bear market rally appears to have stalled at the first Fibonacci resistance level of 2650. The bulls also failed to stage an upside breakout through the falling trend line. Instead, it broke down through the (dotted) rising trend line, indicating the bears had taken control of the tape.


The full post can be found here.

Monday, March 30, 2020

For traders: 3 bullish, and 1 cautionary sign

The following note is addressed to short-term traders with time horizons of a week or less. I would like to highlight some three bullish, and one cautionary data points.

First, the latest update of the Citi Panic/Euphoria Model is solidly in panic territory. This is contrarian bullish, but recognize that the bullish call is based on an intermediate term time horizon.


The full post can be found here.

Sunday, March 29, 2020

The dawn of a new bull?

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 Asset Allocation 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: Sell equities*
  • Trend Model signal: Bearish*
  • Trading model: Neutral*
* 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.


A new bull?
A week ago, I was impatiently waiting for a bear market relief rally (see This is insane! Where's the bear market rally?).  The market gods heard my pleas, and the market surged 20.3% from intraday trough to peak last week, which is enough to pass the definition of a new bull market.


Does that mean we just entered a new bull market after exiting the fastest bear market in my lifetime? Let's consider the issues from a variety of perspectives.

The full post can be found here.

Saturday, March 28, 2020

Handicapping the odds of a V-shaped recovery

Last week's stock market rally appears to be based on the hopes of a V-shaped economic recovery, powered by the combination of all-in monetary stimulus, and fiscal stimulus, as evidenced by a $2 trillion bill passed in Congress. Street consensus is now a V-shaped rebound, with a trough in Q2. This Goldman Sachs forecast is just one of many examples.


How realistic is the prospect of a V-shaped recovery? The economy is clearly either in a recession, or entering recession. LPL Financial found that recessionary bear markets last an average of 18 months compared to non-recessionary bears, which last only 7 months. That finding is inconsistent with the current Street expectation of a brief and sharp slowdown.


What are the odds of a V-shaped recovery?

The full post can be found here.