Sunday, March 1, 2020

Panic City!

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: Buy 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.

Fun with mystery charts
This time last week, I was cautiously bearish (see Correction ahead?), but I never imagined that stock prices would crater as far as they did. My social media feed is full of narratives of how unprecedented and insane the market decline has been. One such example is the comparison of the "coronavirus crash" to other major market events in the last 100 years.

This week, rather than just dwell on how extreme last week's market action was, I would instead like to put on a technical analyst hat and consider the following three mystery daily charts. Which would you buy, or sell? Which is your favorite? Did you wish you had bought one or all of time in the past two weeks?

The analysis is far more revealing about market internals and likely future action than more hand wringing about how oversold and washed out the stock market has become.

Answer is below the fold. The full post can be found here.

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