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.