Sunday, May 16, 2021

Where's the fear?

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 that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.


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 email alerts is 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


A lack of panic
The stock market tumbled last Wednesday on inflation fears from an unexpected "hot" CPI report. It became oversold and rebounded. That bottom seemed a little too easy. The nagging question is, "Where's the fear?"


While a number of technical indicators became oversold, sentiment models did not show any signs of panic or the sort of seller capitulation usually found at bottoms.

The full post can be found here.

Saturday, May 15, 2021

Interpreting the gold breakout

Did anyone notice the upside breakouts in both gold and gold mining stocks? In the short-term, gold may have to contend with overhead resistance at the site of its 200-day moving average (dma). While I am no gold bug, the breakout could be a technical signal of an intermediate bullish phase for precious metals.


This week, I explore the bull and bear case for gold and the macro implications of this upside breakout.

The full post can be found here.

Wednesday, May 12, 2021

The bears take control

Mid-week market update: I have been saying for several weeks that the stock market is vulnerable to a setback but it is a bifurcated market. Value stocks have held up well, but growth stocks were getting smoked. The bears finally broke through this week and they are showing signs that they are seizing control of the tape. Defensive sectors are exhibiting signs of relative breakouts against the S&P 500.


The full post can be found here.

Tuesday, May 11, 2021

NFIB conservatives grudgingly turn bullish

Investors received some data points today that is highly revealing about the economy. The most important was the NFIB small business survey. Small business sentiment is especially important as they have little bargaining power and they are therefore sensitive barometers of the economy. The other is the March JOLTS report of labor market conditions, which is a little dated but nevertheless revealing.

Small business owners tend to be small c-conservatives, and their political leanings tilt Republican. We can see that optimism fell in the wake of the election when Biden and the Democrats took control. What is remarkable is the uptick in optimism despite the leftward drift in government policy.



This is a strong indication of economic strength.

The full post can be found here.

Monday, May 10, 2021

Q1 Earnings Monitor: The jobs puzzle

This will be the final Q1 Earnings Monitor as 88% of the S&P 500 has reported and the results are mostly known. It was a solid earnings season and beat rates are well above average. Callum Thomas of Topdown Charts observed that analysts have scrambled to revise their estimates upwards in response to earnings reports and corporate guidance.


Before the bulls gets too excited, there was one puzzle in a sea of strong earnings reports. If the economy as shown by earnings is so strong, why did the April Employment Report miss expectations so badly? What are the implications for Q2 and Q3 earnings outlook?

The full post can be found here.

Sunday, May 9, 2021

A stealthy growth stock correction

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Growth stocks stumble
Marketwatch reported last week that a meltdown of Cathie Wood's ARK Innovation ETF (ARKK) may spark a S&P 500 pullback.
“Many of the ARK and similar funds that hold high growth stocks are now trading between one and two standard deviations below their 50[-day moving averages] where buyers usually enter,” said technical analyst Andrew Adams in a Wednesday note for Saut Strategy. “I don’t think the market needs to go down any more, so a bounce attempt should occur given all the nearby support levels.”
Since the publication of that article, ARKK and other growth stocks have weakened further relative to the S&P 500.
“If the high-growth areas start breaking support and taking the rest of the market down with them, then maybe the 3,980-4,000 zone in the S&P 500 will be retested after all,” Adams wrote. The S&P 500 finished at 4,167.59 on Wednesday, 1% off a record close of 4,211.47 set on April 29.

A test of support in the 3,980-4,000 area would mark a pullback of only 5% to 6%, but given the damage seen in other parts of the market could lead to “some huge losses” elsewhere, he said. “I’d rather avoid that, so for now I think we can use yesterday’s lows as a test to see if that represented a selling climax in much of the market.”

The growth-heavy NASDAQ 100 bounced off a test of its 50-day moving average (dma) after being rejected twice at resistance. More worrisome is the breach of the relative support zone of NDX compared to the S&P 500 and ARKK to the S&P 500. Market internals such as the percentage of NASDAQ 100 stocks above their 50 dma is not oversold enough to signal a durable bottom.


The full post can be found here.


Saturday, May 8, 2021

Do valuations matter anymore?

How expensive are US equities? Fed Governor Lael Brainard warned about "stretched valuations" in the preamble to the May 2021 Financial Stability Report:
Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year...The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.
By most measures, the market is highly extended. As an example, the S&P 500 trailing P/E looks unreal. But stock markets always look expensive when the economy recovers from a recession because the E in the P/E ratio is compressed.


Do valuations matter anymore? Yes and No. Let me explain my reasoning.

The full post can be found here.

Wednesday, May 5, 2021

What Sell in May really means

Mid-week market update: Should you Sell in May and go away? While many traders are familiar with the Wall Street adage, what "Sell in May" really means is the six months starting May 1 has experienced subpar returns compared to the six months starting in November 1. It's not necessarily bearish.


While it's not advisable to trade strictly on seasonality, investors might want to be extra cautious with their equity allocations this year.

The full post can be found here.

Monday, May 3, 2021

Q1 earnings monitor: Priced for perfection

We are well into Q1 earnings season. 60% of the S&P 500 has reported their results and the top and bottom line beat rates are well above average. The V-shaped recovery is complete.


Here is the more difficult question. The six largest companies in the S&P 500 reported last week and all of them beat consensus EPS expectations. Why was the S&P 500 flat last week?


The full post can be found here.

Sunday, May 2, 2021

As good as it gets?

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


What's wrong with this picture?
The six biggest stocks in the S&P 500 reported earnings last week. Every one of them beat consensus expectations. In addition, the FOMC reiterated its dovish stance after its meeting. These developments should all be bullish. Instead, the S&P 500 only made marginal gains while exhibiting negative divergences.



From a longer term perspective, the weekly S&P 500 chart shows the index recycling after overrunning  a rising trend line indicating a possible blow-off top. The S&P 500 then printed two consecutive weekly doji candles, each of which are signs of indecision.


What's wrong with this picture?

The full post can be found here.

Saturday, May 1, 2021

The inflation red herring

Rising inflation fears are all over the headlines. From a top-down perspective, inflation pressures are clearly rising.


The Transcript, which monitors earnings calls, documented companies reporting rising inflationary pressures from supply chain bottlenecks and commodity price strength, which have the potential to create margin squeezes.
“…the inflationary pressures, particularly surrounding some of our key commodities, looks like it is going to be more of a headwind in ’22” – Coca-Cola (KO) CFO John Murphy

“…we’re watching and seeing SG&A inflation in different parts of the world and in different parts of the business, ranging from wage inflation in selective geographies. You’ve got global logistics inflation. You’ve got commodity inflation.” – Genuine Parts (GPC) President William Stengel

“In the first quarter, global semiconductors and resin shortages amplified existing supply constraints, and thus impacted our product availability. Further, we are faced with rapidly rising inflationary pressures, primarily in steel and resins. To address these issues, we swift the responses with the necessary actions to protect margins and product availability. We announced significant cost based price increase in various countries across the globe ranging from 5% to 12%” – Whirlpool (WHR) CEO Marc Bitzer
BoA also documented a surge in the mentions of "inflation" on their earnings calls.



Instead, I would argue that the inflation threat to equity prices is a red herring. Tax policy poses a stronger threat.

The full post can be found here.

Wednesday, April 28, 2021

Has technical analysis stopped working?

Mid-week market update: Bloomberg recently featured an unusual article titled "Sell Signals All But Useless in Unchartable 2021 Stock Market".
If you bailed because of Bollinger Bands, ran away from relative strength or took direction from the directional market indicator in 2021, you paid for it.

It’s testament to the straight-up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year. In fact, when applied to the S&P 500, 15 of 22 chart-based indicators tracked by Bloomberg have actually lost money, back-testing data show. And all are doing worse than a simple buy-and-hold strategy, which is up 11%.

Of course, few investors employ technical studies in isolation, and even when they do, they rarely rely on a single charting technique to inform decisions. But if anything, the exercise is a reminder of the futility of calling a market top in a year when the journey has basically been a one-way trip.

“What we’ve seen this year is a very strong up market that didn’t get many pullbacks,” said Larry Williams, 78, creator of the Williams %R indicator that’s designed to capture a shift in a security’s momentum. A long-short strategy based on the technique is down 7.8% since the end of December.
Sell signals have failed. Much of this can be explained. Some, like this sentiment signal from BoA's private client holdings, indicate a record crowded long in equities which is contrarian bearish. However, how much can investors allocate to fixed-income instruments in an era of low and rising rates? Stocks are the only game in town, even for income investors.



The straightforward view is the strength of momentum has overwhelmed all other technical signals.

The full post can be found here.


Monday, April 26, 2021

Q1 earnings monitor: Reopening giddiness

Q1 earnings season is well underway. 25% of the S&P 500 has reported, and a number of large-cap bellwether technology companies will report this week. So far, the EPS and sales beat rates are above their historical averages, and forward 12-month EPS estimates continue to surge.


However, risks are rising as the sunny bottom-up view is coming into conflict with a more cautious top-down outlook.

The full post can be found here.

Sunday, April 25, 2021

Sell in May? Where to hide if you do

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Sell in May?
Is it time to sell in May and go away? Market internals are starting to look wobbly. The relative performance of the defensive sectors is flashing warning signs. Two of the four sectors are testing relative breakouts, and the other two are consolidating sideways after rallying out of relative downtrends.



If the market does weaken, where can investors hide?

The full post can be found here.

Saturday, April 24, 2021

A pause in the reflation trade?

Recently, a growing narrative in the market is arguing for a pause in the reflation trade for the following reasons:
  • Both the cyclically sensitive copper/gold and base metal/gold ratios have moved sideways.
  • The 10-year Treasury yield peaked out in March and it is now falling, which is an indication of the bond market's belief of a retreat in growth expectations.
  • The Chinese stock market has tanked relative to global stocks, as measured by MSCI All-Country World Index (ACWI).


If these market signals are indeed pointing to a pause in growth expectations, then investors should be prepared for either a risk-off tone in the markets or some choppiness and consolidation in the months ahead.

The full post can be found here.

Wednesday, April 21, 2021

An exhausted bull, or a bear trap?

Mid-week market update: How should investors and traders react to the recent stock market weakness? The bears will argue that the S&P 500 spiked past a trend line resistance and fell back, which is an indication of bullish exhaustion. Moreover, the 5-day RSI recycled from an overbought condition to neutral, which is a tactical sell signal. The logical initial downside target is the 3840-3900 zone, which represents about a 5% pullback.

The bulls will argue that the bull trend remains intact. The S&P 500 is rising steadily in a channel, and the recent pullback is just a bull flag, which is a bullish continuation pattern. The market can go higher.


This is where the interpretative part of technical analysis comes in.

The full post can be found here.

Monday, April 19, 2021

Q1 earnings season: Sell the news?

Q1 earnings season began with the reports from a number of major banks last week, and it is about to go into full swing this week. Expectations are high, but how much of the good news has been discounted by the market?


The full post can be found here.

Sunday, April 18, 2021

A blow-off top ahead?

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Setting up for a blow-off top
The S&P 500 has been rising steadily since late February. As the stock market advanced, readings became increasingly overbought. The S&P 500 has spent two consecutive weeks above its weekly Bollinger Band (BB). Past upper BB episodes have tended to be signals of positive momentum. that led to further gains. The market spent several months on an upper BB ride in late 2017 and early 2018 before it finally topped out.


It appears the S&P 500 is undergoing another melt-up, with a blow-off top ahead. In the last four years, overruns of a rising trend line have been signals of an imminent blow-off top that lasts no more than two weeks.

A closeup look at the S&P 500 daily chart shows more details. The index has overrun rising trend line resistance, which happened twice since the March low. The market topped out after prices went parabolic within a week of the overruns.


The full post can be found here.

Saturday, April 17, 2021

A "value" industry that's about to be the "next best thing"

Recently, an investor aptly characterized value investing as a portfolio of problems with a call option on good news. One sector stands out as a group of value stocks that are taking on growth characteristics. As shown by its relative performance against MSCI All-Country World Index (ACWI), this cyclical industry bottomed out on a relative basis in March 2020 just as the stock market bottomed and it has been on a tear ever since.


The full post can be found here.

Wednesday, April 14, 2021

Trading a possible melt-up

Mid-week market update: Even as selected sentiment models and market internals scream for caution, the S&P 500 is on the verge of melting up as it tests overhead resistance as defined by a rising trend line. The melt-up condition would be confirmed if the index were to rally through the trend line, which it did on two other occasions in the past 12 months. In that case, the regular trading rulebook goes out the window.


The full post can be found here.

Monday, April 12, 2021

Q1 earnings preview: All calm, but what's next?

Q1 earnings season is about to begin in earnest, with JPMorgan Chase scheduled to report on Wednesday and the rest of the big banks during this week. 



Ahead of the reports, equity volumes have plunged even as the S&P 500 rose to all-time highs.


It's quiet, maybe a little too quiet.

The full post can be found here.

Sunday, April 11, 2021

Internal rotation + Seasonality = More gains

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Positive April seasonality
I normally only give seasonality secondary consideration in my analysis. But April is the most bullish month of the year for S&P 500 in the last 20 years and positive 80% of the time. Combined with the recent healthy internal rotation in the market, and if seasonality continues to track, the stock market should grind higher for the remainder of the month.


The full post can be found here.

Saturday, April 10, 2021

How Powell "the Un-Volcker" is remaking the Fed

Jerome Powell may turn out to be the Un-Volcker Fed Chair. Paul Volcker wrung all the inflation expectations out of the system and convinced everyone that the Fed is an inflation hawk. By contrast, Jerome Powell is attempting a mirror image policy of convincing everyone the Fed is an inflation dove.

A considerable gulf has opened up between the Fed's stated monetary policy path and the market's expectations. Ed Yardeni recently conducted a LinkedIn poll of interest rate expectations. While the poll is unscientific in its methodology, the results roughly parallel market expectations that the Fed would begin to raise rates in late 2022, and raise them several times in 2023. By contrast, the Fed's own Summary of Economic Projections doesn't see any rate hike until late 2023.


Fed governor Lael Brainard appeared on CNBC soon after the release of the Fed minutes and she addressed the issue of the market's disbelief of Fed's interest rate path by distinguishing between outcome and outlook. The Fed is focused on the realized outcome of employment and inflation. The market is focused on expectations, whose forecasts may not be realized.

Here is why it matters, not only for the path of interest rates but how the Fed's outcome-based approach affects the economy and equity prices.

The full post can be found here.

Wednesday, April 7, 2021

Momentum, meet bullish sentiment

Mid-week market update: What should traders make of this stock market? On one hand, the S&P 500 is exhibiting strong positive price momentum. Not only is the index trading above its daily Bollinger Band (BB), it's trading above its weekly BB. In the last 10 years, there have been eight occasions when the S&P 500 was above its weekly BB. Most (five out of eight) of those instances were associated with sustained advances indicative of positive price momentum. The market corrected in three of the eight occasions, but in one of the three corrections (in early 2018), the upper BB ride persisted for three weeks before the market exhibited a blow-off top. That's what strong price momentum looks like.


On the other hand, short-term sentiment is off-the-charts bullish, which is contrarian bearish.

The full post can be found here.

Sunday, April 4, 2021

A change in leadership?

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


The revenge of the tech nerds?
A reader pointed out an unusual market anomaly last week. Market leadership had shifted significantly some time during Q2 or Q3 2020. The old Big Three leaders of US over non-US stocks, growth over value, and large-caps over small-caps had made unmistakable trend reversals. Recently, even as the S&P 500, the Dow, and the Transports made fresh all-time highs, leadership was shifting back. US equities are dominant against non-US again; NASDAQ stocks are enjoying a minor revival; and small-caps are faltering against their large-cap counterparts.


Is this the start of a reversal, or just a blip?

The full post can be found here.

Saturday, April 3, 2021

Biden's American Rescue Plan: Bullish or bearish?

If you thought that Biden would govern as a centrist, you were wrong. In the wake of the passage of a $1.9 trillion stimulus package, President Joe Biden is planning to attack the enduring challenge of inequality by expanding government spending with a second ambitious $3 trillion economic renewal plan and a revamp of the tax code. It is intended to be a repudiation of the Reagan Revolution and the neoliberal consensus that has dominated economic thinking for decades. He reportedly decided to go big on reform for the following reasons:
  • Biden is enjoying his honeymoon period, and his approval ratings are strong. The New York Times reported that a Republican pollster found that even 57% of Republican voters supported Biden's recent $1.9 trillion spending package.
  • The Democrats have full party control of Congress, and a short window before the mid-terms to enact legislation.
  • The pandemic recovery is offering both economic and political tailwinds to enact legislation.
What does this mean for investors?

The full post can be found here.

Wednesday, March 31, 2021

Making sense of the Archegos Affair

Mid-week market update: You can tell a lot about the character of a market by how it reacts to news. In response to the Archegos Affair, the contagion effect has mostly been contained. Other than the share prices of Nomura, Credit Suisse, and the liquidated stocks, the market averages have been steady and this is not a repeat of the Long-Term Capital Management debacle.

Still, there are still nagging doubts about pockets of hidden financial leverage in the banking system. Is there another shoe waiting to drop?



The full post can be found here.

Monday, March 29, 2021

Turkey: Contrarian opportunity or value trap?

It has been a week since Recep Erdoğan`s decision to fire Turkey`s central-bank governor, Naci Agbal, for raising interest rates. Both Turkey`s stock market and currency, the Turkish lira (TRY), have shown some signs of stabilization after a dramatic drop last Monday. However, TRY weakened today but the fall is likely attributable to the fears of a margin call contagion despite a Bloomberg report that the new central bank governor's refused to commit to an interest cut.

Turkish central bank Governor Sahap Kavcioglu said markets shouldn’t take for granted that he’ll cut interest rates as soon as April, when he sets monetary policy for the first time since his surprise appointment.

“I do not approve a prejudiced approach to MPC decisions in April or the following months, that a rate cut will be delivered immediately,” Kavcioglu said in a written response to questions emailed by Bloomberg News, referring to monetary policy committee meeting next month.

“In the new period, we will continue to make our decisions with a corporate monetary policy perspective to ensure a permanent fall in inflation. In this respect, we will also monitor the effects of the policy steps taken so far,” Kavcioglu said.

From an equity perspective, the MSCI Turkey ETF (TUR) is oversold and it is testing a key relative support level.



Do Turkish stocks represent a contrarian buying opportunity or a value trap?

The full post can be found here.

Sunday, March 28, 2021

Will portfolio rebalancing sink equities?

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Theme du jour: Rebalancing
I had a discussion last week with another investment professional about the possible short-term asset price effects of portfolio rebalancing. Equities had handily beaten fixed income investments during the quarter, and balanced fund managers will have to rebalance their portfolios by selling stocks and buying bonds.




How important is the rebalancing effect? It seems that all the trading desks are talking about it. To add to the confusion, JPMorgan's derivatives analyst Marko Kolanovic put out a research note stating that "there will be no monthly selling, and indeed there could be buying of equities into month-end. A lack of these flows, and broad anticipation of ‘month/quarter-end’ effect, could result in the market moving higher near term, all else equal."

What's the real story?

The full post can be found here.

Saturday, March 27, 2021

Has the reflation trade become too crowded?

In light of last week's partial NASDAQ reversal, I had a number of discussions with readers about whether the reflation trade has become overly consensus and crowded. To be sure, bond prices have become wildly oversold while the cyclically sensitive copper/gold ratio has surged upward and appears extended.


Is the reflation trade, which is another shorthand for cyclical and value stocks, due for a reversal?

The full post can be found here.

Wednesday, March 24, 2021

Year 2 of the bull

Mid-week market update: The equity bull market began about a year ago. Ryan Detrick observed that the second year of past major bulls have averaged gains of 16.9%, though investors should not ignore pullback risk.



The full post can be found here.

Sunday, March 21, 2021

A new trading framework

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


A tale of two markets
It was the best of times. It was the worst of times. This doesn't happen very often, but the character of the stock market has made an abrupt turn recently, as evidenced by the performance disparity between the S&P 500 and the NASDAQ 100. 

The weekly chart of the S&P 500 shows that it survived a brief corrective scare, but the index went on to fresh highs. By contrast, the growth-heavy NASDAQ 100 is acting like a sick puppy. NDX violated a rising trend line and last week's rally attempt was rejected at the 50 dma level.



The violent change in market character, or leadership, has created a two-tiered market of extreme winners and losers. Traders need to be aware of this shift and adjust their analytical framework accordingly.

The full post can be found here.

Saturday, March 20, 2021

The sum of all fears: Inflation! Inflation!

The latest BoA Global Fund Manager Survey shows that respondents believe the biggest tail-risks to be inflation and its effects on the bond market.


Are these worries overblown? How will these concerns affect asset prices?

The full post can be found here.

Wednesday, March 17, 2021

There are no more bulls and bears, here's why

Mid-week market update: If you hadn't known that it was FOMC day, you would have looked at the closing market diary and shrugged. The S&P 500 closed only +0.3% on the day. Beneath the surface, however, a lot has been going on in the past few weeks.

Analysts who try to call the direction of the US equity market are facing an especially difficult time as they are encountering a bewildering array of both bullish and bearish sentiment readings. That's because the stock market has bifurcated into a growth stock market and a value stock market. There is no more single stock market anymore.

This chart of the Russell 1000 Value to Russell 1000 Growth ratio tells the story. After value stocks opened a "Vaccine Monday" runaway gap last November, value stocks have made their way higher against growth stocks. The ratio became extended and exhibited a negative 5-day RSI divergence in early January. Both value and growth stocks proceeded to pull back, with value the underperformer. The ratio exhibited another negative RSI divergence in early March. This time, growth stocks rallied with a vengeance while value stocks were mostly flat. The Russell 1000 Growth Index skidded but recovered and its advance is currently testing technical resistance defined by the 61.8% Fibonacci retracement level.



This account of internal rotation underscores my point that this is a tale of two markets. Indeed, it was the best of times and the worst of time for growth and value. There are no more bulls and bears. You can be a value bull and growth bear, or a growth bull and value bear.

The full post can be found here.

Monday, March 15, 2021

FOMC preview: Dot plot, YCC, and SLR

As the markets remain in risk-on mode, readers should be aware of several lurking risks that may appear from the FOMC meeting. Undoubtedly, Powell will repeat his dovish mantra that the Fed is a long way from neutral and policymakers are focused on the labor market. 


Nevertheless, here is what I am watching:
  • What will the "dot plot" convey about the path of interest rates and how does that differ from market expectations?
  • Will the Fed do anything about the soaring 10-year yield, which has risen above 1.6%, i.e. yield curve control (YCC)?
  • What will happen to the Supplementary Leverage Ratio (SLR), and will the banks get SLR relief after March 31?
The full post can be found here.

Sunday, March 14, 2021

Here comes the recovery

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 that 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 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: Bullish*
  • 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 those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


From shutdown to re-opening
About a year ago, the World Health Organization declared the coronavirus a pandemic. Governments around the world shut down their economies and the global economy crashed into a recession. Fast forward a year, fiscal and monetary authorities have responded with unprecedented levels of stimulus, vaccinations are proceeding, caseloads are dropping, and economies are re-opening again.

The Dow Jones Industrials and Transports made new all-time highs last week. That's a Dow Theory buy signal.



Here is how to play the bull market. 

The full post can be found here.