Sunday, March 7, 2021

Momentum crashes, market now oversold

 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.


Momentum crashes, S&P 500 wobbles
I have been warning for the past few weeks that sentiment was overly frothy and due for a reset. The reset finally began in the last two weeks. The weekly S&P 500 chart shows the index fell, but held a rising trend line support after the 5-week RSI flashed a negative divergence for most of 2021. The high-flying momentum stocks, as represented by the NASDAQ 100 (NDX), were not as fortunate. NDX violated its rising trend line indicating significant technical damage has been done.


At its deepest, the S&P 500 was -5.7% off its all-time highs. The carnage in the high-octane NASDAQ 100 was even worse. That index was off -11.3% on a peak-to-trough basis indicating a definitive loss of growth stock leadership. As Big Tech comprise nearly half of S&P 500 weight, this has important consideration for the overall market direction.

However, the short-term market action indicates an oversold market poised for a relief rally.

The full post can be found here.

Saturday, March 6, 2021

Are you positioned for the post-Great Rotation era?

Is the US stock market in a bubble? Yes and no, according to Ray Dalio of Bridgewater Associates. Using a proprietary technique to create a "bubble indicator", Dalio concluded that "the aggregate bubble gauge is around the 77th percentile today", compared to a 100th percentile reading in 1929 and 2000.


Dalio qualified his analysis with some parts of the market are indeed very bubbly, but others are not.
There is a very big divergence in the readings across stocks. Some stocks are, by these measures, in extreme bubbles (particularly emerging technology companies), while some stocks are not in bubbles. 
Credit Suisse came to a similar conclusion with their US Exuberance Index. The number of companies with price-to-sales over 10 have surged, but readings are not at the levels seen during the dot-com peak.


At the same time, the market is undergoing a secular shift from growth to value. Here are some important implications for investor portfolios in the next market cycle.

The full post can be found here.

Wednesday, March 3, 2021

Bond market panic!

Mid-week market update: Is the bond market panic over yet? The 10-year Treasury yield touched a high of 1.6% last week. It fell when the Reserve Bank of Australia began to engage in yield curve control, but it is edging back towards 1.5% again.



Based on this week's market action, I conclude that stock prices have unfinished business, both on the upside and downside.

The full post can be found here.

Monday, March 1, 2021

Q4 earnings: Good news, bad news

With 96% of S&P 500 companies having reported, Q4 earnings season is all but over. For the markets, the earnings reports contained both good news and bad news. 

There was plenty of good news. Both EPS and sales beat rates were well above their historical averages. In addition, consensus earnings estimates have been rising steadily, and forward 12-month EPS estimates have nearly recovered to pre-pandemic levels.


The full post can be found here.

Sunday, February 28, 2021

The Great Rotation continues

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.


More signs of a Great Rotation
The leadership of the last market cycle was dominated by three main themes, the US over global equities, growth over value, and large-caps over small-caps. Leadership began to change in 2020. Small-cap stocks broke their relative downtrend first. November's Vaccine Monday, when Pfizer announced its positive vaccine results, sparked a shift in the other two factors.


Since then, small-cap stocks have roared ahead against their large-cap counterparts. Last week saw another confirmation of the Great Rotation when value/growth relationship broke a key relative support level.

The full post can be found here.

Saturday, February 27, 2021

Will rising yields sideswipe equities?

Jerome Powell's Congressional testimony last week made the Fed's position clear. Monetary policy will remain easy for the foreseeable future. Inflation dynamics change, but not on a dime. While Fed policy will leave short-term interest rates anchored near zero, the market's inflation expectations have been rising. Last week, the 10-year Treasury yield briefly breached 1.6% and the 30-year Treasury yield rose as high as 2.4%.



Will heightened inflation expectations and rising bond yields rattle the equity market?

The full post can be found here.

Wednesday, February 24, 2021

MoMo is losing its mojo

Mid-week market update: About a month ago, I warned that the market was undergoing a regime shift from growth to value (see What would Bob Farrell say?) and compared today's Big Tech momentum stocks, not to the dot-com mania, but the Nifty Fifty era. On the weekend, I rhetorically asked in a tweet that if Bloomberg TV has to explain r/WSB lingo to its audience, it's probably a sign that speculative momentum was nearing the end of its run.


It finally happened this week. The MoMo (momentum) crowd is losing its mojo. The price momentum factor, however it's measured, is undergoing a sharp correction.


Here is what that means for the stock market.

The full post can be found here.


Monday, February 22, 2021

Commodity supercycle: Bull and bear debate

Is it too late to buy into the commodity supercycle thesis? The latest BoA Global Fund Manager survey shows that respondents have moved to a crowded long position in commodities. Many analysts have also hopped on the commodity supercycle train, myself included (see How value investors can play the commodity supercycle).



As a cautionary note, one reader alerted me to a well-reasoned objection on the commodity supercycle thesis.

The full post can be found here.

Sunday, February 21, 2021

Waiting for the sentiment reset

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.


In need of a washout 
While I am a long-term equity bull, sentiment models are extremely stretched in this market and in desperate need of a reset. The latest BoA Global Fund Manager survey shows that institutional risk appetite is at historically high levels.



Retail risk appetite is even more stretched. The CBOE equity put/call ratio (CPCE), which tends to measure retail sentiment, is extremely low indicating excessive bullishness. By contrast, the index put/call ratio (CPCI), which measures institutional hedging activity, has been rising indicating cautiousness. Such high spreads between CPCE and CPCI have resolved themselves with market pullbacks in the past.


This is insane! When's the sentiment reset?

The full post can be found here.

Saturday, February 20, 2021

No reasons to be bearish?

The nature of the market advance has been extraordinary and relentless. From a long-term perspective, the monthly MACD model flashed a buy signal last August for the broadly-based Wilshire 5000 and there are no signs of technical deterioration. This is a bull market, but sentiment has become sufficiently frothy that a reset is overdue.


The latest BoA Global Fund Manager Survey concluded that "the only reason to be bearish...is there is no reason to be bearish". As the economic outlook improved and the vaccine rollouts are on track to control the pandemic, the market's mood has shifted from despondency to mania. An immense amount of speculative froth has appeared. The market has been overrun by small uninformed YOLO (You Only Live Once) investors trading penny stocks and call options. 


In addition, the market has been presented with the spectacle of cash-starved auto maker Tesla spending its precious cash to buy Bitcoin. Not only that, software maker MicroStrategy $900 million in convertible notes at a 0% yield with the expressed intention of purchasing Bitcoin, after tapping the markets in December with a similar convertible.

However, stock prices don't just fall and sentiment reset without a fundamental narrative that investors can focus on. Here are the key risks to the bullish consensus.

The full post can be found here.

Wednesday, February 17, 2021

Too late to buy small caps?

Mid-week market update: Instead of repeating endlessly the mantra of how frothy this market has become, I thought it would be worthwhile to take a look at one of the market leaders. Small cap stocks have led the market up during this recovery.


On the other hand, the latest BoA Global Fund Manager Survey shows that institutions are off-the-charts bullish on small cap stocks, which is contrarian bearish.


What are the risks and opportunities in small-cap stocks?

The full post can be found here.


Sunday, February 14, 2021

The bulls' second wind, or last gasp?

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.


Still scaling the heights
The S&P 500 remains in an uptrend on the weekly chart. After pulling back and successfully testing the lower bound of a rising megaphone trend line three weeks ago, the index rose to test resistance as defined by the upper megaphone trend line. 


Should the market break out to the upside, it would represent a blow-off top of unknown magnitude. On the other hand, bulls should be warned that the market is exhibiting a negative divergence on the 5-week RSI. Should the market break the lower megaphone trend line, the experience of the past four years suggests a pullback in the 6-12% range.

Does this market action represent the start of a renewed bull or the last gasp of a dying bull? Here is what I am watching.

The full post can be found here.

Saturday, February 13, 2021

How value investors can play the new commodity supercycle

The investment seasons are changing. Two major factors are emerging in altering the risk and return profiles of multi-asset portfolios in the coming years, rising commodity prices and value investing.

There is a strong case to be made that we are on the cusp of a new commodity supercycle. The last time the CRB to S&P 500 ratio turned up, commodity prices outperformed stocks for nearly a decade. The ratio is on the verge of an upside breakout from a falling trend line, supported by the stated desire of the Biden administration and the Federal Reserve to run expansive fiscal and monetary policies.


The full post can be found here.

Wednesday, February 10, 2021

Another "good overbought" advance?

Mid-week market update: Despite my warnings about negative divergence, the S&P 500 continued to rise and it is now testing a key trend line resistance level at about 3920. Much of the negative breadth divergence have disappeared, though Helene Meisler observed that about 35% of the NASDAQ new highs are triple counted.



Is this another instance of a "good overbought" sustained advance?

The full post can be found here.

Monday, February 8, 2021

A good news-bad news earnings season

Q4 earnings season is in full swing, and results are strong. With 59% of the S&P 500 having reported, both the EPS and sales beat rates are well ahead of historical averages. Moreover, forward 12-month EPS estimates surged 3.5% in a single week.


As well, estimates are surging across all market cap bands.


But it's not all good news for earnings and the stock market.

The full post can be found here.

Sunday, February 7, 2021

Rip the bandaid off now or later?

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: 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 those email alerts is shown here.

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


A brief storm?
Was the recent bout of r/WSB induced volatility just a brief storm? The S&P 500 remains in an uptrend on the weekly chart, though it is exhibiting a negative 5-week RSI divergence.


Despite last week's recovery, technical alarms are ringing everywhere. Will the market gods rip the bandaid off now with a minor pullback or face a major bearish episode later?

The full post can be found here.

Saturday, February 6, 2021

Outside-the-box risk control = Better returns

After last week's wild market swings, it's time to have a sober discussion about risk control. I know that risk control isn't a sexy topic, but better portfolio risk control can lead to better overall returns.


The framework of analysis will not be the conventional description of risk as it is stylistically shown above. Instead, I offer some "outside the box" thinking and focus on the following:
  • Mis-specifying investment objectives and risk preferences
  • How to take advantage of volatility
  • Regime change risk in the form of:
    1. Unexpected tail-risk
    2. Changes in market environment (conventional regime change);
    3. Slow changing regimes that investors may be unaware of;
    4. Changes in modeling assumptions.
The discussion range from practical suggestions for individual investors to big picture issues more relevant to professional portfolio managers.

The full post can be found here.

Wednesday, February 3, 2021

WSB squeeze over, sound the all-clear?

Mid-week market update: The fever on the r/WSB squeeze has broken. As well, the elevated nature of sentiment readings has begun to normalize. Does that mean the correction is over?


In the past few days, I have had an unusual number of people ask me that question. My answer has been, "In the words of technical analyst Walter Deemer, when it comes time to buy, you won't want to."

Do you still want to buy?

The full post can be found here.

Monday, February 1, 2021

Opportunities from shorts (GME is so last week)

Is this GameStop's "shoeshine boy" moment? Tracy Alloway pointed out that GME had made it to dog Instagram. 


If dog Instagram wasn't enough of a shoeshine boy moment, how about this Michael Bathnick observation?


Regardless, there are a number of other opportunities in the short squeeze space to consider (other than silver).

The full post can be found here.

Sunday, January 31, 2021

How to spot the correction low

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: 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 those email alerts is shown here.

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


Here comes the pullback
I have been increasingly cautious about the tactical market outlook for the past few weeks (see Take some chips off the table). Last week's sudden air pocket certainly gave the bulls a fright. Is this the start of a correction, and how can investors and traders spot the bottom?

The daily S&P 500 chart shows that the S&P 500 has definitively violated its rising channel and it is now testing support at the 50-day moving average (dma). The VIX Index spiked above its upper Bollinger Band which signals an oversold condition. The VIX appears to be going on an upper BB ride indicating a more prolonged downdraft.



Looking longer-term, the weekly S&P 500 chart shows that the S&P 500 is just testing its rising trend line. There are nevertheless warnings from the negative 5-week RSI divergence and a rollover in relative strength in the popular ARK Innovation ETF (ARKK).


Should the market weaken in line with the historical experience of the last four years, it would translate into a pullback of 6-12% or 3200-3640 on the S&P 500.

The full post can be found here.

Saturday, January 30, 2021

What could go wrong?

Now that virtually everybody has bought into the reflation and global cyclical recovery trade, and Reddit flash mobs are ganging up on short sellers to drive the most short-sold stocks into the stratosphere, what could go wrong with this bull?


Notwithstanding the silliness of the WSB flash mobs, here are some key bearish risks to consider.

The full post can be found here.

Wednesday, January 27, 2021

Risk happens quickly

Mid-week market update: What are we make of this market? In the last four years, the weekly S&P 500 chart shows that we have seen six corrective episodes of differing magnitudes. Risk happens, and sometimes with little or no warning.


About half of those instances saw negative 5-week RSI divergences, which we are seeing today. Since the start of 2019, when the ARK Innovation ETF (ARKK) started to get hot, the ARKK to SPY ratio roll over every time during those corrections. That ratio is turning down again.

Will this time be any different? The S&P 500 hasn't seen a downside break of the rising trend line on the weekly chart yet.

The full post can be found here.

Sunday, January 24, 2021

When new highs aren't bullish

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: 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 those email alerts is shown here.

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


An exception to the rule?
The S&P 500 rallied to a fresh all-time high last week. While it is said that there is nothing more bullish than a market making new highs, this may be an exception to that rule, especially when there were more declines than advances on the day of a new high.

The S&P 500 kissed the top of a rising channel while exhibiting a negative 5-day RSI divergence. In addition, the VIX Index, which tends to be inversely correlated to stock prices, is testing a key support level at 20-21. More worrisome is the behavior of financial stocks. Large-cap banks reported last week and most beat expectations, but the entire sector is lagging the market.



The full post can be found here.

Saturday, January 23, 2021

What would Bob Farrell say?

What would the legendary market analyst Bob Farrell say about today's markets? I was reviewing the patterns of factor returns recently, and I was reminded of three of Farrell's 10 Rules of Investing (which are presented slightly out of order).

Rule 3: There are no new eras – excesses are never permanent.
Rule 2: Excesses in one direction will lead to an opposite excess in the other direction.
Rule 4: Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Applying those principles to the return patterns to growth and value over the last 20 years, we can see that growth has peaked out relative to value in 2020 (Rules 2 and 3).


Does that mean that this is the end of an era for growth stocks? Large-cap growth stocks comprise roughly 45% of the weight of the S&P 500. If they were to falter, does this mean investors are facing a major market top?

What would Bob Farrell say?

The full post can be found here.

Sunday, January 17, 2021

Take some chips off the table

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.


Not what you see at market bottoms
I have been writing about the extended nature of sentiment for several weeks. Macro Charts highlighted an email from Interactive Brokers on how to build a "balanced" portfolio using fractional shares, consisting of Netflix, Tesla, Alphabet, and Amazon. Either someone forgot the basics of financial planning in constructing a balanced portfolio, or we are back to the go-go days of the dot-com and Nifty Fifty bubbles.


While it is true that sentiment models are less effective at calling tops than bottoms, there are sufficient signs that investors and traders should be reducing equity risk and taking some chips off the table.



The full post can be found here.

Saturday, January 16, 2021

A Great Rotation region and sector update

In the wake of my Great Rotation publication (see Everything you need to know about the Great Rotation but were afraid to ask), it's time for an update of how global regions and US sectors are performing. The short summary is the change in leadership of global over US stocks, value over growth, and small caps over large caps are still intact.



While the long-term trends remain in place, some tactical caution may be in order in certain parts of the market.

The full post can be found here.


Wednesday, January 13, 2021

One last push, or a downside break?

Mid-week market update: I have been warning about the extended nature of this stock market for several weeks. The latest II sentiment update shows more of the same. Bullish sentiment has come off the boil, but readings are reminiscent of the conditions seen during the melt-up top that ended in early 2018.


The market can correct at any time, but I also have to allow for the possibility of one last bullish push to fresh highs. Here is what I am watching.

The full post can be found here.

Monday, January 11, 2021

Tactically cautious, despite the data glitch

In yesterday's post, I pointed out that, according to FactSet, consensus S&P 500 EPS estimates had dropped about -0.50 across the board over the last three weeks (see 2020 is over, what's the next pain trade?).


The decline turned out to be a data anomaly. A closer examination of the evolution of consensus estimates revealed a sudden drop in EPS estimates three weeks ago. Discontinuous changes like that are highly unusual, and it was traced to the inclusion of heavyweight Tesla in the S&P 500. In this case, analyzing the evolution of consensus earnings before and after the Tesla inclusion was not an apples-to-apples comparison. My previous bearish conclusion should therefore be discounted.


Nevertheless, I am becoming tactically cautious about the stock market despite resolving this data anomaly.

The full post can be found here.


Sunday, January 10, 2021

2020 is over, what's the next pain trade?

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 next pain trade
Now that 2020 is over, what's the next pain trade? I have a few candidates in mind. The latest BoA Global Fund Manager Survey taken in early December described the top two most crowded trade as long technology stocks, and short USD.

Another source of vulnerability is the expectation of a steepening yield curve. If history is any guide, heightened expectations of a steepening yield curve have resolved with market upsets of differing magnitude.


As a reminder, this survey was taken in December. After the Georgia special Senate elections gave the Democrats the trifecta of the control of the White House, Senate, and House of Representatives, the 10-year Treasury yield surged to over 1%, and the yield curve steepened even further.

All of these vulnerabilities are connected from a cross-asset perspective - the steepening yield curve, long technology stocks, and short USD. 

The full post can be found here.

Saturday, January 9, 2021

The Democrats' Trifecta win explained

Last weekend, I conducted an unscientific and low sample Twitter poll on the market perception of the Georgia special Senate elections. The results were surprising. Respondents were bullish on both a Republican and Democratic sweep.


As the results of the Georgia Senate race became clear, the analyst writing under the pseudonym Jesse Livermore tweeted that these results represent a "fiscal Goldilocks" scenario.


However, the analysis of the investment risk and opportunity is far more nuanced than just a simple bull and bear question.

The full post can be found here.