Why the stock market isn't going to crash

Mid-week market update: I've had a number of questions from readers about the warnings of imminent market declines from SentimenTrader. In this post, Jason Goepfert's headline was "This Led to Declines Every Time in the Past 93 Years". He highlighted the market's poor breadth, as measured by the percentage of stocks above their 50 dma.

Going back to the mid-1920's, there have only been a handful of dates with breaks like this. It happened in 1929, 1959, 1963, 1972, 1998, and 1999, and all of them ended up preceding losses in stocks.

Relax, the market isn't going to crash. Here's why.

The full post can be found here.

Bitcoin's existential threat

I have been asked to comment on Bitcoin. On a short-term basis, BTC is testing support while exhibiting a positive RSI divergence. That's the good news.

The bad news is BTC and other cryptocurrencies are facing an existential threat.

The full post can be found here.

Measuring the effects of the Fed's reversal

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.

The Fed's hawkish pivot and reversal

In the wake of the Fed's unexpected hawkish message, the markets adopted a risk-off tone the week of the FOMC meeting. As Fed officials walked back the aggressuve rhetoric, both the S&P 500 and NASDAQ 100 resumed their advance and climbed to all-time highs.

Beneath the surface, however, there was some unfinished business as the internal rotation sparked by the FOMC meeting hasn't unwound itself. Let's take a more detailed look.

The full post can be found here.

The Fed's next challenge: Wage pressure

Stock markets were rattled by the Fed's hawkish tone in the wake of the FOMC meeting. Markets took a risk-off tone, but Jerome Powell walked back some of the hawkishness during his Congressional testimony the following week. The Fed Chair stuck to his familiar refrain that inflation is transitory, dismissed the idea of 1970s-style inflation as “very, very unlikely”, and unemployment is transitory but labor markets need continued support.

In response, the markets rebounded and prices largely made in round-trip in pricing in most asset classes. But in order for the markets to continue accept the Fed's narrative, the next challenge for the Fed is cost-push inflation in the form of wage pressure. This will become more apparent with the release of the June Employment Report in the coming week.

The full post can be found here.

Just a hiccup?

Mid-week market update: The S&P 500 has shown negative seasonality at the end of June. So far, the index has been tracking its historical pattern well in 2021. The market took fright last week from the abrupt hawkish tone of the FOMC statement and subsequent Powell press conference last week. By Friday, it had become deeply oversold (see Boo! Powell scares the children!) and recovered this week.

Was that it? Is the seasonal weakness over?

The full post can be found here.

Boo! Powell scares the children!

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.

The Fed's hawkish pivot

How should investors interpret the Fed's unexpected hawkish turn? The 10-year Treasury yield rose dramatically after the FOMC meeting, but retreated after the initial surge. The S&P 500 fell in the wake of the Fed announcement. While did violate an important downtrend, the violation needs to be confirmed in light of Friday's triple witching expiry volatility.

Helene Meisler's weekly (unscientific) Twitter sentiment poll took a 30 point tumble from net bullish to net bearish. Indeed, Fed Chair Jay Powell has managed to the children. 

Will that be enough to put a floor on stock prices?

The full post can be found here.

China rides to the rescue?

The headlines from last week sounded dire. It began when China’s May economic activity report was disappointing, with industrial production, retail sales, and fixed-asset investment missing market expectations. 

Then the Federal Reserve took an unexpected hawkish turn. The statement from the FOMC meeting acknowledged that downside risks from the pandemic were receding as vaccination rates rose. It raised the 2021 inflation forecast dramatically, shaded down next year's unemployment rate, and projected two rate hikes in 2023 compared to the previous forecast of no rate hikes. As well, a taper of its quantitative easing program is on the horizon.

Collapsing global trade and growth. Rising interest rates. It sounds like the start of a major risk-off episode. My own reading of cross-asset market signals comes to a different conclusion. China's slowdown is stabilizing, which may serve to put a floor on global risk appetite and equity prices.

The full post can be found here.

The market's instant FOMC report card

Mid-week market update: It's always difficult to make any kind of coherent market comment on FOMC meeting days. The market reaction can be wild and price moves can reverse themselves in the coming days.

Nevertheless, experienced investors understand that it's not the announcement that matters, but the tone announcement compared to market expectations. Bloomberg Economics conducted a survey ahead of today's FOMC meeting and found the following:

• FOMC will raise inflation, growth forecasts for 2021
• Forecasts to shift rate liftoff to 2023
• FOMC to signal bond taper at Jackson Hole in August
• Taper announcement in December
• Powell gets reappointed -- Brainard is the next option

The full post can be found here.

What I meant to say was...

After a number of discussions with readers, there appears to have been some misunderstanding over my recent post (see The bond market tempts FAIT). I did not mean to imply that the advance in bond prices is an intermediate-term move, only a tactical counter-trend rally. The decline in Treasury yields can be attributable to:

• The market's buy-in to the Fed's "transitory inflation" narrative, which was discussed extensively in the post;
• Excessively short positioning by bond market investors, as shown by a JPMorgan Treasury client survey indicating that respondents were highly short duration, or price sensitivity to yield changes; and

• A FOMO stampede by corporate defined-benefit pension plans. A recent study showed that pension plans were nearly fully funded from an actuarial viewpoint. Falling rates would raise the value of liabilities, and without asset-liability matching, pension plans were at risk of widening their funding gap.

In short,  the bond market rally is a tactical counter-trend rally. The combination of expansive fiscal and monetary policy will eventually put upward pressure on inflation and bond yields. 

That said, there are a number of pockets of uncorrelated opportunities for investors, regardless of how long Treasury yields stay down.

The full post can be found here.

An S&P 500 new high, but...

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: 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.

One last high?

The good news is the S&P 500 rallied to a marginal all-time high last week. The bad news is it was accompanied by a bearish RSI divergence.

The full post can be found here.

The bond market tempts FAIT

Remember when I called for a bond market rally (see What a bond market rally could mean for your investments). The 10-year Treasury yield broke support last week and shrugged off a hot CPI print. Is the bond market tempting FAIT, or the Fed's Flexible Average Inflation Targeting framework?

Here are some of the broad market implications.

The full post can be found here.

Pigs just get slaughtered...

Mid-week market update: Traders have an adage, "Bulls make money. Bears make money. Pigs just get slaughtered." It's time for equity bulls to be near-term cautious on stocks, though I expect any market weakness to be relatively shallow.

In my weekend update, I had set out a number of tripwires (see Time is running out for the bulls). So far, the S&P 500 is struggling to overcome resistance even as it exhibits a negative RSI divergence.

The full post can be found here.

NFIB update: Revenge of the Proletariat?

The monthly NFIB update is always useful as a window on the economy. Small businesses tend to have little bargaining power and they are therefore sensitive barometers of economic trends. A month ago, NFIB small business optimism surged (see NFIB conservatives grudgingly turn bullish). The latest report saw optimism stall as readings edged back from 99.8 to 99.6. 

The biggest complaint was the availability of labor. While the JOLTS report comes to a similar conclusion, it is a survey of April conditions while the NFIB survey period is May. Its headline "Nearly Half of Small Businesses Unable to Fill Job Openings" tells the story.

The full post can be found here.

Time is running short for the bulls

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: 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.

Negative seasonality ahead

While I am not inclined to trade strictly on seasonality, technical conditions agree with the seasonal pattern. If history is any guide, the S&P 500 is scheduled to pause its advance starting about mid-June.

My base case scenario of record calls for the index to test its old high and possibly make a marginal new high, but the time is running out for the bulls. The coming week is the bulls' last chance to show their strength.

The full post can be found here.

Is the S&P 500 wildly overvalued?

Several readers asked me to address the valuation warning from Jason Goepfert of SentimenTrader, who found that the S&P 500 is wildly overvalued based on a combination of real earnings yield and dividend yield.

Let's begin by unpacking Goepfert's chart (annotations are mine). There were five instances since 1970 when the market appeared overvalued based on this metric. The market had already begun falling in two episodes (red boxes: the Nifty Fifty top and the GFC), and this indicator signaled tops in three (grey boxes: Volcker induced bear market, 1987 Crash, and the Dot-Com Bubble). Is a success rate of 60% (three out of five top calls) enough for an effective sell signal?

The full post can be found here.

Don't short a dull market

Mid-week market update: Even as the S&P 500 remains range-bound, market internals are constructive. I interpret these conditions to mean that the market can grind higher in the short-term, and the intermediate-term trend is still up.

Don't short a dull market.

The full post can be found here.