Sunday, November 28, 2021

COVID Crash 2.0?

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.



COVID panic!
Global markets took a risk-off tone on Friday when news of a heavily mutated coronavirus variant labeled B.1.1.529, or Omicron, emerged from Southern Africa. Nature reports that South African scientists recently identified a new strain.
Researchers in South Africa are racing to track the concerning rise of a new variant of the coronavirus that causes COVID-19. The variant harbours a large number of mutations found in other variants, including Delta, and it seems to be spreading quickly across South Africa.

A top priority is to follow the variant more closely as it spreads: it was first identified in Botswana this month and has turned up in travellers to Hong Kong from South Africa. Scientists are also trying to understand the variant’s properties, such as whether it can evade immune responses triggered by vaccines and whether it causes more or less severe disease than other variants do.

“We’re flying at warp speed,” says Penny Moore, a virologist at the University of Witwatersrand in Johannesburg, whose lab is gauging the variant’s potential to dodge immunity from vaccines and previous infections. There are anecdotal reports of reinfections and cases in vaccinated individuals, but “at this stage it’s too early to tell anything,” Moore adds.

“There’s a lot we don’t understand about this variant,” Richard Lessells, an infectious disease physician at the University of KwaZulu-Natal in Durban, South Africa, said at a press briefing organized by South Africa’s health department on 25 November. “The mutation profile gives us concern, but now we need to do the work to understand the significance of this variant and what it means for the response to the pandemic.”

When COVID-19 first came out of nowhere in early 2020, the global economy shut down and the markets crashed. Could we be seeing the start of COVID Crash 2.0?

The full post can be found here.

Saturday, November 27, 2021

How small caps are foreshadowing the 2022 market

Small-cap stocks have lagged their large-cap counterparts in 2021. Even as the S&P 500 steadily rose to fresh highs this year, the Russell 2000 and S&P 600 finally staged upside breakouts in November out of a multi-month trading range, but they have struggled to hold those breakouts. Small-cap relative performance peaked in March, but they have sagged and been flat to down relative to the S&P 500. In an equally disturbing development for the bulls, the S&P 600 Advance-Decline Line did not confirm the upside breakout by failing to rise to new highs in November.



Here is how I believe small-cap performance is foreshadowing the S&P 500 in 2022, but probably not in the way that you are thinking.

The full post can be found here.

Sunday, November 21, 2021

Trading the seasonal rally

Preface: Explaining our market timing models 
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model 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.

Author's note: There will be no mid-week market update next week because of the holiday-shortened week.


Melt-up risk control
The good news is the S&P 500 is testing resistance and less than 1% from its all-time high. Moreover, the recent sideways consolidation has elevated the VIX Index to near its upper Bollinger Band. An upside breakout of the Bollinger Band would constitute an oversold reading for the stock market that carries with it the prospect of more price gains. The market is presenting investors with an unusual condition of a breakout test while exhibiting a near oversold condition.



The bad news is a number of negative divergences have appeared warning of near-term weakness ahead. Even though a melt-up into year-end remains my base case, investors need to practice some risk control in case the advance unravels.

The full post can be found here.

Saturday, November 20, 2021

What's wrong with value stocks?

What's wrong with value stocks? The accompanying chart shows the relative performance of the Russell 1000 Value to Russell 1000 Growth Index ratio (bottom panel, solid line) and the closely correlated S&P 600 to NASDAQ 100 (bottom panel, dotted line). When the dot-com mania peaked in 2000, value stocks initially rocketed upward relative to growth stocks. The relative ascent began to moderate in 2001 but continued for several years.

Fast forward to 2020. The growth style had been dominant for 5-7 years and value/growth relative performance had become extremely stretched. Value recovered in 2020 but fell back in 2021. 


History doesn't repeat, but is it even rhyming this time? What's wrong with the value style? 

The full post can be found here.

Wednesday, November 17, 2021

Consolidating for a rally

Mid-week market update: My trading view remains unchanged. The market is consolidating for a rally into year-end (see The seasonal rally is intact). Initial S&P 500 support on the hourly chart is at about 4680, and secondary support is at 4630-4640. If the S&P 500 breaks out to an all-time high, we're off to the races.



The full post can be found here.

Monday, November 15, 2021

The inflation challenge

Inflation fears have been rising in the wake of the hot October CPI report. Barry Ritholz, the CEO of Ritholz Wealth Management, recently issued an open challenge to the inflationistas.


Which side of that bet would you take?

The full post can be found here.

Sunday, November 14, 2021

The seasonal rally is intact

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.



The most wonderful time of the year?
Jurrien Timmer at Fidelity observed that the S&P 500 is roughly following the pattern of a seasonal rally into year-end and beyond. In light of last week's market weakness, what's the health of the seasonal rally in 2021?


However, traders who rely on seasonality should be cautious as Ryan Detrick pointed out the middle of November can be choppy.



The full post can be found here.

Friday, November 12, 2021

Commodity weakness = Global slowdown?

My Trend Asset Allocation Model has performed well by beating a 60/40 benchmark on an out-of-sample basis in the last few years. The early version of the Trend Model relied exclusively on commodity prices for signals of global reflation and deflation. While the inputs have changed to include global equity prices, this nevertheless raises some concerns for equity investors. 



Commodity prices are weakening, which could be a signal of global economic deceleration. In particular, the cyclically sensitive industrial metals are losing momentum and showing signs of violating a rising trend line.



The full post can be found here.

Wednesday, November 10, 2021

Bullish and bearish signals from volatility

Mid-week market update: Volatility indexes are flashing a number of signals of interest. In the past few weeks, a yawning gap has opened out between MOVE, which measures bond volatility, and VIX, which measures equity volatility. The divergence has begun to close in the last couple of days as the VIX has risen and the spread has narrowed.


The full post can be found here.

Sunday, November 7, 2021

A question of 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. 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.



Nagging questions of leadership
It is said that the most bullish thing a market could do is to make fresh highs. An even more bullish development is to see the market break out to fresh highs across all spectrums. Indeed, the large-cap S&P 500, mid-cap S&P 400, small-cap S&P 600, and the NASDAQ Composite has achieved all-time highs.



However, discussions with several readers revealed nagging questions about the quality of the leadership in this advance.

The full post can be found here.

Saturday, November 6, 2021

A Dow Theory buy signal, but...

Jack Schannep at DowTheory.com described a classic Dow Theory buy signal this way:
The classic Buy signal is developed as follows: After the low point of a primary downtrend in a Bear market is established, a secondary uptrend (this is the most often debated part of the Theory) bounce will occur. After that, a pullback on one of the averages must exceed 3%, according to Robert Rhea in his 1930's The Dow Theory,  must then, ideally, hold above the prior lows on both the Industrial and the Transportation Averages. Finally, a breakout above the previous rally high by both, constitutes a BUY Signal for the developing Bull market.

The chart represents how the Dow Jones Industrial Average and the Transportation Average might look under the most usual BUY signal (B-1):


Both the Dow and the Transports made all-time highs last week, aided by a surge in the shares of Avis. The technical pattern is consistent with the description of a Dow Theory buy signal.



While the Dow Theory buy signal is bullish for stock prices, a number of key risks are lurking as I look forward to 2022.

The full post can be found here.

Wednesday, November 3, 2021

A no-surprise Federal Reserve

Mid-week market update: I told you so. Earlier in the week, I wrote that the market had become overly hawkish about interest rate expectations (see Hawkish expectations). Leading up to the November FOMC meeting, the Fed had signaled that a QE taper is about to begin and, if everything goes along with projections, the first rate hike would occur in late 2022.

Fed watcher Tim Duy added (before the meeting) that the Fed had unveiled its spanking new FAIT framework and it was unlikely to abandon it so quickly.
The Fed doesn't want to drop the new framework at the first sign of trouble. The issue of full employment still obstructs the path to rate hikes. If the Fed were to pull tapering forward, the implication would be either the Fed is abandoning its new shiny new framework or that it has redefined full employment. Remember, there is institutional inertia at play here...The new framework sets the Fed apart from its central banking peers that are quickly pivoting in a hawkish direction. Indeed, the new framework is intended to prevent such a pivot, which means that if the Fed were to move in the BoC/BoE/RBA/RBNZ direction, it would amount to abandoning the new framework.

We got a dovish taper, which is what I expected. The 2-year Treasury yield eased in reaction to the FOMC decision and the yield curve steepened.


The full post can be found here.


Monday, November 1, 2021

Hawkish expectations

Short-term rates are freaking out. 2-year yields are rising based on the expectation of a tightening bias by global central bankers.


The market should gain greater clarity on central bank intentions soon. Both the Fed and the BoE will announce their interest rate decisions this week and the BLS will report Non-Farm Payroll Friday.

The full post can be found here.