Trading the FOMC pattern

Mid-week market update: Even though the sample size is small (n=4), the stock market seems to be repeating the FOMC meeting pattern of 2022. The pattern consists of weakness into an FOMC meeting and a rally afterward. The post-meeting rally in May fizzled out quickly but the others were more sustainable. 

The S&P 500 is now testing support after breaking out. If the market were to rally, gap resistance can be found at 3980-4020. Is there any more life left in the current rally? Will the market decline into the next FOMC meeting scheduled for July 26-27?

The full post can be found here.

Q2 earnings season = Market abyss?

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 prices. 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: Sell equities*
• Trend Model signal: Bearish*
• 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 doubts

Despite my constructive views on the direction of the stock market, some nagging doubts remain. Even as top-down strategist reduce their S&P 500 EPS estimates, bottom-up estimates, as measured by forward 12-month EPS, have been rising steadily for both large and small caps.

As we approach Q2 earnings season, the risk of a flood of negative guidance that pushes down consensus estimates is high, which would spark a risk-off episode.

The full post can be found here.

Bullish omens from the factor gods

Recession fears are rising everywhere, both on Wall Street and in Washington. Fed eonomist Michael T. Kiley formulated a recession model based on unemployment rates. The probability of a recession over the next four quarters is now over 50%, but the economy has never avoided a recession when readings were this high.

The New York Fed's DSGE model, which does not represent its official forecast, puts the chances of a hard landing at 80%. There are numerous other examples. That's just two of them. 

Recessions are supposed to be negative for stocks, right? Yes, most of the time. Even as recession anxiety rises, the omens from the sector and factor gods are telling a different story for the stock market.

The full post can be found here.

Unpacking my market bottom call

Mid-week market update: My last publication (see Why last week may have been THE BOTTOM) certainly caused some contraversy. Why I am making no promises about the future, I turned cautiously bullish on February 25, 2008, just a week before the generational March 2009 bottom (see Phoenix rising?). 

In that post, I postulated that the market was sufficiently washed out that it was time to dip your toe into the water with speculative Phoenix stocks, low-priced stocks that had fallen dramatically and saw significant insider buying. The good news is the timing of the call was nearly perfect, it came a week before the ultimate low. The bad news is the S&P 500 fell another -8% before the market finally bottomed.

Nobody's perfect.

The full post can be found here.

Why last week may have been THE BOTTOM

I am not always right and financial markets are facing many uncertainties, but last week's market action may have marked the bottom of this market cycle.

It isn't just the extreme level of the BoA Bull & Bear Indicator. though that is one piece of the puzzle. This indicator turned prematurely bullish by falling below 2 in March, but readings have declined to the extraordinarily low level of 0. 

The full post can be found here.

A butterfly flaps its wings in Zurich

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 prices. 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: Sell equities*
• Trend Model signal: Bearish*
• 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 disorderly unwind

Just when you thought it was safe to go back into the water after an FOMC meeting that turned out to be more dovish than expectations, the Swiss National Bank unexpectedly raise rates by a half-point after holding it at -0.75% for almost a decade and sent global asset prices reeling.

Here's why the SNB's actions mattered. 

The full post can be found here.

The Fed braces for a harder landing

Even before the FOMC meeting and in a survey period that ended on June 10, 2022, which was the day of the hot May CPI print, the respondents to the BoA Global Fund Manager Survey showed a high degree of anxiety about a recession.

Here is the bad news. At the post-FOMC meeting press conference, Fed Chair Jerome Powell pointedly responded to a question with, "We are not trying to induce a recession". Despite the "softish landing" rhetoric, it is becoming clear that the Fed is trying to induce a recession.

The full post can be found here.

How the FOMC meeting script played out

Mid-week market update: Can the stock market follow the script for past FOMC meetings in 2022? In each of the cases this year, the market weakened ahead of the meeting and rallied afterwards. The only deviation from the script occurred at the May FOMC meeting, when stock prices fell to new lows after a post-meeting reflex rally. 

Fast forward to the June meeting. The S&P 500 skidded in accordance to the script and stocks rallied today, though there are two unfilled gaps above.

The full post can be found here.

A liquidation panic

I know that Friday's CPI print was ugly, but it seems to have sparked a "correlations converging to 1" liquidation panic where everything is getting sold today. The good news is such panics usually don't last long.

Several readers highlighted analysis from Rob Hanna of Quantifiable Edges of a rare Inverse Zweig Breadth Thrust. Although the sample size is small (n=10 since 1926), the bearish implications of the study are clear.

Take a deep breath. Notwithstanding the fact that negative ZBTs were not part of Marty Zweig's work as detailed in Winning on Wall Street, this study is nearing "torturing the data until it talks" territory. While positive ZBTs are rare buy signals, there have been six instances since the publication of Zweig's book in 1986. Can you really trust the results of a study when the last instance of a negative ZBT was in 1943?

The full post can be found here.

The bears gain the upper hand

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 prices. 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: Sell equities*
• Trend Model signal: Bearish*
• 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.

Breaking support

So much for the breadth thrust. After surging off a test off the lows in late May after exhibiting strong price momentum known as breadth thrusts, the S&P 500 consolidated sideways for about a week. The index decisively broke down through a narrow trading range Thursday with a 93% downside volume day, which negated the bullish implications of the previous breadth thrust signal. The index is now testing support as defined by the May lows.

While it would be very easy to turn bearish, sentiment and market internals suggest relatively low downside risk. 

The full post can be found here.

In search of the bullish catalyst

I have pointed out before that the last time the 10-year Treasury yield was at these levels, the S&P 500 was trading at a forward P/E of 14-16. The current forward P/E is 16.8, which is slightly above that range. In order for stock prices to rise, at least one of two things has to happen. Either the discount rate has to fall, which expands P/E ratios, or earnings have to rise.

Since global central bankers are engaged in a tightening cycle, the prospect of falling rates is off the table. In that case, what's the outlook for earnings?

The full post can be found here.

Waiting for the breakout (or breakdown)

Mid-week market update: As the S&P 500 consolidates its gains in a narrow range after its surge last week, it has been a frustrating time for both bulls and bears. 

As investors wait for either the breakout or breakdown from the range, here are the bull and bear cases.

The full post can be found here.

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 prices. 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: Sell equities*
• Trend Model signal: Bearish*
• Trading model: Bullish*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

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

Nearing upside targets

I recently outlined several ways of estimating the upside potential of the current market rally. A number of tripwires have been triggered or nearly triggered. While the market may strengthen further, it's time to take some chips off the table.

Firstly, the S&P 500 is nearing initial resistance at the combination of the first Fibonacci resistance level and descending trend line at about 4200.

As well, the S&P 500 Intermediate Term Breadth Oscillator recycled from an oversold to an overbought condition. While overbought markets can become more overbought, it would be prudent to be reducing some risk at these levels.

While these represent cautionary signals, some other indicators are still bullish.

The full post can be found here.

Buy or fade the breadth thrust?

The recent price surge in late May off the bottom produced a flurry of excitement among technical analysts. Extreme price momentum is known as a breadth thrust in chartist circles. Depending on the magnitude of the breadth thrust, they are often signals of new bull markets.

Marty Zweig detailed what became known as the Zweig Breadth Thrust buy signal in his book, Winning on Wall Street, which was first published in 1986. A ZBT buy signal is generated when NYSE breadth moves from an oversold extreme to an overbought extreme within 10 trading days. ZBT signals are very rare. The book described 14 signals since 1945. The average gain following these 14 Thrusts was 24.6% within 11 months.

The market surge in late May just missed generating a ZBT. The market achieved the breadth thrust in 11 days, not 10. Since then, a number of chartists have analyzed these "just missed" signals and concluded that they are nearly just as good as the classic ZBT buy signal. As an example, Recession Alert observed:

All but 2 of the 13 signals in the above chart provided positive gains averaging 8.4% some 6 month out, which is equivalent to a 84.6% accuracy. If you relaxed the positive outcome holding period from 6 months to 12 months, then only the 2001 signal provided a negative outcome, increasing the accuracy to 92%. In fact, an examination of an actuarial table of the SP-500 gains for various holding periods after each ZBT-A signal yields some more interesting results.

Does that mean it's time to sound the all-clear and buy stocks?

The full post can be found here.

A bull's view of the rebound

Mid-week market update: As the stock market rebounded from a deeply oversold condition last week, a consensus is building that this is a bear market rally, and I am in that camp. A Google Trends search for "bear market rally" has spike to all-time highs.

The contrarian conclusions are either the rally will carry much further than anyone expects, or the recent bottom represented the actual low for the current market cycle. With that thought in mind, what should the bullish investor be buying?

The full post can be found here.