Sunday, October 30, 2022

How to trade the Fed Whisperer 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 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: Neutral*
  • 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.



Still a single macro trade
How should investors interpret the recent risk-on episode? It's all still one big macro trade. The S&P 500 continues to be inversely correlated to the USD Index, which is mainly driven by the expectations of a less hawkish Fed. The USD Index helpfully broke down through a minor rising trend line, which is a positive sign for risk appetite.


I call it the Fed Whisperer rally (h/t Walter Deemer).

The full post can be found here.

Saturday, October 29, 2022

What is the market anticipating ahead of the FOMC meeting?

Ahead, of the upcoming FOMC, meeting, what is the market discounting? I conduct a factor and sector review for some answers. Starting with a multi-cap review of value and growth, value stocks have been outperforming growth stocks within large caps since early August, but this has not been confirmed by mid and small caps. The value and growth relationship has been mostly trendless since June.


The full post can be found here.

Wednesday, October 26, 2022

How far can this rally run?

Mid-week market update: How far and long can this rally run? Here is one way of determining upside potential. The S&P 500 staged an upside breakout through an inverse head and shoulders pattern, with a measured objective of about 4120, which is the approximate level of the 200 dma.


The full post can be found here.

Sunday, October 23, 2022

Five constructive signs of a short-term bottom

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: Neutral*
  • 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.



Testing support
As the S&P 500 tests a key support level just above its 200-week moving average and while exhibiting a series of positive RSI divergences, I am seeing five constructive signs that the market may be forming a short-term bottom.



The full post can be found here.

Saturday, October 22, 2022

How inflation is a game changer for portfolios

In light of the dismal performance in the first nine months of a 60/40 portfolio in 2022, it's time to ask, "What's changed and what adjustments should investors make to their portfolios?"


The answer is inflation, and it's a game changer...

The full post can be found here.

Wednesday, October 19, 2022

Liftoff?

Mid-week market update: Recent discussions with readers made me realize that many investors may have become so numb to the endless bearish stock market impulses that they don't realize how oversold the stock market is. I have highlighted in the past the chart of the NYSE McClellan Summation Index (NYSI) to demonstrate that a reading of under -1000 is rare and historically led to tactical rebounds.


But that's not the full story...

The full post can be found here.

Sunday, October 16, 2022

How bears turn into 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 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: Neutral*
  • 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.



A failed reversal
Last week, I highlighted a possible bullish reversal candlestick on the weekly chart, but warned that the reversal needs to be confirmed by the next candle. This week, the S&P 500 weakened and failed to confirm the reversal candle, though the market is still exhibiting a positive 5-week RSI divergence and it is still testing support at the 200 week moving average. 



Regardless, I am seeing helpful signs of leadership rotation. During bear markets, the old market leaders fade and new leadership emerges to lead the new bull cycle. The change in leadership is a constructive market internal that is indicative of a bottoming process.

The full post can be found here.

Saturday, October 15, 2022

Why the pivot may be closer than you think

Richard Nixon's Treasury Secretary John Connally famously said in 1971, "The dollar is our currency, but it is your problem". Nixon's actions at the time closed the gold window, imposed a number of tariffs, and drove the USD down in the aftermath of the collapse of the Bretton Woods Agreement of fixed exchange rates.

Fast forward to 2022, and the situation is different. The Federal Reserve is one of the most hawkish of advanced economy central banks. The Fed's actions are exporting disinflation abroad and forcing major trading partners to engage in a series of competitive tightening to defend their own currencies. 


While US financial conditions are still relatively stable, financial cracks are appearing abroad and USD strength has become a wrecking ball wreaking havoc around the world. In spite of the hot September CPI print, the Fed's pivot may be closer than the market expects.

The full post can be found here.

Wednesday, October 12, 2022

Do divergences matter anymore?

Mid-week market update: The stock market has been exhibiting a series of positive breadth and momentum divergences as the S&P 500 weakened, but the recent main driver of risk appetite has been the fixed income and currency markets. 


Do divergences matter anymore?

The full post can be found here.

Sunday, October 9, 2022

Buy now, pain 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 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: Neutral*
  • 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.



Still constructive 
Last week, I outlined seven reasons why traders should grit their teeth and buy. I reiterate my short-term bullish and intermediate-term cautious view of the stock market. Traders should continue to buy now, but be prepared for pain later.

The S&P 500 rallied strongly early in the week but gave up most of its gains as time passed. Friday's hot NFP report cratered stock prices and the index traced out a bearish island reversal, which is clearly visible on the hourly chart. The good news is the S&P 500 has nearly reached the measured downside target of its reversal pattern. In addition, the last hour was characterized by a morning star doji candle, which is a possible reversal pattern that needs to be confirmed by market strength Monday morning.



The full post can be found here.

Saturday, October 8, 2022

Why you should financial model the Yom Kippur War

The recent OPEC+ decision to cut oil output by 2 million barrels per day is giving me a case of PTSD from a Yom Kippur long ago. In October 1973, the stock market was just getting over a case of Nifty Fifty growth stock mania. Arab armies, led by Egypt and Syria, made a surprise attack on Israel on Yom Kippur and overwhelmed the surprised defenders. The Israelis eventually prevailed in the conflict with US help. Arab oil-exporting countries responded with an oil embargo that spiked energy prices and caused a deep recession. The stock market fell roughly -50% on a peak-to-trough basis before recovering.


Fast forward to 2022. Instead of the Nifty Fifty, we have the FANG+ mania, which may be show signs of fading. Instead of a Middle East war, we have the Russo-Ukraine war. Instead of an Arab Oil Embargo, Russia has weaponized energy, mostly against the EU. Despite much lobbying by Washington, this year's Yom Kippur brought an OPEC+ surprise. The organization made a decision to cut oil output by 2 mbpd. While the cut isn't as bad as it sounds because a number of OPEC members aren't producing at capacity, the decision nevertheless shows that the US and Europe have no allies within OPEC. As a consequence, Street analysts are scrambling to raise their oil price forecasts, and higher energy prices are likely to put pressure on the Fed to stay hawkish.

Will investors see a repeat of the 1973-1974 bear market in 2022-2023?

The full post can be found here.

Wednesday, October 5, 2022

Managing fear and greed in a time of volatility

Mid-week market update: I received a number of questions from readers who were positioned for the monster rally that began on Monday, "What's your upside target?"

The answer is, "It depends." Make no mistake, the market was washed out and oversold when the rally began, but it was sparked by a rebound in bond prices. Much will depend on the interest rate outlook going forward.



The full post can be found here.

Sunday, October 2, 2022

Seven reasons why traders should grit their teeth and buy

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: Neutral*
  • 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.


So much for the BoE 
The market took a risk-off to begin last week until the BoE announced a surprise intervention to buy gilts with maturities of 20 years or more “on whatever scale is necessary” in order to stabilize markets. Global markets rallied for all of one day and the S&P 500 weakened for the rest of the week. So much for BoE intervention.

As the S&P 500 violated support on Friday, the midcap S&P 400 and the smallcap Russell 2000 did not confirm by holding their respective support levels. Should you believe the breakdown?


Here are seven reasons why traders should grit their teeths and buy stocks.

The full post can be found here.

Saturday, October 1, 2022

The anatomy of a failed breadth thrust

Many technical analysts turned excited in late August when the percentage of S&P 500 stocks above their 50 dma surged from below 5% to over 90%. Historically, such breadth and momentum thrusts have signaled a fresh bull market with a track record of 100% accuracy.


Since then, the percentage of stocks above their 50 dma retreated all the way back down to 5%. The breadth thrust fizzled. Here's why.

The full post can be found here.