Sunday, May 28, 2023

Don't learn the wrong lesson from 2011

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: 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. I am also on Twitter at @humblestudent and on Mastodon at 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 History Lesson from 2011
The last time the U.S. faced a serious debt ceiling impasse was 2011. The S&P 500 skidded 
-8.2% in the weeks leading up to x-date, or the estimated day that the U.S. Treasury would run out of funds. Both sides came to an agreement two days before x-date, and the market fell further after the deal.

While history doesn’t repeat itself but rhymes, we fear that some analysts have learned the wrong lesson from 2011. The post-deal market weakness was mainly attributable to the Greek Crisis in which the very existence of the euro currency was threatened. It’s unclear how much of that sell-off can be traced to a “buy the rumour, sell the news” reaction to a debt ceiling deal.

This time is indeed different. Here’s why. 

The full post can be found here.

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