Wednesday, June 28, 2023

A test of support at S&P 4320

 Mid-week market update: The S&P 500 daily stochastic recycled from overbought to neutral last week and stock prices pulled back. Initial support can be found at about 4320, with secondary support at about 4200, which is also the approximate level of the 50 dma.


Can 4320 hold?

The full post can be found here.


Sunday, June 25, 2023

A focus on AI and technology stocks

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 (Last changed from “buy” on 26-Mar-2023)*
  • Trend Model signal: Neutral (Last changed from “bullish” on 17-Mar-2023)*
  • Trading model: Neutral (Last changed from “bearish” on 15-Jun-2023)*
* 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 @humblestudent@toot.community. 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.
 

AI mania
These days, it’s difficult to turn on financial TV without mention of artificial intelligence and technology stocks. Indeed, popular AI-related plays like NVDIA and C3.AI have been on a tear.
 
 
 
How sustainable is the move? Let’s examine the technical and fundamental underpinnings.
 
The full post can be found here.

Saturday, June 24, 2023

Is the Fed deliberately engineering a recession?

 Fed Chair Jerome Powell struck a hawkish tone at the Semiannual Monetary Policy Report to the Congress last week, “The process of getting inflation back down to 2 percent has a long way to go”. While the Federal Open Market Committee (FOMC) decided to pause its pace of rate hikes at the latest meeting, he signaled further rate hikes in the near future. “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.”
 
The word “nearly” is an understatement. The “dot plot” shows only two out of 18 dots project the Fed Funds rate to remain constant at current levels by the end of 2023. Nine project a half-point rate hike, and three project even more rate hikes by year-end. None expect rate cuts.
 
 
At the same time, Powell acknowledged during his testimony that shelter costs are lagging components of CPI and PCE. Leading indicators of shelter are falling, which is good news on inflation.

Why is the Fed ignoring leading indicators of inflation, which are falling, while focusing on lagging conventional inflation metrics, which are stable? Is it deliberately trying to engineer a recession?
 
 The full post can be found here.

Wednesday, June 21, 2023

An overdue pullback?

Mid-week market update: The S&P 500 reached an overbought extreme on the 5-week RSI after nearing the top of an ascending channel and it appears to be in the process of pulling back. In the past, such extreme RSI conditions has seen the market rally stall. There is a strong support zone at about 4200, though it's an open question whether the index will reach those levels.

 

The full post can be found here.


Sunday, June 18, 2023

How to trade a split personality market

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 (Last changed from “buy” on 26-Mar-2023)*
  • Trend Model signal: Neutral (Last changed from “bullish” on 17-Mar-2023)*
  • Trading model: Bearish (Last changed from “neutral” on 02-Jun-2023)*
* 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 @humblestudent@toot.community. 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 bifurcated market
In the past few weeks, I have heard different variations of a similar message from professional investors when asked about their portfolios: “We recognize that the AI transformation is very real and AI-related plays could soar, we are staying with defensively oriented names in our client portfolios.”
 
Translated: We are afraid of being left behind in an AI bubble, so we have a part of the portfolio in those names. The core portfolio consists of high-quality value stocks.
Indeed, the stock market has become bifurcated.
 
The accompanying chart tells the story of bifurcation by style and quality. There are different ways of 
measuring quality. One simple way is to compare the performance of S&P and Russell indices in the same market cap range. S&P has a much stricter index inclusion criteria than the FTSE/Russell indices, which creates a quality spread as the Russell Index will have a higher proportion of unprofitable companies.
As the top panel of the chart shows, growth has outperformed value in 2023. Within the value universe (second panel), the high-quality factor is dominant. By contrast, low-quality is dominant within the growth universe (bottom panel).


 
That’s the essence of the split personality the stock market is exhibiting. Investors appear to be chasing speculative growth while holding high-quality value stocks in a barbell portfolio.
 The 
full post can be found here.

Saturday, June 17, 2023

How economic myopia is leading investors astray

I found this recent CNBC interview with former Obama CEA Chair Jason Furman on June 6 rather disturbing. Furman expressed the opinion that the Fed would need to raise rates by 50 basis points before the rate hike cycle is complete, though he believed that it would skip a hike at the June FOMC meeting. 
 

While headline inflation had been falling, core CPI hadn’t made any progress for several months, which is causing concern for the Fed.

This prompted a discussion of the level of unemployment needed to slow inflation to acceptable levels, which Furman estimated at 4.5–5.0% (which incidentally would trigger a Sahm Rule recession alert). The question arose, “Is such a level of unemployment politically palatable?”

Furman equivocated by saying that’s why you have a Fed that’s insulated from political pressure, but that was the wrong answer. Both the question and the reply demonstrated a level of economic myopia that’s sure to lead investors astray.

The full post can be found here.

Wednesday, June 14, 2023

A very hawkish skip

Mid-week market update: It's not easy to make a market comment on an FOMC day. Let's start by analyzing the Fed's projections. The latest Summary of Economic Projections (SEP) shows a stronger economy and tigher monetary policy in response to the revised projections.

The Fed revised up its GDP projections for this year by 0.6% and revised down the unemployment rate by 0.4%. While headline PCE inflation is expected to fade by -0.1%, the more important core PCE was revised up by 0.3%. As a consequence, the target Fed Funds rate projection rose by 0.5% for 2023, with further upside revisions for 2024 and 2025.

The full post can be found here.


Sunday, June 11, 2023

How the Treasury refresh may not be catastrophic

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 (Last changed from “buy” on 26-Mar-2023)*
  • Trend Model signal: Neutral (Last changed from “bullish” on 17-Mar-2023)*
  • Trading model: Bearish (Last changed from “neutral” on 02-Jun-2023)*
* 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 @humblestudent@toot.community. 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 liquidity catastrophe?
Even before the resolution of the debt ceiling impasse, analysts had been warning about the consequences of a post-deal hangover.


 It was said that the U.S. Treasury market would see a flood of new issuance which would draw liquidity from the financial system. Such a loss of liquidity would create significant headwinds for the prices of risk assets. Since the conclusion of the debt ceiling deal, the warnings have become a cacophony. Estimates vary, but consensus market expectations call for the issuance of about $1 trillion in Treasury paper over the next three months.
 

 

I have warned before about the liquidity impact of new Treasury issuance and I am certainly cognizant of the risks. However, there is a narrow path for a benign resolution of the reset of the U.S. Treasury’s cash balances without significantly affecting the price of risk assets.

The full post can be found here.


Saturday, June 10, 2023

Can AI stocks lead the market to a new bull?

 

NASDAQ stocks have been on a tear lately, led by AI-related plays. The relative performance of the NASDAQ 100 has begun to depart from macro factors such as the inverse relationship with the 10-year Treasury yield. 


 
I have had a number of discussions with investors and the question keeps coming up. Can the AI frenzy, which appears to be in its early stages, carry the stock market to a new bull?

The full post can be found here.




Wednesday, June 7, 2023

The good news and bad news

Mid-week market update: Subscribers received an email alert last Friday that I had issued a tactical sell signal for the stock market. The VIX Index had fallen below its lower Bollinger Band, which is often a signal of a short-term top. Since then, the index has been trading sideways while the 5-day RSI slowly descended and flashed a minor negative divergence.
 

Here is the good news and the bad news.

The full post can be found here.


Monday, June 5, 2023

Why the Saudi output cut could be a bullish catalyst for energy stocks

The Saudis made a surprise unilateral cut of 1 mbpd at the OPEC+ meeting on the weekend. The NY Times reported that the Kingdom was forced to make the move as a matter of fiscal necessity:

Saudi Arabia is in “whatever it takes mode,” Helima Croft, head of global commodity strategy at RBC Global Markets, wrote in an investor note this morning. That the country is “willing to shoulder it alone adds to the credibility of the cut and signals real barrels coming off the market.”

Analysts calculate that Brent needs to stay above $80 in order for Saudi Arabia to keep its budget balanced and to finance the ambitious infrastructure program backed by the country’s crown prince, Mohammed bin Salman.

Oil prices initially popped in reaction to the cut, but pulled back over the course of the day.
 

Here's what the cut may mean for energy stocks.

The full post can be found here.


Sunday, June 4, 2023

Global market review: Risks and opportunities

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 @humblestudent@toot.community. 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 quick trip around the world
Now that the U.S. debt ceiling drama is over, it’s time to take a quick trip around the world to review the state of global equity leadership.
 
The relative performance of different major regions against the MSCI All-Country World Index (ACWI) shows a surge in the U.S. market. Europe has pulled back and Japan is steadily advancing against ACWI. Within emerging markets, heavyweight China is weak and EM ex-China is steady against ACWI.
 

The full post can be found here.


Saturday, June 3, 2023

A different kind of Fed pivot?

 Now that the debt ceiling drama is over, investors’ eyes are turning toward the Fed and the trajectory of monetary policy. The current Fed tightening cycle is one of the most aggressive in memory. After a series of staccato rate hikes, the Fed hinted that it was ready to pause. However, the recent stronger-than-expected April PCE may have changed the narrative from a pause to another rate hike.
 
 
Will the Fed pause its rate hikes, skip a hike but continue later, or just raise rates at the June FOMC meeting?
 
The full post can be found here.