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.