How to spot the correction 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: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)*
• Trading model: Neutral (Last changed from “bearish” on 03-Aug-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 correction in an uptrend

I have been warning for several weeks that U.S. equities appeared extended even as stock prices advanced. Even though the intermediate trend was bullish, the market could pull back at any time.

It seems to have finally happened. The S&P 500 stalled and turned down on the news that Fitch had downgraded U.S. government debt. The ratings downgrade shouldn’t have been a risk-off trigger. U.S. Treasury paper is regarded as the default-free and risk-free asset. No one buys Treasuries based on a credit rating. In fact, the market reaction to the ratings downgrade was a steepening of the yield curve. Short Treasury yields fell while longer-term yields rose. If the market was truly rattled by the change in credit rating, yields should have risen across the board.

Instead, I believe the stock market had risen too far and too fast. The Fitch downgrade was just an excuse to sell and the pullback was overdue. You can tell a lot about the psychology of the market by the way it responds to news. FactSet reported that, with 84% of the S&P 500 having reported earnings, the market isn’t rewarding the shares of companies that beat EPS expectations.
 

 

Where’s the correction bottom?

The full post can be found here.