A bull market with election year characteristics

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: Bullish (Last changed from “neutral” on 20-Nov-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 X/Twitter 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 revived bull

As 2023 drew to a close, the revival of a long-term buy signal emerged. I have highlighted the utility of the bullish crossover of the monthly MACD histogram of the NYSE Composite Index before. In the past, such instances have signaled strong long-term buy phases (blue vertical lines). 

This model first flashed a buy signal in June 2023, but MACD turned negative in September. As the market rallied off its recent October lows, the monthly MACD turned bullish again. There have been two other similar episodes of these MACD buy signalisakeouts. Once in 1999, and the other in 2012. Both traced out brief range-bound price patterns before breaking out to new highs. If the limited past (n=2) is any guide, stock prices should also rally to new all-time highs in the near future.

 The full post can be found here.

What the politics of 2024 tell us about 2025

I am not fond of the ritual of “year ahead” forecasts. Street strategists’ forecasts are far more dispersed compared to past years. The 2024 year-end target for the S&P 500 varies from 4200 to 5200.
So let’s make this brief. Analysis from Ryan Detrick of Carson Group shows that the S&P 500 rises an average of 12.2% in an election under a new president. That sounds about right in light of the recent Zweig Breadth Thrust buy signal from early November.

 
Instead, I would like to offer a different kind of “year ahead” analysis. What does the political and economic landscape of 2024 mean for investors in 2025?

The full post can be found here.

What investors and traders should think about in 2024

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: Bullish (Last changed from “neutral” on 20-Nov-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 X/Twitter 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.

Publication note: There will be no mid-week market update next week. Regular service will resume the weekend of December 30. Happy Holidays.

A temporary blip

It appears that the best explanation for Wednesday's sudden market downdraft was same-day option related activity (0DTE) that forced market makers to hedge by selling equities. From a longer-term context, analysis from Bespoke indicates that similar hiccups in strong bull trends haven't done damage.

With that in mind, here are the issues to consider as we look ahead into 2024 on differing time horizons.

The full post can be found here.

Will we see the Santa rally this year?

Mid-week market update: The recent stock market rally has been astounding. Sentiment readings on the Fear & Greed Index surged from extreme fear in October to extreme greed in less than two months. While extremely fearful sentiment can be useful buy signals, extreme bullish sentiments are condition indicators and inexact sell signals. This leads to the tactical conclusion that it’s too late for investment-oriented accounts to be adding risk. Bulls should wait for a likely pullback for a lower-risk entry point.

 

Publication note: There will only be one publication this weekend showing the model readings with a brief commentary. There will be no mid-week market update next week barring unforeseen volatility. The regular publication schedule will resume the weekend of January 30.

The full post can be found here.

The most frothy time of the year?

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: Bullish (Last changed from “neutral” on 20-Nov-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 X/Twitter 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 frothy Christmas

Two weeks ago, i set out a number of bearish tripwires (see Sell Signal Set-Ups Are Appearing, But Don’t Panic). Several of them are flashing warning signals.

One sentiment indicator that’s of concern is the put/call ratio. Both the CBOE put/call and the equity-only put/call ratios are approaching the bottom of their one-standard deviation Bollinger Bands, or the froth zone. Past instances, which are marked by vertical pink lines, have tended to resolve in pullbacks.

Price momentum has been strong as stock prices surged in response to the FOMC announcement. It’s starting to look like a frothy Christmas this year.

 

The full post can be found here.

High conviction idea: Buy U.S. financials

The Fed has clearly pivoted. It indicated at its December FOMC meeting that, for all intents and purposes, it was done hiking and the “dot plot” is projecting three quarter-point rate cuts in 2024 against a soft landing backdrop. Fed Chair Jerome Powell was given ample opportunity to push back against the dovish narrative. Instead, he embraced it. He shrugged off concerns about easing financial conditions. He didn’t express concern about above trend growth in the economy. When asked about the “last mile” problem of reducing inflation to the Fed’s 2% target, he said, “We kind of assume it will get harder from here, but so far it hasn’t."

The Fed pivot set off a bull steepener in the bond market, where yields fell (and bond prices rose) while the yield curve steepened. The historical evidence shows that the relative performance of bank stocks is correlated to the shape of the yield curve. There was some interruption of this relationship in 2016–2018 when the shares of banks surged when Trump was elected on the expectations of bank tax cuts, and another rally when tax cuts were passed in 2017. Otherwise, the relative performance of banks has been sensitive to the yield curve as they tend to borrow short and lend long. As a consequence, a steepening yield curve is bullish for lending margins.

 

The Fed pivot is the catalyst for my high conviction call to buy U.S. financials for potential outperformance.

The full post can be found here.

Get ready for the year-end rally

Mid-week market update: The Fed delivered a dovish pause today. In addition, Powell was given opportunities to push back with bearish scenarios, such as raising concerns over the recent risk-on rally as a sign that financial conditions are loosening, or the elevated levels of super-core inflation, but he declined to do so. It is becoming more and more evident that the rate hike cycle is over. The market is looking forward to rate cuts and it’s discounting cuts to begin in March and five quarter-point cuts in 2024.

 
Here is a framework for thinking about the Fed’s monetary policy.

The full post can be found here.

The animal spirits are still alive

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: Bullish (Last changed from “neutral” on 20-Nov-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 X/Twitter 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 healthy consolidation

The S&P 500 staged a late Friday breakout above 4600 out of a narrow consolidation range. The accompanying hourly chart shows that whenever the 14-hour RSI reaches an overbought extreme of 90 or more, it has retreated to a minimum level of 50, which it has in the latest episode. In light of the powerful momentum exhibited by the Zweig Breadth Thrust buy signal in early November, the market has met the conditions for another bull run in the near future. 

 
I continue to believe that stocks are poised for a rally into year-end. My analysis of market internals shows that the market’s animal spirits are still alive.

 

The full post can be found here.

What happens after the momentum chase?

The Zweig Breadth Thrust buy signal in early November sparked a price surge and a price momentum chase. Already, the S&P 500 made a late-day charge above 4600 for a new recovery high. 

The price momentum factor is defined as stocks that beat the market continue to beat the market. The red line in the accompanying chart shows the difference between the one-month price momentum ETF (FDMO) and the six-month price momentum ETF (MTUM). One-month momentum has rocketed upward against six-month momentum, which is an indication that under-invested funds are scrambling to buy beta and momentum in order to catch up on performance.

In all likelihood, the momentum chase will last until year-end as fast money accounts continue to chase returns into year-end. The key question for investors is what happens after the chase?

 

The full post can be found here.

More sideways consolidation before the Big Event

Mid-week market update: Another day, another sideways consolidation price action in the S&P 500, which is typical of seasonal pattern in the first half of December.

 
Beneath the surface, I am seeing numerous signs that the market is still poised for the year-end rally.

The full post can be found here.

Sell signal set-ups are appearing, but don't panic

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: Bullish (Last changed from “neutral” on 20-Nov-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 X/Twitter 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.

 

Don’t overstay the party

Two weeks ago, I set out a number of bearish trigger warnings for investors (see How Far Can This Market Run?). Two signals have been triggered.

The NYSE McClellan Summation Index saw its weekly stochastic (bottom panel) edge into overbought territory. The NASDAQ McClellan Summation Index, which is not pictured, also reached a similar reading.

 
Don’t panic. These readings are only bearish set-ups and not immediate take-profit signals. Current conditions are consistent with a rally into year-end and possibly early January, but it is a warning not to overstay the party.

 

The full post can be found here.

The market meaning of a gold breakout

Gold bulls became very excited when gold prices tested overhead resistance at the 2000–2100 level. In the past, such tests had been met with selling pressure, but technical analysts would interpret a definitive breakout at these levels as opening the door to significant upside.

Moreover, the bottom panel of the accompanying chart shows that the gold to S&P 500 ratio has been making a multi-year bottom, which argues for the start of a cycle that favours hard assets like gold and commodities over paper assets like stocks and bonds. Before you get too excited, such bottoms can take some time to develop and a hard asset bull market may not appear for several years.

In addition, the long-term bull case for commodities and hard assets is underscored by a regime of chronic underinvestment in capital expenditures in commodity extraction industries.

 

I am no gold bug and I have no strong opinion on the direction for gold prices. I am more interested in the cross-asset implications of this gold rally.

 

The full post can be found here.