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.