4 reasons why you should buy the Great Rotation

Mid-week market update: Today's market action looks rather ugly today, but I believe that stock prices are poised for a short-term bottom as the S&P 500 tests a key rising trend line on the weekly chart.

Here's why.

The full post can be found here.

Hey, hey, LBJ, how many kids have you killed today?

Well, well, the Biden decision to withdraw from the presidential race certainly put a new spin on stock market behaviour. According to Ryan Detrick, stock prices don't behave well during election years of lame duck presidents.

That said, "lame duck" years often refer to a second term president. The closest analogues to the current circumstances could be 1968. When LBJ, under severe pressure over the opposition to the Vietnam war, said on national television, "I will not seek, nor will I accept the nomination of my party". Baby Boomers may remember the chant, "Hey, hey, LBJ, how many kids have you killed today?"

 

His successor, Hubert Humphrey, won a controversial nomination (remember the riots outside the convention in Chicago). A divided party lost the White House to Nixon. The market also topped out in 1968.

The second closest analogue was 1980, when Jimmy Carter won a bitter fight for his party's nomination over Ted Kennedy, Carter, who was also politically wounded over the nomination fight, lost to Reagan that year. The market also topped out in 1980.

The full post can be found here.

The one burning question of the Great Rotation

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 “bullish” on 23-May-2024)*

* 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.

 

Here come the Great Rotation

The stock market recently underwent a Great Rotation. Leadership violently rotated from growth to value, and from NASDAQ stocks to small-cap stocks. The reversal was accompanied by a sudden downdraft in the S&P 500.

 

For investors, the burning question is whether the Great Rotation is a signal for a correction in stock prices.

The full post can be found here.

Positioning for Trump 2.0

In the wake of Biden’s subpar debate performance and the assassination attempt on Trump, the prediction markets’ odds of a Trump victory in November have substantially risen. Equally important is Wall Street’s reaction, which has investors sitting up to take notice of the implications of a second Trump Administration in 2025.

Despite the real-time information from the betting markets, financial markets haven’t fully discounted the possibility of a Trump win. Here’s how you can take advantage of that arbitrage opportunity.

The full post can be found here.

How the small cap breakout could be short-term bearish

Mid-week market update: Small cap stocks, as measured by the Russell 2000 and S&P 600, staged convincing upside breakouts in the past week. Both small cap indices are now testing key relative resistance zones against the S&P 500.

 

 

Even though this seems to be counter-intuitive,  such a development could be bearish for the S&P 500.

The full post can be found here.

A roadmap for the rest of 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: Neutral (Last changed from “bullish” on 23-May-2024)*

* 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.

 

Another upper BB ride

The S&P 500 went on an upper Bollinger Band ride and unusually pulled back on Thursday after the soft CPI report and closed below the upper BB on Friday. What’s unusual is the risk-on tone adopted by the rest of the stock market even as heavyweight technology stocks in the S&P 500 weakened. The small-cap Russell 2000 gapped up and staged an upside breakout through a key resistance level in response to the prospect of lower interest rates owing to the weak CPI print.

 
Historically, the S&P 500 has consolidated sideways for a few days after upper BB rides. Will this time be any different, or does small-cap strength foreshadow further price advances in the near future? What about the rest of 2024?

The full post can be found here.

Trading the slow market melt-up

We’ve all seen the warning signs about narrow market concentration and deteriorating breadth. The S&P 500 is an accident waiting to happen.
 

On the other hand, strategist Ed Yardeni stated in a CNBC interview that he believed we are in a “slow motion melt-up”. I agree. While the excesses in the stock market are becoming more evident and risks are rising, the bull isn’t done just yet.

The accompanying chart from Jurrien Timmer at Fidelity illustrates my point. If this is a bubble in the making, it could run a lot further as valuation differences are nowhere near the height of the Nifty Fifty or Dot-Com Bubble eras.

Remember Bob Farrell’s Rule #4: “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.”
 

The full post can be found here.

How I missed a trade (and what I would do)

Mid-week market update: The usually reliable S&P 500 Intermediate Term Breadth Momentum Oscilator (ITBM) flashed a buy signal in the third week of June when its 14-day RSI recycled from oversold to neutral. The S&P 500 consolidated sideways for about a week and resumed it climb. This is the story of why I did not act on the buy signal and the lessons learned.

The full post can be found here.

Tops are processes

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 “bullish” on 23-May-2024)*

* 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.

 

Warnings everywhere

Even as the S&P 500 reached another all-time high, numerous warnings about a market top have been appearing in my social media feed and elsewhere, starting with the elevated level of the forward P/E ratio. The S&P 500 forward P/E now stands at 21.2, which is above its 5-year average of 19.3 and 10-year average of 17.9.

 The full post can be found here.

How politics is intruding on Fed policy

Recent U.S. economic data has generally been weakening, as evidenced by the decline in the Citigroup Economic Surprise Index (ESI, gold line), which measures whether economic data is beating or missing expectations. As ESI has been roughly correlated to bond yields, this should put downward pressure on rates and expectations of rate cuts in the near future.

 
Not so fast! Fed policy has become increasingly constrained by politics, both on a short- and long-term basis. Here’s why.

The full post can be found here.

Positive seasonality boost the S&P 500

Mid-week market update: The S&P 500 followed the typical pattern of consolidating sideways for about a week after an upper Bollinger Band ride before breakout out to a fresh all-time high. As recent history shows, it's impossible to know which way stock prices will break after the consolidation.

In many ways, the upside breakout was not a big surprise.

The full post can be found here.

How much is left in the bulls' gas tank?

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 “bullish” on 23-May-2024)*

* 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.

 

Too far, too fast?

Has the bull run gotten ahead of itself? The S&P 500 was up 14.5% for the first half. In addition, Ryan Detrick observed that the Zweig Breadth Thrust signal of early November showed very strong returns. It was a buy signal I also highlighted (see Zweig Breadth Thrust: From caution to YOLO). The S&P 500 was up 19.0% in the six months since the buy signal, and the market was up 3.5% since then. Combined, investors would be up nearly 22.5% since the buy signal, which is just under the 12-month average and median return.

 
In light of these strong returns, how much gas is left in the bulls’ gas tank? Is this the case of the market going up too much, too fast?

 

The full post can be found here.

A Q2 earnings season preview

The first half of 2024 was very good to U.S. equity investors. The S&P 500 was up 14.5% excluding dividends for that period. As stock market investors look forward to the second half, the first order of business will be the Q2 earnings reports, and there are a number of unanswered questions.

The bulls will argue that forward 12-month EPS estimate revisions have been strong, which should be positive for stock prices. The bears will argue that top-down macro reports have largely missed expectations, which foreshadows a period of earnings disappointment and negative guidance. Moreover, valuations are becoming stretched, which will be a headwind for stock prices.

Who is right? Here is a preview of the Q2 earnings season.
 

 The full post can be found here.

A market of NVIDIA and everything else

Mid-week market update: The S&P 500 has become an index of behemoth NVIDIA and everything else. The all-time high experienced by the S&P 500 in mid-June was largely attributable to the price action of NVIDIA. The rest of the market, as measured by the equal-weighted S&P 500, has been trading sideways for several months and never exceed the highs reached in late March.

Will the S&P 500 continue to rise, or is it destined to correct in the short run? The answer is "yes". Here are the risks and opportunities.

The full post can be found here.

Why the breadth divergence may not be bearish

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 “bullish” on 23-May-2024)*

* 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 case of bad breadth

Anxiety has been increasing among the technical analysis community over the blatant instances of narrow market leadership and negative breadth divergence. Even as the S&P 500 rose to new all-time highs, the Advance-Decline Line, regardless of how it is measured, is exhibiting a series of negative divergences.

 

 
Even though these breadth divergences are concerning, they are not necessarily bearish signals. Here’s why.

The full post can be found here.

Why the November election matters to gold

I am reiterating my bullish outlook on gold. The yellow metal staged an upside breakout from a cup and handle pattern in March. As well, the long-term inflation expectations of ETF (RINF) has been in a steady uptrend. The only question is how far and how fast can gold run?

The future may be bright as gold prices respond to unexpected inflation. The non-partisan Congressional Budget Office (CBO) recently updated its projection of the U.S. fiscal path by raising its FY 2024 estimate of the deficit from $1.5 trillion to $1.9 trillion, driven by emergency spending on foreign assistance to Israel, Ukraine and Taiwan, as well as student loan relief. The long-term picture also deteriorated, the deficit rises to $2.8 trillion by 2034 and debt is expected to grow to 122% of GDP by 2034. 

 

For investors, much of its intermediate-term outlook depends on the outcome of the U.S. November elections and the trajectory of White House policies.

The full post can be found here.

What's different this time

Mid-week market update: I am publishing this earlier than usual as the U.S. markets are closed for the Juneteenth holiday.

 

The S&P 500 has gone on another upper Bollinger Band ride, accompanied by a severely overbought reading on the 5-day RSI, which is over 90%. Overbought conditions are often not bearish, but a manifestation of strong price momentum, otherwise known as a "good overbought" signal. That's bullish, right?

Here is what's different this time. The overbought condition occurred along with signs of weak breadth, as evidenced by a series of negative net highs-lows on both the NYSE and the NASDAQ even as the index made new all-time highs.

 

The full post can be found here.

Tactically cautious but not bearish

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 “bullish” on 23-May-2024)*

* 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.

 

Time for cheap protection?

Last week, I suggested that the stock market was susceptible to a setback (see A Time For Tactical Caution). Even though the pullback never appeared, I reiterate my cautious view, though I am not outright bearish.

In light of the market’s vulnerable position, it may be time to exploit the low VIX and buy some cheap downside protection in the form of protective put options. The S&P 500 achieved a fresh all-time high while exhibiting a negative 5-week RSI divergence. As well, the VVIX/VIX ratio is showing a negative divergence. Such episodes have tended to resolve bearishly in the past. As well, the VIX Index is low and testing its lower boundary at 12, indicating low option premium and cheap cost of downside protection.

 

The full post can be found here.

The market gods present patient investors with three gifts

Remember that equity investors tend to enjoy strong returns in the absence of recession, which dents returns, or war and revolution, which can result in a permanent loss of capital. With those caveats in mind, the market gods are presenting patient investors with three gifts from the three economic blocs in the world: the U.S., Europe, and China.

 The full post can be found here.

The market is fighting the Fed, should you?

Mid-week market update: The option market was pricing in a daily equity market swing of 1.6% ahead of today's events, namely the May CPI report and the FOMC decision. Even though the S&P 500 gained strongly today, the move could be said to be disappointing in volatility terms.

 

The bullish tone was set this morning by the softer than expected CPI report. Stocks gained but didn't react much to the FOMC decision, despite the hawkish tone of the Summary of Economic Projections. Bond prices held above a key resistance level, and the USD weakened, indicating a risk-on tone.

 

 

The market is fighting the Fed, should you?

 

The full post can be found here.

A time for tactical caution

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 “bullish” on 23-May-2024)*

* 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.

 

The bull isn’t done

Make no mistake, I am intermediate-term bullish on U.S. equities. The monthly MACD buy signal remains in force and there are no signs of any negative divergence that signals a major market top.

Beneath the hood, however, disturbing signs of that not all is well in the short run. Here are bull and bear cases.

The full post can be found here.

Is good news good news, or bad news?

Is good economic news good news for equities or bad news? We know how to interpret macro news for the bond market. The Citi Economic Surprise Index (ESI), which measures whether top-down economic releases are beating or missing expectations, has been a bit weak. Historically, a weak ESI has meant lower bond yields.

What does it mean for equities? Investors saw a string of weaker-than-expected macro prints last week, starting with an anemic ISM PMI on Monday, followed by a miss on job openings in JOLTS Tuesday and another miss on ADP employment Wednesday. In each of those cases, bond prices rallied and equities initially weakened, followed by price recoveries later in the day.

I interpret events from the perspective of three trading desks: bonds, commodities and equities.

The full post can be found here.

A well-telegraphed market advance

Mid-week market update: The S&P 500 has risen to a new all-time high, and this move was well-telegraphed. I wrote on the weekend and characterized conditions "half-hearted buy signals that indicate low downside risk".

The S&P 500 subsequently staged an upside breakout from a bull flag to a fresh all-time high.

The full post can be found here.

The market's dance of thrusts and dips

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 “bullish” on 23-May-2024)*

* 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 failed breadth thrust?

Is the Triple 70 breadth thrust that triggered on May 6 in trouble? As a reminder, a Triple 70 breadth thrust occurs when the percentage of NYSE advances exceed 70% for three consecutive days, which is a bullish momentum signal. If history is any guide, Rob Hanna’s study of such events has seen strong bullish momentum follow through.

 

On the other hand, the short-term warning signs have been appearing everywhere. Even as the S&P 500 advanced to new all-time highs, the 5-week RSI flashed a negative divergence, and so did the VVIX/VIX ratio.

 
Is this evidence of a failed breadth thrust? How should investors react to the simultaneous appearance of bullish price momentum signals like a breadth thrust and the risk of dips from negative technical divergences?

The full post can be found here.

Transitory disinflation in 2025?

The closely watched April PCE moderated as expected. Headline PCE came in 0.3%, in line with expectations, while core PCE was 0.2% (blue bars), which was softer than expectations. Supercore PCE, or services ex-energy and housing, also decelerated (red bars). This latest print represents useful progress, but won’t significantly move the needle on Fed policy.

The worrisome development is the global trend of transitory disinflation. The Citi Inflation Surprise Index, which measures whether incoming inflation data is beating or missing expectations, is bottoming in most countries and rising again. If this continues, any expectations of ongoing rate cuts are likely to be pulled back.

Now that 2024 is nearly half over, it’s time to peer into 2025 to see the upside and downside factors that are expected to affect inflation and the Fed’s interest rate trajectory. The three main factors to consider are changes in immigration policy and how they affect employment; the evolution in productivity; and the possible political effects of the election on inflation.
 

The full post can be found here.

A modest correction ahead?

Mid-week market update: I pointed out on the weekend that it's not unusual for the S&P 500 to consolidate sideways after reaching its upper Bollinger Band before the market makes its next major directional move. There have been five other similar instances in the last six months. What's a little unusual about the current episode is the length of the consolidation.

 

Even though the S&P 500 remains in its narrow consolidation range, the odds point to a shallow correction, as the daily stochastic has recycled from overbought to neutral, which is a sell signal. Initial SPY support can be found at 520-525, and secondary support at 505-510, based on volume by price analysis.

The full post can be found here.

How to spot a market top

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 10-May-2024)*

* 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.

 

Bearish Capitulation

Morgan Stanley’s strategist Mike Wilson has been one of the more prominent bears left standing and he capitulated last week. Now that Wilson has reluctantly turned bullish, is it time to turn contrarian bearish on stocks?

I can think of two scenarios for the U.S. equity market. The bulls will argue that the market structure of the S&P 500 shows the index has outrun the bullish channel, as defined by the solid lines, and ascended to a steeper channel, as defined by the dotted lines. The advance has been characterized by a series of “good overbought” RSI signals. The bullish scenario opens up a short-term objective of 5500 before the rally is done.

The bears will argue that the combination of the “buy the rumour, sell the news” market reaction to the strong NVIDIA report and the negative divergence on the 5-week RSI is a signal of an exhaustive advance.

 
Bull or bear? Here are the signposts to an intermediate-term market top.
 

The full post can be found here.

How to buy a company with no money

Perhaps you remember the late-night television commercials selling tapes and courses on how to buy real estate with no money down. One memorable character from the early 1990s ran infomercials featuring him on a yacht surrounded by bikini-clad women to emphasize how he, a Vietnamese refugee, had made a fortune from nothing. You could do the same thing if you bought his course.

The Wall Street equivalent of buying a company with no money down is the leveraged buyout, or LBO. The LBO was made possible by the popularization of junk bond, or high yield bond, financings, which was a financial innovation from the 1980s.
 

Even though the LBO has gone mostly out of usage, it may be time to revisit LBO targets now that high yield spreads are narrowing. I screened non-financial stocks in the S&P 1500 for LBO candidates and came up with a number of interesting insights. 

It turns out that LBO candidates are relatively rare. They may be the modern deep value equivalent of Ben Graham’s formulation of stocks trading below net-net working capital or current assets minus all debt.
 

The full post can be found here.

Drifting and waiting for the NVIDIA report

Mid-week market update: After the market reaches its upper Bollinger Band, it isn't unusual at all for it to consolidate sideways and drift for a few days before making the next move. As the chart below shows, this has happened four other times (grey shaded boxes) in the last six months. The latest episode is the fifth.

The market rose in two of the four episodes and fell in the other two, so there are no apparent clues to future short-term market direction. That said, I have heard concerns about the VIX Index declining below the 12 level, which is historically low. But the VIX did not fall below its lower Bollinger Band, which would be an overbought signal for the market.

The most important difference between now and past instances is the pending earnings report from AI bellwether NVIDIA. As a reminder, the last time NVIDIA reported earnings, not only did the stock pop, the upside gap took the S&P 500 with it and the market didn't look back for weeks.

The full post can be found here.

A Trend Asset Allocation Model review

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 10-May-2024)*

* 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 Trend Model review

Over the course of several discussions with readers, it was apparent that some didn’t understand the Trend Asset Allocation Model, otherwise known as the Trend Model. This is a model that applies trend-following principles to a variety of global markets and commodities to form a composite signal.

While a history of out-of-sample weekly signals are available dating back to 2013, there is no actual portfolio return track record. However, a simulated strategy of using the out-of-sample signals to either overweight or underweight the S&P 500 by 20% around a 60% S&P 500 ETF (SPY) and 40% 7-10 year Treasury ETF (IEF) would have yielded significantly better returns with 60/40 like risk.

 
This week I review the model’s internals to reveal why I am bullish on equities.

The full post can be found here.