Wednesday, April 17, 2024

Oversold enough for a bottom?

Mid-week market update: I wrote on the weekend that conditions were setting up for a panic bottom (see Here comes the sentiment flush), but one final flush may be necessary to spark a relief rally. The S&P 500 has now achieved the milestones for a panic bottom. The stochastic is sufficiently oversold. The index violated its 50 dma and it's now filling the February 22nd gap after the strong NVIDIA earnings report, which represents a secondary support level.
 
 
The key questions are:
  • Is this a bottom?
  • If this is a bottom, is it a durable bottom or just a bounce before prices weaken further?
The full post can be found here.

Sunday, April 14, 2024

Here comes the sentiment flush

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: Bearish (Last changed from “neutral” on 15-Mar-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.
 

Is the decline over?

Last week, I pointed out that the S&P 500 violated an uptrend that began in November. The violation resolved with the index is testing initial support at the 50 dma at about 5110. Secondary support can be found at the upside gap in the wake of the last NVIDIA earnings report at roughly 5000 and strong support at the breakout level at about 4800.

The decline may not be done. The stochastic recycled from overbought to neutral, which is a tactical sell signal, but hasn’t quite yet reached an oversold level. I am inclined to look for an oversold reading before turning more constructive on stock prices after a major trend break.

The full post can be found here.

Saturday, April 13, 2024

How expensive are US equities?

How worried should equity investors be about valuation? The S&P 500 is trading at a forward P/E of 20.6, which is elevated compared to its 5-year average of 19.1 and 10-year average of 17.8. Moreover, the 10-year Treasury yield of 4.5% is becoming a more attractive alternative to owning stocks.


 
Here are the bull and bear cases.
 
The full post can be found here.

Wednesday, April 10, 2024

Goodbye to June, hello September

Mid-week market update: In the wake of the hot CPI print and the doubts raised by members of the FOMC as shown in the minutes, such as:
Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations. However, a few participants noted that residual seasonality could have affected the inflation readings at the start of the year. 
In addition...
Several participants noted that the disinflationary pressure for core goods that had resulted from the receding of supply chain bottlenecks was likely to moderate.
As a consequence, the market's expectations of the first rate cut has been pushed out to September, with only two cuts in 2024.



The full post can be found here.

Saturday, April 6, 2024

How serious is the market's trend break?

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: Bearish (Last changed from “neutral” on 15-Mar-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.
 

What rotating correction?

It finally happened. I’ve been warning about the extended nature of the market advance since late January, and the pullback seems to have begun. The S&P 500 violated a rising trend line that stretches back to November last Thursday. Friday’s market rebound didn’t help as it left the index below the rising trend line.

At the same time, market breadth hadn’t broadened out since mid-January. While I had hopes that market weakness in one group would be offset by strength in another, the rotating correction scenario isn’t working out.
 
Initial support for the S&P 500 can be found at the 50 dma at about 5080, with secondary support at the NVIDIA earnings report price gap at around 5000 and strong support at the breakout turned support at about 4800.

 The full post can be found here.

Looking for inflation in all the wrong places

Last week, I suggested that even though Fed Chair Powell voiced a balanced view of inflation, a voting bloc of hawks (Waller, Bostic, Barkin, and Bowman) on the FOMC may be a key obstacle to the market expectations of a June rate cut. Indeed, Atlanta Fed President Raphael Bostic reiterated his view last week of one rate cut in 2024 and the first cut should occur in Q4.

Based on the speeches of Fed speakers, a divide of opinion is appearing in the FOMC. On one hand, Fed Chair Powell has said that January and February PCE reports represent a bumpy path to the Fed’s 2% inflation target, hawks such as Governor Waller have raised concerns about the persistence of inflation and asked, “What’s the hurry [to cut rates]?”

As well, Chicago Fed President Goolsbee revealed that he wrote down two rate cuts for 2024 in his dot plot projection, which is a surprise as he has been regarded as a dove. Moreover, he stated that if inflation continues to move sideways, it raised doubt as to whether the Fed should cut at all. Minneapolis Fed President Kashkari also revealed that he wrote down two rate cuts for 2024, and also openly wondered if the Fed needs to cut if progress on inflation stalls.

Is it time to say goodbye to a June rate cut? What about the expectation of three cuts this year?
As a reminder, the Fed targets headline PCE as its main inflation metric. Both headline and core PCE rose in January and February after a series of tame readings in late 2023. The key question that concerns Fed officials is the last mile inflation question. How persistent is inflation and what’s the path to the 2% target? Investors may gain some insights from the FOMC meeting minutes, which are due to be released in the coming week.

 

The full post can be found here.

Wednesday, April 3, 2024

Guideposts to a deeper pullback

Mid-week market update: The S&P 500 hasn't seen a 2% pullback since the rally off the November bottom, but is a deeper pullback starting? Stephen Suttmeier at BoA wrote that the index is testing an initial objective in the 5200s, with further upside in the 5600s. This would be an ideal spot for the market to pause.
 

 Here are some guideposts to a deeper pullback.
 
 The full posts can be found here.

Sunday, March 31, 2024

The stock market's Q2 challenges

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: Bearish (Last changed from “neutral” on 25-Mar-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 "good overbought" condition

Happy Q1 quarter end!

The S&P 500 ended the quarter exhibiting a series of “good overbought” conditions on the 5-week RSI, which are signals of strong momentum. It’s impossible to know when such bull runs end. If history is any guide, they usually resolve with a correction or consolidation once the momentum fades.


Can the momentum continue into Q2?

The full post can be found here.

Friday, March 29, 2024

Why the first Fed rate cut will be later than June

Sometimes being Fed Chair is a trying job. During the last post-FOMC press conference, Powell was given numerous opportunities to interpret the data in a hawkish fashion. Instead, he took a dovish tone.

As one of many examples, Jenna Smialek of the New York Times asked if strengthening in the labour market would be a reason to hold off on rate cuts. Powell’s response was, “No, not all by itself no.”
 
Even as Powell sounded a dovish tone, and markets took a risk-on tone as a relief that the median dot plot is still forecasting three rate cuts for 2024, not all is dovish within the FOMC. An analysis of how the 2024 dot plot evolved between December and March shows a mildly hawkish tone. Even though the median stayed at three cuts, the average fell and the distribution became far less dovish than the December projections.
 
The opinion of individual members of the FOMC has become more hawkish. If Powell needs to achieve a consensus for a rate cutting decision, it was be as difficult as herding cats.
 
 
The full post can be found here.

Wednesday, March 27, 2024

Lucy and the correction football

Mid-week market update: Since January, I have been saying that the stock market is extended and could pull back at any time. The latest conditions shows that the S&P 500 is consolidating sideways after pulling back from above its upper Bollinger Band. The stochastic has recycled from overbought to neutral, which is a tactical sell signal.
 

But the correction scenario could be a replay of the story of Lucy, Charlie Brown, and the football.

The full post can be found here.

Sunday, March 24, 2024

This bull run is nowhere near finished

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: Bearish (Last changed from “neutral” on 25-Mar-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.
 

Market structure review

This week I present a review of the overall market structure, starting from a long-term perspective and gradually shortening the time horizon.

I am  bullish on stock prices, as evidenced by the positive MACD histogram of the NYSE Composite that acts as a buy signal. In the past, such buy signals are long lasting and the bull run can stretch into years.
 
 
The full post can be found here.

Saturday, March 23, 2024

The investor's cyclical mystery

Copper is a cyclically sensitive metal that was given the moniker of Dr. Copper, because it is said to have a Ph.D. in economics because of its ability to forecast global economic trends. Its recent breakout from a 10-month base excited a lot of people. Similarly, the turnaround in the relative performance of materials stocks was interpreted as a cyclical green shoot.

On the other hand, the sideways pattern of the copper/gold ratio gave a different message of economic stagnation. Both copper and gold are metals with inflation hedge properties, but copper is more cyclically sensitive. The copper/gold ratio acts as a cyclical indicator to filter out the inflation sensitivity of changes in metal prices.

Therein lies the mystery. Are the markets signaling a cyclical rebound, or not? 

The full post can be found here.

Wednesday, March 20, 2024

It's all about expectations

Mid-week market update: Four weeks ago, I published NVIDIA at the bat, in which I discussed the market expectations for leading AI stock NVIDIA ahead of its earnings report. NVIDIA came out with a strong report that exceeded Street expectations, and the stock reacted with a price gap the following day.
 

Fast forward a month. The company unveiled its new chip and the market reaction was a thud. In fact, the AI bellwether Semiconductor Index weakened and violated a relative uptrend channel (bottom panel). This was a lesson in expectations, how the market reacted to incoming data, and how expectations evolve.

The full post can be found here.

Sunday, March 17, 2024

The stealth breakout you may have missed

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 24-Jan-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 convincing breakout at 2100

My recent publication highlighting the opportunity in gold mining stocks worked out better than expected (see How gold miners could be a refuge from the YOLO and FOMO frenzy). The gold miners’ ETF (GDX) is up slightly over 10% in under two weeks.

While GDX may be a little extended in the short run, I would like to point out the long-term potential in gold. Gold has staged a convincing upside breakout from a multi-month cup and handle formation. Moreover, the gold-to-S&P 500 ratio (bottom panel) is turning up from a multi-year saucer-shaped bottom, indicating the possible start of a new relative bull for gold over stocks. As well, the breakout has occurred with little fanfare as investors have been focused on AI and GLP-1 plays. This combination of breakout and lack of public participation suggests a substantial upside potential.

 
 The full post can be found here.

Friday, March 15, 2024

A reply to Grantham's AI warning

Well-known value investor Jeremy Grantham recently penned an essay titled, “The Great Paradox of the U.S. Market”, in which he warned, “Prices reflect near perfection yet today’s world is particularly imperfect and dangerous”.

In particular, he sounded the alarm over the bubble in AI stocks and cited the Gartner Hype Cycle as the main reason for caution:
 
But every technological revolution like this – going back from the internet to telephones, railroads, or canals – has been accompanied by early massive hype and a stock market bubble as investors focus on the ultimate possibilities of the technology, pricing most of the very long-term potential immediately into current market prices. And many such revolutions are in the end often as transformative as those early investors could see and sometimes even more so – but only after a substantial period of disappointment during which the initial bubble bursts. Thus, as the most remarkable example of the tech bubble, Amazon led the speculative market, rising 21 times from the beginning of 1998 to its 1999 peak, only to decline by an almost inconceivable 92% from 2000 to 2002, before inheriting half the retail world!


As much as I respect Grantham’s investment insights, he suffers from the value investor problem of being too early and overly reliant on valuation for his views. I reiterate my view that it’s still early in the bull cycle for AI stocks (see The Path to Magnificent Exuberance). Here’s why.
 
The full post can be found here.

Wednesday, March 13, 2024

Waiting for the recycle amidst an elevated tail-risk backdrop

Mid-week market update: Marketwatch recently highlighted analysis from NDR which concluded that sentiment was extended and while it may make sense to be cautious about adding risk, it's too early to turn tactically bearish until readings recycle from an overbought condition.
 

I agree. I've been saying the same thing for several weeks. A correction or pullback is on the horizon, but hasn't arrived yet. While signs of technical deterioration are appearing, a sideways consolidation marked by a rolling correction is very possible.
 
Here are the indicators that I've been watching, some of which have recycled and some have not.

The full post can be found here.

Sunday, March 10, 2024

A Hindenburg Moment for growth stocks?

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 24-Jan-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.
 

NASDAQ Hindenburg warnings

I have been concerned about the extended and frothy nature of the advance in growth stocks. Worries came to a head when the Semiconductors Index rallied through and reversed though an upward trending relative performance channel, indicating a possible blow-off top. Beneath the hood, however, market internals are signaling breadth deterioration for NASDAQ stocks that warn of an impending corrective downdraft.


The ominous sounding but controversial Hindenburg Omen was designed by James Miekka to spot major market tops, though it purportedly only has many false positives and a success rate of 25%. The indicator looks for the combination of an increasingly bifurcated market, as measured by breadth divergences, and a downside momentum break from an uptrend.

NASDAQ stocks have been flashing Hindenburg Omens starting in January and the warnings continued into February. While the signal isn’t perfect, the history of such clusters in the last 10 years has usually resolved in declines, shown as pink bars), while the instances of false positives (grey bars) have been relatively low.


The full post can be found here.

Saturday, March 9, 2024

Doesn't Fed policy matter to stocks anymore?

During Fed Chair Powell’s testimony to the Financial Services Committee of the U.S. House of Representatives, he said that it will likely be appropriate to begin cutting rates “at some point this year”. At the same time, he reiterated the message that other Fed officials sent to the markets that the Fed is not ready yet. The messaging has been the same and uniform by almost all speeches by Fed officials. The economy and labour market are strong. Central bankers have time to wait for more evidence that inflation is headed back to the 2% goal before cutting rates.

Market expectations of the timing of the initial rate cut have evolved from March to May in the past few weeks. At the same time, stock prices have rallied and they rallied in response to Powell’s testimony. 
 
Doesn’t Fed policy matter to stocks anymore?
 

The full post can be found here.

Wednesday, March 6, 2024

Mind the gaps

Mid-week market update: In the short run, how the market reacts after price gaps can be important clues to market psychology and direction. How quickly the market fills a gap is a measure of either strength or weakness.
 
As accompanying hourly chart of the S&P 500 shows, we have price gaps everywhere (upside gaps in grey, downside gap in pink). In particular, the price gap in reaction to the NVIDIA earnings report sticks out the most.


Here is how I interpret the gaps.

The full post can be found here.

Monday, March 4, 2024

How gold miners could be a refuge from the YOLO and FOMO frenzy

I wrote yesterday that the stock market has been gripped by a YOLO (You Only Live Once) and FOMO (Fear of Missing Out) madness. I can suggest a possible refuge: gold and gold miners.

Gold prices recently made a fresh high last week, but the breakout was not decisive to be judged as unabashedly bullish for the yellow metal. The technical pattern was nevertheless highly constructive as it’s tracing out a possible cup and handle formation. In addition, the inflation expectations ETF (RINF), which measures 30-year bond market inflation expectations, is upward sloping and confirms gold’s uptrend.

 The full post can be found here.

Sunday, March 3, 2024

How to trade the YOLO and FOMO 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: 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 24-Jan-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 YOLO and FOMO market

Another week, another all-time high for the S&P 500 and NASDAQ Composite. The U.S. market has been infected with the FOMO (You Only Live Once) and FOMO (Fear of Missing Out) sentiment viruses while numerous macro and technical warnings have appeared.

As an example, Bitcoin prices have soared. Historically, Bitcoin has been correlated with the relative performance of the ARK Innovation ETF (ARKK), which is a bellwether for speculative growth stocks. This time, ARKK hasn’t risen as much. Is this a positive or negative divergence?

 
The full post can be found here.

Saturday, March 2, 2024

Are you ready to be a contrarian cigar butt investor?

How would you feel about a star value manager with the track record shown in the chart below. While he beat the market in the wake of the dot-com bubble, he has only matched the performance of the S&P 500 since 2011. To be sure, he did beat his style benchmark (second panel).
 
The star manager is none other than the legendary Warren Buffett and the chart shows the relative performance of Berkshire Hathaway’s stock price relative to the S&P 500 and the Russell 1000 Value Index. Buffett’s best known recent win was his purchase of Apple in 2016 which became his largest holding, and whose relative returns are shown in the bottom panel.

 
I examine how he achieved his results, and offer studies of sources of alpha as examples of different investing styles.

The full post can be found here.

Wednesday, February 28, 2024

How extended is this market?

Mid-week market update: I have said before that the stock market is extended in its advance and it could pull back at any time. How extended? Here is another metric.
 
Bollinger Bands (BB) are overbought/oversold indicators. If a stock or index rises above its 2 standard deviation BB. it is said to be overbought. Standard calculations of BBs are based on a 20 dma. It's unusual to see the market rise up above its upper 200 dma BB. The S&P 500 recently reached 110% above of its upper BB. The history of such episodes (pink bars) show that it usually pulls back soon afterwards. There were only two exceptions since 1997 when the market experienced a sustained uptrend (shown by arrows).


 
The full post can be found here.

Sunday, February 25, 2024

Did the NVIDIA-fueled rally exhaust the bulls?

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 24-Jan-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.


NVIDIA’s week

The main market focus of last week was NVIDIA. Anticipation was building ahead of the company’s earnings report and option positioning was extremely bullish. In the end, the bulls were rewarded by a blowout report. NVIDIA’s stock surged and pulled the market up with it.

However, the advance was marred by poor internals. The rally in the S&P 500 took it to the top of its Bollinger Band, but it’s rare that upper BB rides are accompanied by negative RSI divergences and poor participation. Moreover, it’s unusual to see the market rally to an all-time high with the NASDAQ Summation Index flat when it should have been a source of strength.
 
 
The full post can be found here.

Saturday, February 24, 2024

The path to Magnificent Exuberance

Signs of technical deteriorations had been appearing last week, but NVIDIA’s earnings report saved the day. The earnings report can best be described as a blowout. The results beat Street expectations on all metrics and the company guided upwards. There wasn’t anything not to dislike about the report. As a consequence, the Semiconductor Index, which is a bellwether for artificial intelligence (AI) related plays, rallied strongly after briefly testing the lower bound of its absolute and relative return rising channels.


Even though some excesses are appearing, I reiterate my view that the AI bubble has far more room to run before it reaches the phase of Magnificent Exuberance (see Why this AI bull is nothing like the NASDAQ in 2000).

The full post can be found here.

Wednesday, February 21, 2024

NVIDIA at the bat

Mid-week market update: The poem "Casey at the Bat" may represent an apt analogy for today's stock market (see Wikipedia entry if you're unfamiliar with it). Technical warnings signs had been appearing. The S&P 500, the NASDAQ 100, and the Semiconductors Index, which is a bellwether for AI-related plays, had all weakened and violated their 10 dma. Even the Russell 2000 small cap index, which is largely unrelated to AI market factors, weakened below its 10 dma. 


 
Much like the story in the poem, it was up to Casey (NVDIA), mighty Casey (NVIDIA) to pull the team out at the end.
 
The full post can be found here.

Sunday, February 18, 2024

Are negative divergences necessarily 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 24-Jan-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.



Divergences everywhere

From a technical perspective, divergences may not matter in the short term, but long-term divergences are particularly worrisome. 

The accompanying chart shows a series of long-term divergences that are concerning. Even as the S&P 500 rallied to all-time highs, the NYSE Advance-Decline Line did not confirm the fresh high. The relative performance of high beta to low volatility stocks, which is an indicator of equity risk appetite, is barely testing its overhead resistance. In the meantime, the 10-year Treasury yield (inverted scale) has been climbing and higher yields offer an increasingly more attractive alternative for investors. And the USD, which is historically inversely correlated to the S&P 500, has been rallying and creating headwinds for stock prices.
 
 
How concerned should investors be about these divergences?
 
The full post can be found here.

Saturday, February 17, 2024

Is transitory disinflation here to stay?

I’ve discussed the risk of transitory disinflation before, and it manifested itself in the form of hotter-than-expected January CPI and PPI reports. The reports rattled the bond market and expectations of the first quarter-point rate cut has been pushed out from May to June and a slower rate cut trajectory for the remainder of year.



As a reminder, here is Fed Chair Powell reply in to a question about the timing of rate cuts in his 60 Minutes interview: “We just want to see more good [inflation] data along those lines. It doesn't need to be better than what we've seen, or even as good. It just needs to be good. And so, we do expect to see that.” 
 
The hot CPI report was undoubtedly a shock to Fed officials who had watching a series of tame inflation reports.

The latest BoA Global Fund Manager Survey showed that only 4% of respondents expect higher rates and 7% expect higher inflation. It was therefore no surprise that bond prices skidded badly in the wake of the CPI report.
 

Do the stronger-than-inflation reports mean a pivot to a “higher for longer” narrative? Here are bull and bear cases.
 
The full post can be found here.

Wednesday, February 14, 2024

A hiccup, or the start of a correction?

Mid-week market update: The hot CPI print on Tuesday spark a massive risk-off episode. The S&P 500 staged a partial recovery today. The key question is, "Is this just a hiccup in the bull run, or the start of a correction?"
 
The stock market has been ripe for a correction for some time. The percentage of bullish stocks on P&F charts has flashed a negative divergence, which has usually resolved in a market downdraft.

 
The full post can be found here.

Sunday, February 11, 2024

Why this AI bull is nothing like the NASDAQ in 2000

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 24-Jan-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.



Priced to the point of insanity?

You may have seen the charts of the relative performance of the NASDAQ 100 to S&P 500. The ratio has already exceeded the dot-com peak in 2000. In addition, NYU professor Aswath Damodaran, who is regarded as the dean of company valuations, went on CNBC to say that Nvidia is priced “to the point of insanity”, while the other Magnificent Seven stocks are roughly fairly priced.


 
While the latest AI-driven mania may seem stretched by historical standards, we would argue that it has a lot further to run before the AI bull is done.
 
The full post can be found here.