Sunday, April 28, 2024

Time to tiptoe back into Big Tech?

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 16-Apr-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.
 

Washed out Big Tech?

In discussions with investors, I have been asked if Are Big Tech has formed a bottom. Big Tech had been the leadership in the U.S. equity market. It’s an important group as it forms roughly 40% of the weight of the S&P 500. The NYSE FANG Plus Index staged an upside breakout out of a cup and handle pattern with long-term bullish implications. The index then pulled back and it’s bouncing off a relative support zone (bottom panel).

 
Is it time to tiptoe back into these stocks? What are the implications for the overall market in light of the outsized weight of Big Tech in the S&P 500?

The full post can be found here.

Saturday, April 27, 2024

Relax, it's just a mid-cycle expansion

The market adopted a risk-off tone when headline Q1 GDP came in lower than expected at 1.6%, compared to an expected 2.5%. More importantly, core PCE rose at an annualized rate of 3.4%, which was hotter than expectations and led to stagflation fears. Upon closer inspection, nominal GDP growth was dragged down by the combination of inventory adjustments and exports. Final sales, which is a better signal of economic growth, came in at 3.1%.
 
Greg Ip at the WSJ offered a constructive interpretation when he pointed out that the U.S. economy still accounts for 26.7% of global GDP, which is the highest level since 2006.
Investors should fade stagflation fears and embrace the “no landing” scenario. These conditions should be good news for risk assets. It’s what a mid-cycle expansion looks like.

The full post can be found here.

Wednesday, April 24, 2024

A V-shaped rebound, or dead cat bounce?

Mid-week market update: I presented this chart on the weekend and rhetorically asked if the inevitable market bounce would be durable. Since then, the S&P 500 rallied strongly off last Friday's oversold condition. In addition, the stochastic recycled from oversold to neutral, which is a tactical buy signal.
 

Does this mean the relief rally isn't a dead cat bounce, but a durable V-shaped rebound?
 
The full post can be found here.

Sunday, April 21, 2024

What's bothering the stock 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: Bullish (Last changed from “neutral” on 16-Apr-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 trifecta of woes

What’s bothering the stock market? Stock prices have had to contend with a trifecta of woes:
  • Fear of a hawkish pivot by the Fed;
  • Strong USD; and
  • Geopolitical risk and rising oil prices.
As a consequence, the bond market has weakened; the USD, which is affected by yield differentials and the safe-haven trade, has strengthened; oil prices surged in the wake of the Iranian missile attack on Israel and the Israeli counterstrike; and gold, which is another safe-haven trade, rallied and prices remain elevated.

The stock market is very oversold and ripe for a relief rally. The key question is: does the bounce represent a durable bottom or is there more downside ahead?

The full post can be found here.

Saturday, April 20, 2024

Are we in for a 1970's style inflation revival?

When Fed Chair Jerome Powell spoke at a moderated Q&A last Tuesday, he confirmed the higher-for-longer message of virtually all other Fed speakers: “The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence [to reduce rates]”.
 
As a consequence of the shift to a higher-for-longer narrative, different versions of this ominous CPI chart have been making the rounds. Could we be in for a 1970s-style inflation revival?
 

 

The full post can be found here.

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.