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.

New highs can beget more new highs

The Dow, S&P 500 and NASDAQ Composite all achieved new all-time highs last week. It is said that there is nothing more bullish than a stock making a new high. This is not a time for caution. Higher stock prices are ahead.

 Here are the reasons why I am bullish.
 

The full post can be found here.

How frothy is the stock market?

Mid-week market update: Now that the Dow, S&P 500, and NASDAQ Composite have risen to an all-time high on the back of a slightly softer than expected CPI report, and Keith Gill, otherwise known as Roaring Kitty, and the meme stock brigade is back, how frothy is this stock market? Just look at the surge in the meme stock favourite, GameStop (GME).

 

The full post can be found here.

5 reasons you may have not have thought of to be bullish

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 14-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 good overbought advance

The S&P 500 violated a rising trend line in early April and corrected. It appears to have formed a V-shaped bottom and it is resuming its advance by clearing a resistance and volume congestion zone. It’s also exhibiting a series of “good overbought” conditions on the 5-day RSI. The “good overbought” rally will be confirmed if and when the 14-day RSI becomes overbought and stays overbought.

 
Market internals are pointing to another sustained upleg in stock prices. Here are four other reasons why.
 

The full post can be found here.

Beware of the AI hangover

Artificial Intelligence (AI) related stocks have been on an absolute tear. The Magnificent Seven, which is one proxy for AI plays, has beaten the S&P 500 for six consecutive quarters. But the degree of outperformance is decelerating. This looks like the early stages of an AI hangover.

 
I believe AI stocks are overhyped short term but underhyped long term. Here’s why.

The full post can be found here.

A new breadth thrust buy signal?

Mid-week market update: Bulls were disappointed when the Zweig Breadth Thrust buy signal didn't achieve its objective when the ZBT Indicator failed to rise from oversold to overbought in 10 trading days. But they received a consolation when it reached a late overbought reading on Monday, which was two days late.

 

 

Do the two extra days matter? Is this a sort or, kind of, breadth thrust buy signal?

 

The full post can be found here.

What's driving stock prices right now?

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.

 

Key drivers

What are the key drivers of stock prices? There are some factors to keep an eye on:

• Interest rates;
• Geopolitical risk; and
• The earnings outlook.

The full post can be found here.

Value or growth? Here's an analytical framework for decision making

Should you be a value or growth investor?

The accompanying chart shows the historical record. In the last 20 years, growth has handily beaten value. The U.S. value/growth track record closely tracked the international developed value/growth record until 2023, when AI-related plays in the U.S. went on a tear. Such stocks weren’t readily available in non-U.S. markets.

Does that mean you should continue to bet on growth investing or are value stocks about to have their day? Here an analytical framework to think about the value/growth paradigm.
 

The full post can be found here.

Macro events have been big nothingburgers

Mid-week market update: The big macro events of this week hasn't really moved the needle on risk appetite. The market didn't react much to the Quarterly Refunding Announcement detailing the schedule of Treasury issuance. The JOLTS report showed slightly weaker than expected job openings, but quits and layoffs declined as well, indicating a general deceleration in the labour market.

 

The FOMC decision came in slightly more dovish than expected, as the Fed reduced the rate of quantitative tightening a little more than expected. This should reduce any headwind that equities may face from a reduction in banking system liquidity.

 

The full post can be found here.