Sunday, June 16, 2024

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.

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