Wednesday, November 15, 2017

An orderly retreat, but getting oversold

Mid-week market update: After several weeks of waiting, evidence of near-term weakness and consolidation is finally appearing. The SPX violated an uptrend this week and it is undergoing a retreat or a period of sideways consolidation.



Until today, this orderly retreat in stock prices was enough to depress stock prices, but not enough to flash oversold readings. Today`s decline, however, is beginning to spark oversold readings, indicating that a tradeable bottom may occur in the next few days.

The full post can be found at our new site here.

Monday, November 13, 2017

Nervous about FANGs? Here is a washed-out high beta opportunity

Are you getting nervous about the FANG stocks? The debut of the FANG+ futures contract may mark a top for this group, as it presents an easy vehicle for hedgers to short these high beta stocks. But don't despair, consider this chart of the relative performance of a high beta group that is washed-out, and may present an opportunity for investors and traders who missed out on the FANG move.



Would you buy this?

The full post can be found at our new site here.

Sunday, November 12, 2017

The tax reform jitters correction?

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bearish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Tax reform jitters
This was the week that jitters over the Republican tax bill finally caught up with stock prices. Now that both the House Republicans and Senate Republicans have different versions of a tax bill, the market is waking up to the challenges ahead.
  • Both Houses of Congress have to reconcile their bills, which may not be easy. Further bargaining lies ahead, which has the potential to dilute the bullish effects of any corporate tax cuts.
  • Any bill will have to overcome the twin Byrd Rule hurdle of $1.5 trillion in incremental deficit in the next 10 years, and no further deficits after 10 years. Any violation of the Byrd Rule would require 60 votes in the Senate, which would be challenging as the GOP only has a 52-48 seat majority.
  • The Roy Moore scandal is creating additional uncertainty, as a Moore loss in the December special election in could cut the Republican majority to a single vote in the Senate.
Even before stock prices got spooked, the market showed signs it was ready to go down. There were cautionary signals from risk appetite indicators, which signaled rising skepticism over the passage of any tax bill. The top panel depicts the relative performance of high beta vs. low volatility stocks as a metric of risk appetite. Risk appetite perked up in September as the odds of a tax cut became more likely, then flattened out into a range. This pair broke down through a relative support on Friday. The other pairs show the relative performance of "champagne" stocks Sotheby's (BID) and Tiffany's (TIF) against the market. The "champagne" stocks have been underperforming the market for the last few months, which is another sign of market skepticism that much was going to be accomplished on the tax bill.


As well, the latest update from John Butters of FactSet shows that the market reaction to earnings reports may be showing signs of bullish exhaustion. EPS beats were barely being rewarded, while misses were severely punished (annotations are mine).



The full post can be found at our new site here.

Wednesday, November 8, 2017

The market's report card on the GOP tax bill

Mid-week market update: The price action of stocks in the last few weeks makes it evident that US equities are awaiting the resolution of the Republican tax bill. This week will be critical for the progress of the bill through the House, as it is scheduled to be marked up in the Ways and Means committee. So far, the market verdict is not hopeful.

As the top panel of the chart below shows that high beta/low volatility pair, which is a proxy for risk appetite, rallied in September, followed by a range-bound market, indicating a lack of conviction. The bottom panel shows that this market has been mainly driven by momentum stocks.



Other market internals are also flashing warning messages for the bulls. From a political perspective, the tax bill is also running into trouble. These are all signs of likely corrective action ahead.

The full post can be found at our new site here.

Sunday, November 5, 2017

Bull or bear?: It depends on your time horizon

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bearish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Tops are processes
It is said that while market bottoms are events, which are sparked by emotional panic selling, tops are processes, which are the result of a series of connected episodes that depress prices. In the past few months, I have adopted the belief that the market is undergoing a topping process. Consequently, I become increasingly cautious about the stock market, though I do not believe that the ultimate top has been seen yet.

Here is what we know about the market on an intermediate term time frame:
  • Positive momentum: The market has been supported by strong price, fundamental, and macro-economic momentum. Most macro models show that the risk of recession is low or nonexistent.
  • Valuation: Valuation is stretched.
  • Sentiment: Sentiment has been frothy, which is contrarian bearish.
  • Technical: The pre-conditions for an intermediate or long-term top are not yet in place.
  • Short-term outlook: Much depends on the fate of the GOP tax bill and the market's evaluation of other sources of risk, such as the Middle East.
Under these conditions, an investor could be either bullish or bearish and be correctly positioned. It just depends on the investment time horizon.

The full post can be found at our new site here.

Wednesday, November 1, 2017

A market volatility update

Mid-week market update: In my weekend post (see Good news, bad news from Earnings Season), I had identified several sources of potential market volatility this week:
  • Mueller indictments
  • GOP tax plan
  • FOMC decision
  • Fed chair nomination
  • Key macro-economic reports
It's time for an update, and it spells caution for the bulls.

The full post can be found at our new site here.

Tuesday, October 31, 2017

Things you don't see at market bottoms: Halloween edition

It is said that while bottoms are events, but tops are processes. Translated, markets bottom out when panic sets in, and therefore they can be more easily identifiable. By contrast, market tops form when a series of conditions come together, but not necessarily all at the same time.

I have stated that while I don't believe that the stock market has made its final cyclical top, we are in the late stages of a bull market (see Risks are rising, but THE TOP is still ahead and Nearing the terminal phase of this equity bull). Nevertheless, psychology is getting a little frothy, which represent the pre-condition for a major top. This is just another post in a series of "things you don't see at market bottoms". Past editions of this series include:
As a result, I am publishing another edition of "things you don't see at market bottoms".

The full post can be found at our new site here.

Sunday, October 29, 2017

Good news, bad news from Earnings Season

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bullish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Good news and bad news
We are about halfway through Q3 earnings season, and the market saw its share of ups and downs last week.


The market rallied to fresh highs on Friday, and leadership was provided by large cap FAANG stocks. Beneath the surface, there was a mixture of both good news and bad news for investors.

The full post can be found at our new site here.

Wednesday, October 25, 2017

Minor turbulence ahead

Mid-week market updateThe SPX has been on an upper Bollinger Band (BB) ride on the weekly chart, and I have been waiting for a downside break on the weekly RSI-14 indicator as the signal that a correction is starting. Current readings show that the weekly RSI has not broken down below 70 tet.



However, a downside break could also be seen on the daily chart. RSI-5 has broken down below 70, which is a short-term sell signal. RSI-14 has also followed suit, which is another bearish sign. The index also experienced a bearish engulfing pattern on Monday, which is potentially ominous.





The full post can be found at our new site here.

Monday, October 23, 2017

Peak FANG?

I had been meaning to write about this topic, but Barron's beat me to it with a terrific article called "Breaking up Tech" which detailed the anti-trust vulnerability of Big Tech companies. The Barron's article stands in direct contrast to a recent Josh Brown post which postulated that investors are rushing into the technology sector as a hedge against the obsolescence of their own skill sets:
A 45 year old married father of two with a mortgage and a pair of college educations to fund. The remote yet persistent threat of a nuclear war is not what keeps him up at night. In fact, he might almost see it as a relief should it come. He is a bundle of raw nerves, and each day brings even more dread and foreboding than the day before. What’s frying his nerves and impinging on his amygdala all day long is something far scarier, after all. He, like everyone else, is afraid that he doesn’t have a future.

He is petrified by the idea that the skills he’s managed to build throughout the course of his life are already obsolete...

We could be in the midst of the first fear-based investment bubble in American history, with the masses buying in not out of avarice, but from a mentality of abject terror. Robots, software and automation, owned by Capital, are notching new victories over Labor at an ever accelerating rate. It’s gone parabolic in recent years – every industry, every region of the country, and all over the world. It’s thrilling to be a part of if you’re an owner of the robots, the software and the automation. If you’re a part of the capital side of that equation.

If you’re on the other side, however – the losing side – it’s a horror movie in slow motion.

The only way out? Invest in your own destruction. In this context, the FANG stocks are not a gimmick or a fad, they’re a f***ing life raft. Market commentators rhetorically ask aloud what multiple should investors pay to own the technology giants. That’s the wrong question when people feel like they’re drowning.

What multiple would you pay to survive? Grab a raft.
Who is right?

The full post can be found at our new site here.

Sunday, October 22, 2017

Beware the expiry of the 19th Party Congress Put option

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bullish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


A China-led reflationary recovery?
Copper and industrial metal prices have been on a tear lately. Prices bottomed out in early 2016, and the latest rally has seen a recovery to levels last seen in 2014.



China is a major driver of commodity demand, and her economic growth has been surging recently. It is therefore no surprise that copper and industrial metal prices have been soaring.


The latest upside surprise in Chinese PPI prompted David Ingles at Bloomberg to ask if China is leading a bout of global reflation.



Callum Thomas at Topdown Charts also observed that China is at the epicenter of the global reflation theme.


The developed markets are also experiencing a synchronized upswing.



On the other hand, China is currently holding its 19th Party Congress. It doesn't take a genius to understand that any bureaucrat who creates conditions that causes either a growth slowdown or financial instability during this critical period will have made his own life very difficult. In effect, Beijing has given a 19th Party Congress put option to the market, where nothing bad would be permitted to happen to the economy ahead of the meeting.



Skeptics could therefore ask if the current growth revival is real, or window dressing ahead of the Party Congress. What happens after the expiry of the 19th Party Congress Put as the meeting winds up next week?

The full post can be found at our new site here.

Wednesday, October 18, 2017

A continued grind upwards

Mid-week market update: I wrote last weekend that there was a possibility that the stock market may undergo a melt-up, followed by a crash (see Market melt-up and crash?). That scenario may well be occurring, and I sent out an email to subscribers on Monday stating that my trading account had moved from all-cash to being long stocks.

There are a number of reasons for my tactical position. First, I had set a line in the sand on the weekend. The SPX was overbought, as evidenced by the combination of a weekly close above the upper Bollinger Band, and RSI-14 above 70. In the past, a mean reversion of RSI-14 below 70 was a signal for a correction of 2-5%. That sell signal has not occurred yet.



In fact, RSI-14 has not even mean reverted below 70 on the daily SPX chart.



The full post can be found at our new site here.

Tuesday, October 17, 2017

What would a Taylor Fed look like?

Bloomberg reported that Donald Trump interviewed John Taylor for the position of Fed chair and "Trump gushed about Taylor after his interview", as "Kevin Warsh has...seen his star fade within the White House". The current list of leading candidates under consider are said to be Jerome Powell, John Taylor, Kevin Warsh, and Janet Yellen. Taylor's rise in the candidate stakes is a bit of a surprise, as he had been regarded as a dark horse.

The question for investors is, "What would a Taylor Fed look like?"

Taylor is famous for the "Taylor Rule", which is a rules-based method of determining the Fed Funds rate. The rules-based approach is a favorite of the Republican audit-the-Fed crowd, and therefore Taylor will have substantial support should he get nominated. The standard application of the Taylor Rule would see the Fed Funds target substantially higher than it is today.


Despite these dire projections, Matthew Boesler at Bloomberg argued that a Taylor led Fed would not be substantially different from a Yellen Fed, because Taylor would have difficulty bringing the members of the FOMC to such a hawkish tilt to monetary policy:
Resistance from the other participants on the rate-setting Federal Open Market Committee, which currently numbers 16 participants, is why investors need not worry too much about Chairman Taylor leading the Fed onto a much faster rate-hike path than the three rate increases next year penciled in by officials in quarterly forecasts updated in September.

“Taylor would have a very hard time persuading the rest of the FOMC to abide by the prescriptions of his original rule,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington. “In fact, he won’t be able to persuade hardly anyone -- there isn’t much sympathy in the FOMC for a policy that blindly follows rules.”
On the other hand, uber-dove Neel Kashkari of the Minneapolis Fed argued that the application of a Taylor rule would have kept millions out of work:
In December, I wrote an op-ed in the Wall Street Journal explaining that forcing the Federal Open Market Committee (FOMC) to mechanically follow a rule, such as the Taylor rule, to set interest rates can cause tremendous harm to the economy and the American people. My staff at the Minneapolis Fed estimates that if the FOMC had followed the Taylor rule over the past five years, 2.5 million more Americans would be out of work today. That’s enough to fill the seats at all 31 NFL stadiums simultaneously, almost 6,000 more people out of work in every congressional district.
Who is right? How should we assess John Taylor as a potential Fed chair?

The full post can be found at our new site here.

Sunday, October 15, 2017

Market melt-up and crash?

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bullish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


The challenges of a late cycle bull
I have been making the point that the American economy is in the late stages of an expansion. This presents some investment challenges as an inflection point may be near. As the chart below shows, while every equity downdraft has not signaled a recession, every recession has seen an equity bear.


The question is, "How far away are we from a recession?" I try to answer that question this week by focusing on three components of the economy using the leading indicators in my Recession Watch Monitor:
  • The household sector;
  • The corporate sector; and
  • Monetary conditions.
Further, I analyze the nowcast of the economy and the market outlook from both macro and technical viewpoints. The market may be setting for a scenario where stock prices melt-up, followed by a market crash of unknown magnitude.

The full post can be found at our new site here.

Wednesday, October 11, 2017

Peak small cap tax cut euphoria?

Mid-week market update: The intermediate term technical trend remains bullish, it`s hard to argue with the strong momentum that the market has displayed. Ari Wald recently pointed out that the market is experiencing a "good overbought" condition (my words, not his) that has the potential to carry the market much higher.


However, the current market environment may be setting up for a short correction. The SPX is trading above its upper weekly Bollinger Band (BB). Past episodes, when viewed in isolation, have been relative benign. The market has either continued grind upwards, or move sideways. That said, I am monitoring the weekly RSI-14 indicator when the market is above its upper BB. Past breaks below the 70 after an overbought reading have seen the market pull back. (Note that the weekly RSI reading remains above 70, and therefore no sell signal has been generated.)



I am watching the evolution in small cap leadership, which may be in the process of breaking down. Such a development could be a signal of near term market weakness.



The full post can be found at our new site here.

Monday, October 9, 2017

The VIX also rises

Deep in the recesses of my memory from my youth, I recall reading an Ernest Hemingway quote that went something like this:
How did you go bankrupt?
Two ways. Gradually, then suddenly.

From The VIX Also Rises
The VIX closed at an all-time low last week. Anyone who bought volatility in the last couple of years would have suffered the same fate outlined in the Hemingway novel.



To be sure, there are good reasons for the VIX decline. One reason is the drop in pair-wise correlation between stocks. When this happens, the diversification effect of owning different stocks rises, which depresses index volatility relative to individual stock volatility.



It isn't just the VIX, but the volatility of other asset classes have also fallen. The MOVE Index, which measures interest rate volatility, is also at depressed levels.


Charlie Bilello recently asked if shorting volatility is a free lunch. The answer is an emphatic "no", because traders who take on that trade have to live with the possibility of 90%+ drawdowns. Bilello went on to state that drawdowns from a short VIX position "is not a question of if but when", though he was silent on the timing, or the trigger for such an event.


With overall realized volatility at historically low levels across all asset classes, the trigger for a VIX spike might come from a non-equity asset class.

The full post can be found at our new site here.

Sunday, October 8, 2017

Is 3% for 6 months enough to take equity risk?

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 Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
* 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 and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


A lukewarm buy signal
Mark Hulbert recently updated the market forecast of former Value Line research director Sam Eisenstadt. Eisenstadt has had a remarkable record of forecasting equity returns, according to Hulbert.
The reason to take this projection seriously is Eisenstadt’s track record. Consider a statistic known as the r-squared, which measures the degree to which one data series predicts or explains another. If the first series perfectly predicted the second, the r-squared would be 1.0; if the first series had absolutely no predictive ability the r-squared would be zero.

For the data plotted in the chart below, the r-squared is 0.31, which is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine. Though you might be disappointed that this r-squared isn’t higher, you should know that most of the models that get attention on Wall Street and in the financial press have r-squareds that are far lower—if they’re not actually zero.

Eisenstadt`s latest six month SPX forecast is 2620 to 2640, which represents a gain of about 3%. The chart shows Eisenstadt`s forecasts, as documented by Hulbert, since 2013. The forecast levels are shown in blue, with the actual below (black if the market beat his target, red if it missed).


Hulbert wrote that Eisenstadt has two critical inputs to his forecast, both of which are mildly bullish:
Eisenstadt constructs his model to include all factors he has found to have an ability to project the stock market’s subsequent six-month return. Though his model is proprietary, Eisenstadt has told me that two of the more important inputs are low interest-rates and market momentum. Both factors are mildly positive right now.
No forecast is complete without some understanding of the risks to the forecast. When I peek under the hood of the Eisenstadt's model, interest rates and momentum represent sources of both risk and opportunity to the market. Investors will have to judge for themselves whether a potential 6-month gain of 3% is worth the risk.

The full post can be found at our new site here.

Thursday, October 5, 2017

Be careful what you wish for: Catalonia independence edition

The situation in Catalonia is a mess. Catalan frustrations are understandable. The region is the most prosperous of all in Spain, and shares similar characteristics as norther Italy to the rest of Italy, or North Rhine-Westphia and Bavaria to Germany.


Here at Humble Student of the Markets, we try not to take political positions, but we stand in principle against the suppression of democracy. However, the independence referendum was ruled to be unconstitutional, but the heavy-handed reaction of the Rajoy government did not help matters.

Where do we stand now?

King Filipe IV has condemned the vote, as he has taken the position that it is unconstitutional. Catalan President Carles Puigdemont is offering mediated talks, but threatened to declare independence perhaps as soon as this weekend.

The full post can be found at our new site here.

Wednesday, October 4, 2017

Nearing upside target, what now?

Mid-week market update: Back on July 19, 2017, I wrote about using point and figure charting as a way of projecting an upside SPX target when the index stood at 2473 (see What's the upside target in this rally?). Using different sets of inputs that represent different time horizons and risk tolerances, I arrived at a target range, and a median upside target of 2561. The final targets were roughly the same whether outliers (highlighted in red) were removed or not.


Now that the index is within about 1% shy of the median target, what now?

The full post can be found at our new site here.

Monday, October 2, 2017

How American policy could tank China

As China approaches its 19th Party Congress, there has been no shortage of analysis about what to watch for. Here are a couple of examples worth reading:
  • The meeting that could seal Xi's grip on China (Bloomberg)
  • Beijing's Game of Thrones: Signaling loyalty before the Party Congress (China Focus)
Of particular importance is the Reuters report that the Party plans to amend its constitution at the Party Congress as a sign that Xi Jinping is tightening his iron grip:
China’s ruling Communist Party is expected to amend its constitution at a key party congress next month, state media said on Monday, in a sign that President Xi Jinping aims to enshrine his guiding ideological doctrine in the charter.

Since assuming office almost five years ago, Xi has rapidly consolidated power, with moves such as heading a group leading economic reform and appointing himself military commander-in-chief, although as head of the Central Military Commission he already controls the armed forces.

The Politburo, one of the party’s elite ruling bodies, deliberated a draft amendment to the constitution to be discussed at the congress that would include “major theoretical viewpoints and major strategic thought”, the official Xinhua news agency said.
For investors, the main focus is how China plans to continue its objective of rebalancing growth from the old credit driven infrastructure building model to an economy based on household consumption. As the IMF recently noted, some progress has been made, but the transition has been slow.


The full post can be found at our new site here.