Sunday, September 24, 2017

The Fed has spoken (and what that means)

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.


The risks to the bond market
The Fed has spoken. Janet Yellen made it clear that the Fed is ready to normalize monetary policy, come hell or high water. This tone to US monetary policy begs the question of how much interest rates can rise.

The Citigroup Economic Surprise Index (ESI), which measures whether high frequency economic releases are beating or missing expectations, has been on a tear for the last few months. In the past, rising ESI values have put upward pressure on bond yields (blue line). How far can they go up this time, and what kind of effects will they have on stock prices?



Moreover, there are a number of indications that the Fed will become increasingly hawkish, and the trajectory of interest rate increases discounted by the market are well below actual Fed actions.

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

Thursday, September 21, 2017

NAAIM buy signal update

I had highlighted an unusual contrarian buy signal in my last post (see Round number-itis at 2500). NAAIM sentiment, which is reported weekly, turned anomalously bearish last week and fell below its lower Bollinger Band. Past episodes of such occurrences have turned out to be very good contrarian buy signals.


The reading last week was anomalous because every other sentiment indicator had become more bullish, while NAAIM RIAs got more bearish. This week, NAAIM managers turned more bullish, while the AAII survey became more cautious.


Was last week's contrarian buy signal for real, or a data blip?

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

Tuesday, September 19, 2017

Round number-itis at 2500

Mid-week market update: I normally write my mid-week market update on Wednesday, but the market action on FOMC decision days tend to be wildcards and not necessarily indicative of future market direction, therefore I am writing my commentary a day early.

I agree with Jonathan Krinsky of MKM Partners when he wrote that the stock market is likely to encounter some resistance at SPX 2500, but the intermediate term remains bullish.


There are a number of strong negative seasonal factors at work, as well as some short-term overbought indicators that point to either a period of consolidation or shallow pullback. That said, I discovered a little noticed but unusual sentiment buy signal that has historically resolved itself bullishly in the past.

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

Sunday, September 17, 2017

A secular bottom for inflation?

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.


Rising inflation = Secular commodity bull
This chart has been floating around since July and was featured in a Marketwatch article. While it is interesting from the viewpoint of a chartist, the stretched relationship between stocks and commodities is difficult to reconcile when seen through macro and fundamental lenses. Rising commodity prices require a sustained recovery in inflation, or a collapse in the value of financial assets. How is that possible in this era of inflation undershoot and pedal-to-the-metal central bank QE?


I think I found the answer, and it may be a signal of an inflection point in inflation, interest rates, and asset return patterns.

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

Thursday, September 14, 2017

Things you don't see at market bottoms, Paris Hilton 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.

Wednesday, September 13, 2017

A "good overbought" advance, or an imminent pullback?

Mid-week market update: A number of major averages hit fresh all-time highs this week. For traders and investors, the question is whether the market is likely to continue to grind upwards while flashing a series of "good overbought" signals, or will it pull back?



Here are the bull and bear cases.

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

Tuesday, September 12, 2017

The Fed's perfect storm of 2018

I see that the world is catching up to me. The resignation of Federal Reserve vice chairman Stanley Fischer has sharpened the focus of analysts on the future composition of the Fed Board in determining the direction of monetary policy. This is a topic that I have been writing about since June (see A Fed preview: What happens in 2018?).

As well, in light of leaks indicating that Gary Cohn is no longer the front runner to be the next Fed chair, there has been widespread speculation as to the identity of the next Fed chair in determining interest rate policy. A number of commentators, such as Pedro da Costa, have speculated that Trump's demand for personal loyalty is likely to usher in an era of a highly politicized Federal Reserve and destabilize the Fed's credibility. This factor is particularly acute as there will be four vacant seats on the Fed's Board of Governors after Fischer's departure - and that does not include the possible replacement for Janet Yellen.

In other words, we have potential chaos at the Fed in 2018.

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

Sunday, September 10, 2017

Correction is over, wait for the blow-off 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 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.


The bull and bear cases
In my last post (see A step-wise market advance), I indicated that some of the concerns that overhang the stock market have been alleviated. Falling risk levels should act to put a floor on stock prices. Does that mean that stock prices are ready to rocket to new highs?

This week, I analyze both the near-term bull and bear cases for stocks. The bull case is based mainly on broad based fundamental momentum, such as continued improvements in ISM.


The bear case, on the other hand, is based on a case of bad breadth.


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

Wednesday, September 6, 2017

A step-wise market advance

Mid-week market update: In my post written last Sunday (see September uncertainties), I outlined three disparate sources of uncertainty that faced investors in September.
  • Legislative uncertainty over the debt ceiling and tax reform;
  • Geopolitical uncertainty over North Korea; and
  • Uncertainty over Fed action.
While some of those problems have been temporarily resolved, developments since the weekend have raised further questions about others. This suggests that the market will follow the recent pattern of a stepwise advance, but remain range-bound pattern until many of these uncertainties are resolved.



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

Monday, September 4, 2017

The bullish implications of the North Korean Bomb

In the wake of the news of the latest North Korean news, Donald Trump responded with his usual tweetstorm.


The markets have learned that Trump doesn't necessarily follow up presidential tweets with action. Official statements, on the other hand, are another matter. In the aftermath of the North Korean missile test which overflew Japan, the statement that "all options are on the table" was far more serious and chilling.

After the North Korean H-bomb test, Trump met with his senior advisors and Secretary of Defense released the following statement to the press:
Good afternoon, ladies and gentlemen. We had a small group, a national security meeting today with the president and the vice president, about the latest provocation on the Korean Peninsula. We have many military options. The president wanted to be briefed on each one of them.

We made clear that we have the ability to defend ourselves and our allies, South Korea and Japan, from any attack. And our commitments among the allies are ironclad: Any threat to the United States or its territories, including Guam, or our allies, will be met with a massive military response. A response both effective and overwhelming.

Kim Jong-Un should take heed of the United Nations Security Council's unified voice. All members unanimously agreed on the threat North Korea poses, and they remain unanimous in their commitment to the denuclearization of the Korean Peninsula. Because we are not looking to the total annihilation of a country, namely North Korea. But as I said, we have many options to do so. Thank you very much, ladies and gentlemen.
It was a measured response that made the following points:
  • The United States is not looking to preemptively annihilate North Korea, but
  • Any threat to the US or its allies will be met with "a massive military response".
How should investors react in the face of escalating tensions? Is the world on the brink of nuclear war, or another Korean war?

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

Sunday, September 3, 2017

September uncertainties

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.


September headwinds and tailwinds
Welcome to September. Looking forward, this month is known to be seasonally bearish. Jeff Hirsch of Trader`s Almanac found that September was the worst month of the year, based on seasonal factors.


Ryan Detrick of LPL Financial Research further dissected past September seasonality. While while returns have been negative, he found a silver lining. When the SPX is trading above its 200 dma, which it is today, the market has seen positive average returns, though the percentage positive is still below 50% at 47.9%.


That said, investors face a sea of uncertainty as we head into September. I have never known the market to perform well under conditions of high uncertainty, but consider the hurdles ahead:
  • Legislative uncertainty over the debt ceiling and tax reform
  • Geopolitical uncertainty over North Korea
  • Uncertainty over Fed actions
Can stock prices climb the proverbial wall of worry in September, or will it retreat and test its correction lows seen in August?

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

Tuesday, August 29, 2017

The surprising conclusion from top-down vs. bottom-up EPS analysis

Mid-week market updateBusiness Insider recently highlighted an earnings warning from Strategas Research Partners about possible earnings disappointment for the remainder of 2017 and early 2018. Expect a deceleration in EPS growth because of base effects:
A big part of Strategas' argument stems from the fact that the period against which current earnings are compared — the first half of 2016 — was notably weak. And that, in turn, pushed year-over-year growth to unsustainable levels.

As the chart below shows, Wall Street is not bracing for the decline. Its estimates are represented by the blue columns, which show continued profit expansion over the next two quarters. Strategas has other ideas. Adjusting for historical factors, the firm sees earnings growth declining over the period before being cut almost in half by the first quarter of 2018, as indicated by the red columns.

In addition, Strategas believes that sales growth appears "toppy".


On the other hand, Ed Yardeni has the completely opposite bullish view:
(1) S+P 500 forward revenues per share, which tends to be a weekly coincident indicator of actual earnings, continued its linear ascent into record-high territory through the week of August 10.

(2) S+P 500 forward operating earnings per share, which works well as a 52-week leading indicator of four-quarter-trailing operating earnings, has gone vertical since March 2016. It works great during economic expansions, but terribly during recessions. If there is no recession in sight, then the prediction of this indicator is that four-quarter-trailing earnings per share is heading from $126 currently (through Q2) to $140 over the next four quarters.
Yardeni's believes that there is little risk to stock prices, as long as forward 12-month EPS and revenues are rising.


What`s going on? How do investors reconcile the two contradictory conclusions of analysis of the same data set?

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

Monday, August 28, 2017

Hurricane Harvey as a mini-stress test

Q: What's George W. Bush position on Roe vs. Wade?
A: He doesn't care how people get out of New Orleans after Katrina.

- Joke that circulated in the aftermath of Hurricane Kartina


There are many stories coming out in the wake of Hurricane Harvey that hit Texas. I was most struck by this BBC account of the woman who was too poor to evacuate from her mobile home:



Judie stayed, she tells me, because she had no means to leave and no place to go.

"I had some problems getting out of town, a little broke and stuff, so I had to come home and, you know, tough it out," she says. "We're all the working class people.

"We're the ones who go to the restaurants and wait on you and pick up your trash and do all that work. We don't have a lot of money."

"Fighting for the American dream," she adds, with a rueful laugh.
Hurricane Harvey may prove to be a significant stress test for both the American economy and the Federal Reserve. A recent Bankrate survey indicated that only roughly 4 in 10 Americans have sufficient savings to cope in an emergency, which is indicative of the low margin of financial error that the household sector operates under.



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

Sunday, August 27, 2017

Is the Fed tightening into a stalling economy?

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.


Risk of a policy error are rising
Tim Duy, writing at Bloomberg View, recently observed that the stock market has been behaving roughly as expected during past Fed rate hike cycles. As long as growth is holding up, stock prices should continue to rise, regardless of any perceived valuation excesses:
The general rule is that if the economy continues to grow, then it is more likely than not that stock prices rise, even if the Fed tightens monetary policy. Many analysts, however, continue to resist this historical lesson, largely on the basis of traditional valuation metrics. These metrics, such as PE ratios, have been long elevated, leading to the difficulty explaining market behavior that my Bloomberg View colleague Barry Ritholtz has observed.

But if not market valuations what should be the focus on investors? My view is that they should be watching for signs that, at a minimum, earnings growth will falter or, probably more importantly, that the economy is set to tip into recession. I tend to think it is more likely that the economy takes the equity market down with it than the opposite.

Duy thinks that risks are low and we are not near the tipping point yet:
To be sure, it is impossible to know that the future holds. The chaotic environment in Washington, for example, could erupt into a crisis than threatens the economy. A more likely scenario is that the time will come -- as it always has -- when the Fed tightens policy too much and reverses itself too slowly. That is the most likely event that brings down the economy and equity markets. We just aren’t near that point yet.
I beg to differ. There are early signs that the American economy is starting to stall. These indications, if viewed from a standalone basis, are not cause for concern. But combined with the Fed`s resolve to normalize monetary policy, current conditions could become the basis for a monetary policy error that tips the economy into recession.

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

Wednesday, August 23, 2017

Trumponomics meets Mr. Market

Mid-week market update: As the stock market staged a bounce yesterday, it was still exhibiting a pattern of lower highs and lower lows. After the close, the market ran into a dose of Trumponomics that spooked the market and pushed the index below its 50 day moving average.



Notwithstanding Trump's fiery rhetoric about Charlottesville and immigration policy, which are beyond the scope of this publication, two details of his speech served to tank the market. First, his threat to shut down the government by holding up debt ceiling negotiations if his Wall was not funded did not do the bulls any favors. As well, his comment of "I don't think we can make a deal", when referring to NAFTA raised the specter of tariff walls.

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

Sunday, August 20, 2017

Imagining the next bear 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 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: 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.


What will the next bear market look like?
Recently, Lawrence Hamtil of Fortune Financial wrote an article entitled "Imagining the next bear market (with examples from the last two)". He analyzed the effects of sector performance, large and small cap returns, asset correlations, and other characteristics of the last two two equity bears.

While that kind of analysis represents a good starting point, we know that history doesn't repeat, but rhymes. With that in mind, here is an examination of the stress points of the next bear market, based on the assumption that it is sparked by a recession.

My main focus estimating equity downside risk. What will the next bear market look like (chart bars =annual returns, dots=annual drawdowns)? Will the recession be mild (1990), or long and protracted (1980-82, 2000-02)? Will the market crash? If so, will it be accompanied by a recession (2008) or not (1987)?


Recessions are periods when the excesses of the past expansions are unwound. Arguably, there have been few excesses in the current expansion except for the proliferation of Silicon Valley unicorns. That argues for a shallow bear market with a drawdown in the order of 20%, such as 1990. On the other hand, the excesses have occurred outside the US (see Looking for froth in the wrong places), which makes the case for higher losses if the economic downturn is global.

The answer can be found by analyzing the fault lines of the economy today for clues of how the next recession might develop.

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

Thursday, August 17, 2017

A summer reading list

I will be off for a few days in Oregon, where I will (hopefully) observe the Great American Eclipse of 2017. The regular weekend commentary will continue to be published, but posting will be lighter than usual as internet access is expected to be spotty.

Before I leave, I leave you with a summer reading list. I have been asked in the past to suggest books on how to invest and trade. My answers are a bit more offbeat than the usual recommendations to read Market WizardsThe New Market Wizards, or Fidelity Low-Price Stock PM Joel Tillinghast's book, Big Money Thinks Small (see Barron's interview).

The purpose of this site is to teach readers how to fish. No book is going to make you the next Warren Buffett or Paul Tudor Jones. I am going to make you work and expend some effort to catch your fish in your reading.


The basics
Let`s start with the basics. Even before thinking about investing, consider the basics of financial literacy and why you need a financial plan. Here are some blog posts of value, including some old posts of my own.

Freakonomics: Everything you wanted to know about money (but were afraid to ask). Can you correctly answer three basic financial literacy questions? If not, you should start with the 10 things you need to know about investing that fit on an index card.

Humble Student of the Markets: The ABCs of financial planning. Do you have an Investment Policy Statement? If not, how will you know where you are going if you don't have an objective? Put simply, if the term investment plan sounds overly intimidating, think of it as a savings plan.

Humble Student of the MarketsInvestment policy: Not just for pension funds. Once you have figured out where you are going, here is an example from CALPERS on how to create an investment road map.

A Wealth of Common Sense: Thinking through a change in asset allocation. Once you have an investment plan, Ben Carlson goes through on how to create a process on thinking through changes.

A Wealth of Common Sense: Reframing the concept of risk. Risk is everywhere. Carlson puts it very simply, "Don't over-react to events."


Corporate strategy and fundamental analysis
For a primer on corporate strategy, there is no better place to start than with Michael Porter. Porter is known as the guru of corporate strategy. His books Competitive Advantage and Competitive Strategy are must-reads and taught in virtually all B-School programs. However, Porter acknowledged that his list of competitive advantages, however, are static advantages and shifts can occur. He evolved by detailing how the shifts occur at a macro level in The Competitive Advantage of Nations.

For investors interested in how disruptions happens, Blue Ocean Strategy represents a newer line of thinking in corporate strategy. Authors W. Chan Kim and RenĂ©e Mauborgne argue that companies can succeed by creating "blue oceans" of uncontested market space, as opposed to "red oceans" where competitors fight for dominance, the analogy being that an ocean full of vicious competition turns red with blood. They assert that these strategic moves create a leap in value for the company, its buyers, and its employees while unlocking new demand and making the competition irrelevant. The book presents analytical frameworks and tools to foster an organization's ability to systematically create and capture blue oceans (via Wikipedia).

Do you want to find undervalued companies and takeover candidates? Try this useful handbook of how companies work financially: Best-Practice EVA: The Definitive Guide to Measuring and Maximizing Shareholder Value. The book is an eye opener and details how companies add shareholder value. More importantly, the Economic Value-Added (EVA) framework details where the cash flow goes in a company. In turn, it lends to an understanding of corporate restructuring process by private equity investors. In the process, investors can discover hidden gems and takeover candidates where private market value exceeds publicly listed value.


Top down analysis
Regular readers know that I have a global big picture macro focus. Here are some important books that have formed my views of how societies develop. Unless you understand the development process, you won't be able to construct an analytical framework and react properly when shocks like the Great Financial Crisis, or the Asian Crisis occur.

The Competitive Advantage of Nations. Michael Porter lays out how countries go through the stages of development, and the kinds of policies that work at each stage of growth.

The Economy of Cities and Cities and the Wealth of Nations: Principles of Economic Life. Jane Jacobs was a leading researcher in how cities develop. Jacobs' views on development are very similar to Porter's, except that her unit of development is the city-state, instead of country, which is Porter's framework.



Personal journeys in technical analysis
Finally, we get to the good stuff (for traders)! I am going to disappoint many readers here. There is no magic black box to trading. Everyone has to develop their own style. Books like Market Wizards will not instantly make anyone a better trader. Instead, I have suggested to readers that they enroll in the Charter Market Technician program. Start by learning the basic body of knowledge, then develop your own style.

That said, here are some examples of books written by a couple of readers that undertaken their own journey of market analysis.

Mind, Money and Markets: A guide for every investor, trader, and business
Authors Dave Harder, portfolio manager, and Janice Dorn, a psychologist, have put together a book that combines human psychology with market analysis. The book has received positive reviews from the likes of James P. O’Shaughnessy, money manager and author of What Works on Wall Street, Predicting the Markets of Tomorrow, How to Retire Rich, and Invest Like the Best; Robert McTamaney, Former Partner and Head of Trading, Goldman Sachs Asia; Robert Sluymer, Technical Analyst, RBC Capital Markets; and John Gray, Editor, Investors Intelligence.

The Pathway
Author and portfolio manager Ken MacNeal uses a unique technique that uses price momentum for his clients. While I don't always agree with his conclusions, I respect his approach and insights. Ken describes his book this way:

'The Pathway - Your money ... in a changing world' tells why Momentum-style investing is the best strategy to navigate the new factors, with unknowable outcomes, affecting financial markets today: the digital revolution, globalization, new Central Bank policies like negative interest rates, Middle East politics, Donald Trump, to name a few. Momentum points you mathematically to the winning sectors and companies while as importantly, avoiding the casualties. You are also given the tools to invest; customized momentum charts of over 500 industry ETFs and the largest companies in them. These are dynamically linked to the internet and update automatically when viewed.

These are just some samples of journeys that others have taken. The CMT program as a good way of learning the basics, and then you can find your own path.



Regular programming will resume next week. Please keep everything together while I step out (and, please, don't shoot any Archdukes while I am gone).

Wednesday, August 16, 2017

Bought for a good time, but not a long time

Mid-week market update: Last Friday, subscribers received an email alert indicating that the trading model had flipped from short to long. In my weekend commentary (see "Fire and Fury" is hard) that my inner trader expected "the time horizon of that trade to be not much more than a week."

I am reminded of the Trooper song, "We're here for a good time, not a long time" when referring to this trade. On one hand, the relief rally has been impressive. Both my VIX model and Zweig Breadth Thrust Indicator had flashed deeply oversold conditions (see Three bottom spotting techniques for traders). If history is any guide, the duration of the rally should last, at a minimum, until Friday or Monday.

On the other hand, breadth indicators are not showing the bulls any love. The chart below shows negative divergences in credit market risk appetite, % bullish, % above 50 and 200 dma, In particular, the latter three indicators are exhibiting bearish patterns of lower lows and lower highs.



Looking into September, the stock market faces a number of macro headwinds that could serve to further depress prices.

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

Sunday, August 13, 2017

"Fire and Fury" is hard

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: Risk-on*
  • 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.


War is hard
President Donald Trump has achieved few major legislative victories in his six month presidency, despite the Republican majority in both the Senate and House. One disappointment was the failure of the Republicans to repeal Obamacare because of disagreements between different wings of the GOP. Trump has learned that "healthcare is hard". Similarly, "tax reform is hard".

By design, American government was built on a system of checks and balances. While Trump's legislative initiatives may be held up by Congressional dissension, the President has far fewer constraints in the conduct of trade policy, foreign policy, and military affairs. In particular, he can do more or less what he wants without Congressional oversight when it comes to his role as Commander-in-Chief of the American military.

As the markets are gone risk-off in light of Trump's "fire and fury" comment about North Korea, I am going to depart from the usual economic and market analysis this week and focus on the question of the constraints on President Trump in a conflict with North Korea. To be sure, the markets are showing a high degree of fear that war could break out on the Korean peninsula. Past scares has seen little reaction from the Korean Won (KRW) or Korean equities. This time, South Korean stocks are tanking, both on an absolute basis and relative to global stocks.



Investors should relax. As Donald Trump is about to find out, "War is hard too".

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

Wednesday, August 9, 2017

Correction ahead:

Mid-week market update: Narrow trading ranges are often technical signs of sideways consolidation, followed by further upside. In this case, bulls are likely to be disappointed, as market internals point to a correction ahead.



I am reiterating my tactically cautious view that has been in place for the last two weeks (see Curb your (bullish) enthusiasm) for the following reasons:
  • All sectors are overbought, indicating an extended condition
  • Negative seasonality
  • Overbought breadth
  • Negative momentum
The full post can be found at our new site here.