Sunday, December 17, 2017

Five steps, where's the stumble?

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.


What happened to 3 steps and a stumble?
As expected, the Federal Reserve raised rates by a quarter point last week and re-affirmed its dot-plot projection of three more quarter-point hikes next year. What happened to "three steps and a stumble"?

The old Wall Street trader's adage of "three steps and a stumble" refers to the stock market's reaction to Fed rate hike cycles. At first, stock prices don't react to the Fed raising rates, but eventually the market succumbs to the economic cooling effects of monetary policy, and a bear market usually begins after three rate hikes. Hence, "three and a stumble". The chart below from Ned Davis Research shows the effects of this rule on the Dow. Historically, the DJIA has declined a median of -17.9% from sell signals to NDR market bottoms.



Historically, the sell signals have been fairly prescient, though sometime early. This expansion cycle has been unusual in that the Fed began raising rates two years ago. We have seen five consecutive quarter-point rate hikes, so where's the stumble?

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

Wednesday, December 13, 2017

Do you believe in Santa Claus?

Mid-week market update: You can tell a lot about market psychology by the way it reacts to events. News overnight of the victory by Democrat Doug Jones over the troubled Republican candidate Roy Moore in the Alabama senate race was judged to be market unfriendly, as it meant that the GOP would have its Senate majority shrink by one vote to 51-49. ES fell immediately, but eventually recovered to roughly even the next morning at 8:30 before the release of CPI.

The near term message from the market is "stock prices don't want to go down".

Rob Hanna of Quantifiable Edges observed that this week, which is December OpEx, is one of the most bullish weeks of the year. Moreover, positive seasonality extends past this Friday for another two weeks.


Do you believe in Santa Claus?

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

Tuesday, December 12, 2017

China: A 19th Party Congress postscript

A decent interval has passed since China's 19th Party Congress (see Beware the expiry of the 19th Party Congress put option), and it's time to check in again on China to see how things are progressing. For the China bears, the overhang in debt looms large.



The worries are especially acute in light of International Monetary Fund's publication of the results of its financial stability assessment of China. In connection with that review, the IMF issued the following warning about three sources of vulnerability:
  • Excessive debt: In particular, concerns were raised over the rapid buildup of debt to keep non-viable zombie companies alive.
  • Growth of shadow banking: The growth of the shadow banking system makes it more difficult to monitor and control the risks in the financial system.
  • Moral hazard: The IMF also raised concerns over "moral hazard and excessive risk taking" because of the belief that the government will bail out troubled state-owned enterprises (SOEs) and local government financing vehicles (LGFV).
The concerns raised by the IMF echoes the writings of Winston Yung at McKinsey, who penned an article called "This is what keeps Chief Risk Officers in Chinese Banks awake at night".
  • Economic downturn leads to the emergence of credit risk
  • Risk management cannot keep up with constantly changing business models: 
  • Asset liability mismatch
  • Significant risk from off balance sheet activities
The full post can be found at our new site here.

Sunday, December 10, 2017

Here comes the blow-off!

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.


Party on!
Friday's November Jobs Report highlighted a number of important bullish data points for the stock market in the weeks ahead. The headline non-farm payroll release came in ahead of expectations, while average hourly earnings missed. At the margin, tame wage pressure which will restrain the Fed from becoming overly aggressive in raising rates.

As well, Thursday's release of initial jobless claims also underlined the remarkable inverse correlation between initial claims (inverted scale) and stock prices. So far, the continuing improvement in initial claims is supportive of higher equity prices.


In his latest update of high frequency economic data, New Deal democrat painted a bright picture for the near term, and an improving long term outlook:
The nowcast and the near term forecast remain very positive, with only relatively strong oil prices juxtaposed with relatively weak commodity prices as flies in the ointment. The longer term forecast, which I briefly downgraded to neutral, is weakly positive again.
Throw in the anticipated corporate tax cuts, it is difficult to contain our short-term enthusiasm. This week, I review my Recession Watch indicators and find that the current snapshot of recession risk is receding, though there are still some key risks on the horizon (also see Things you don't see at market bottoms: Rational exuberance edition).

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

Wednesday, December 6, 2017

Duel of the market studies

Mid-week market update: Swing and day traders are often fond of studies that show an edge under certain market conditions. But what happens when two different studies disagree?

On one hand, Rob Hanna at Quantifiable Edges published a study yesterday that signaled a likely bullish outcome for stock prices. Yesterday (Tuesday) would have day 1 of that study.


On the other hand, I had identified a hanging man candle on Friday. While hanging man formations are thought of as bearish reversals, further studies showed that they don't necessarily resolve themselves in a bearish fashion unless there is a bearish follow-through the next day.



When the market opened up strongly on Monday, I had given up on Friday's hanging man, but the market astonishingly closed in the red to flash a bearish confirmation. My own historical study indicates that these episodes tend to be short-term bearish, and bottom out between day 3 and 4, which translates to either this Thursday or Friday.


How can we resolve this apparent contradiction in market studies?

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

Tuesday, December 5, 2017

How worried should you be about an elevated Shiller P/E?

In my discussions with investors, the Cyclically Adjusted P/E (CAPE), or Shiller P/E, has come up numerous times as a risk for the U.S. stock market. The current reading of 32x is only exceeded by the peak during the NASDAQ Bubble, and it is higher than the levels seen before the Crash of 1929. Does this mean that the risk of a substantial stock market drawdown in the near future is rising?


I studied the question in the context of some of the criticisms of the Shiller P/E and made a number of adjustments to the calculation. I found that the answer is the same. The U.S. equity market is expensive, but Shiller P/E does not work well as a short-term market timing technique. However, I have found that the combination of valuation and price momentum can provide clear warning signs that the market is about to enter a bear market.

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

Sunday, December 3, 2017

Brace for more a volatile 2018

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.


Volatility ahead
Equity market volatility, as measured by the VIX Index, has been extraordinarily low by historical standards.



Last week's events is setting the stage for greater market volatility in 2018, which stems from the following three sources:
  • Political uncertainty
  • Fiscal policy
  • Monetary policy
Let's examine each, one at a time.

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

Wednesday, November 29, 2017

What's next for the tax cut bull?

Mid-week market update: It was clear from yesterday's market action that the equity bull depends entirely on the success of the Republican tax cut bill. The market rallied on the news that the tax cut bill had made it out of Senate Budget Committee. It manage to shrug off the news of a possible government shutdown, and a North Korean ICBM test, which was later determined to have a range to reach the entire Continental United States.

The combination of the market enthusiasm yesterday and the strength in the Goldman Sachs high tax basket indicates that the market is discounting the passage of the bill.



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

Monday, November 27, 2017

Things you don't see at market bottoms: Rational exuberance 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. My experience has shown that overly bullish sentiment should be viewed as a condition indicator, and not a market timing tool.

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, November 26, 2017

Embrace the Blow-off (but with a stop-loss discipline)

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.


Yield Curve freakout
I received a considerable amounts of feedback to my post last week (see 2018 outlook: Last charge of the bulls) over my comments about the risks posed by a flattening yield curve. Interest in the term "flattening yield curve" has spiked, but consistent with levels last seen when the yield curve flattened to this level.



My readers highlighted some recently published articles indicating that a flattening yield curve doesn't matter.
  • Scott Grannis wrote a thoughtful piece about the contrary indicators that point to a slowdown.
  • Cullen Roche at Pragmatic Capitalism concluded that a flattening yield curve isn't a concern until it inverts, and that analysis from the Cleveland Fed indicated that the current yield curve implies a 12% chance of a recession.
  • Tim Duy observed that a flattening yield curve is a typical market reaction in a tightening cycle, though it suggests that "the economy remain mired in a low rate environment for the foreseeable future" and the Fed probably didn't expect it to flatten this much.
  • Philadelphia Fed President Patrick Harder voiced concerns about inverting the yield curve in a Bloomberg interview.
  • The San Francisco Fed released a paper entitled, "A new conundrum in the bond market?", that was reminiscent of Greenspan's hand wringing over the flattening yield curve even as the Fed raised rates in 2005.
I agree 100%. The more the authorities pay attention to a metric, the less the metric matters. In some instances, the metric can be gamed, just like China's regional GDP growth statistics.


Even though an inverted yield curve has been an uncanny leading indicator of recession, it may not work this time because of the effects of the Fed's quantitative easing (and now quantitative tightening) program on the bond market. Indeed, the Fed's own estimates showed that its QE programs had pushed the 10-year yield down by 100 bp, which had the effect of manipulating the shape of the yield curve.


There are sufficient contrary indicators that the economy is booming, and the near-term odds of a recession is low. Those conditions are consistent with my belief that the stock market is undergoing a terminal blow-off phase, but Scott Grannis' work also hint at how investors might look for signs of a market top.

Investors can embrace the blow-off, but I can also offer you some risk control techniques that can act as a kind of stop-loss discipline.

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

Tuesday, November 21, 2017

Round number-itis at SPX 2600?

Mid-week market update: The mid-week market update is being published a day early because of the shortened trading week due to American Thanksgiving on Thursday.

You can tell a lot about market psychology by the way it reacts to news. Early Monday morning (Europe time) and before the market open, a grim Angela Merkel announced that coalition talks had collapsed, and she was unable to form a government. DAX futures instantly took a tumble, and so did US equity futures. Over the course of the European trading day, equity prices recovered and the DAX actually closed in the green. US stocks followed suit and closed with a slight gain. This was a signal that the market has a bullish short-term bias.

I issued a tactical "buy the dip" trading call for subscribers last Friday. Now that the SPX has risen to test resistance at 2600, which represents an all-time high, is it time to sell the rip?


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

Monday, November 20, 2017

Relax! NAFTA isn't going to collapse

As American, Canadian and Mexican negotiators meet for a fifth round of NAFTA discussions in Mexico City, CNBC reported that a number of analysts are projecting significantly high odds that the trade pact would fall apart:
Jens Nordvig, Exante Data CEO, sent out a warning note Monday that his firm now sees a 30 to 40 percent chance of NAFTA "blowing up" by March.

While Ian Bremmer, president of Eurasia Group said in a note Monday that he has long thought there was 50/50 chance NAFTA would fall apart, but he is also becoming increasingly concerned.

"The big risk is that trade tension in NAFTA spreads to a more global stage, for example if the EU sides with Mexico in WTO disputes. This is where the global risk grows very large," Nordvig said in an email.
Canada's McLean's magazine proclaimed in an article that, "If NAFTA dies, 'all hell will break loose'". As a consequence of these trade jitters, both Canadian and Mexican equities have underperformed American ones.



Relax, even if the Trump administration didn't get its way in its negotiations, the path to walking away from NAFTA will be long and difficult.

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

Saturday, November 18, 2017

2018 outlook: The last charge of the bulls

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.


The outlook for 2018 
It`s that time of year, when investment strategists look ahead to the following year. I favor the analytical framework of New Deal democrat, who views the economy through the prism of coincident, short leading, and long leading indicators. I agree with NDD`s latest assessment that the short term outlook is very strong. While NDD scores the long term outlook as neutral, long leading indicators have been gradually deteriorating. A continuation of the Fed tightening cycle could see downward pressure to equities from either valuation or recessionary warnings by mid-year.

Enjoy the party for now. The global economy is undergoing a reflationary surge, and the outlook for Q1, and possibly Q2, is bright. Consequently, equity bulls are responding with one last charge.


Be warned, however, that the early part of 2018 could be as good as it gets for this cycle. Chris Puplava observed that consumer confidence is nearing the 90th percentile level going back to 1967.


Such readings have seen stock prices perform poorly over a 1-2 year time horizon. The latter half of 2018 could therefore be very bumpy.



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

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.