Thursday, April 28, 2016

Treasury holdings as a political weapon?

Imagine the following scene in the not too distant future:

The US Navy confronts the PLAN (People's Liberation Army Navy) in the South China Sea. Someone miscalculates and shooting starts and the situation escalates wildly. Eventually, there are three American carrier task forces, accompanied by submarines, along with the fleets of Asian allies like the Philippines, Japan, Australia and so on, in the area.

Just as PLAN forces are outnumbered and the Chinese tactical situation look hopeless, the PBoC picks up the phone to New York, "I have $1 trillion in Treasury assets to sell - now." The theory is, some Americans may be patriotic willing to die for their country, but how many would be willing to lose their homes for their country? How about losing their jobs for their country?

Is this the plot for a twisted Tom Clancy novel? Bearish Apocalyptic fantasy? How plausible is this scenario?

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

Tuesday, April 26, 2016

What happens if the Fed gets less dovish?

Mid-week market update: There doesn't seem to be much of a point in writing about the technical condition of the market when its likely path is dominated by a binary event like the FOMC meeting this week. So I thought that I would write about how to interpret and react to the FOMC statement instead.

Much of investing is about setting a course of action and assessing risks under different scenarios. A key assumptions of my equity bull case that I made on the weekend is a relatively equity friendly Federal Reserve (see How the SP 500 can get to 2400 this year). As we approach another FOMC meeting, a key question is, "How do we react if the Fed gets more hawkish?"


Poised for a hawkish rebound?
Despite the dovish tilt of the Yellen Fed, BCA Research pointed out that the Fed seems to go through a stop-start hawk-dove policy loop - and we are currently nearing a dovish extreme.A reversion to a more hawkish tone in its communications would therefore be no big surprise.


From a technical perspective, the markets are also ripe for a reversal. The USD Index, which is a key indicator of monetary policy divergence and driver of US corporate earnings growth, is currently testing an important support level.



Hedge funds have reversed out of their crowded long in the USD and they are now slightly short.



The flip side of the USD weakness coin is commodity strength. The post child of commodity strength are the precious metals and Tiho Brkan pointed out that gold miners are now highly overbought:


...while hedge funds are in a crowded long position in silver:


A less dovish message from the Fed this week has the potential to embolden dollar bulls and panic commodity bears.

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

Sunday, April 24, 2016

How the S&P 500 could get to 2400 this year

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 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 seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" 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 this 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: 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


The (inflation) universe is unfolding
The (inflation) universe seems to be unfolding as it should. Regular readers know that I have been preparing for a resurgence in commodity prices (see The 2016 macro surprise that no one talks about, written in December 2015, RIP Correction. Reflationary resurrection next? written in March 2016 and My roadmap for 2016 and beyond, written a week ago). We finally got broad based confirmation of a recovery in commodity inflation last week.

Commodity and oil prices shrugged off the Doha non-freeze surprise and broke out to new recovery highs, which is bullish as you can tell the tone of a market by how it reacts to what should have been bad news. As the chart below shows, the cyclically sensitive industrial metals staged upside breakouts above its 200 day moving average (dma), as well as new recovery highs. The energy heavy CRB Index did break out to the upside, but it is now testing its 200 dma.



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

Wednesday, April 20, 2016

Climbing the Wall of Worry

Mid-week market update: I was wrong. I thought that the stock market was due for a pause and pullback last week (see A possible pause in the uptrend). Instead, it has strengthening on skeptical sentiment and improving breadth.

The combination of these conditions are suggestive that the current rally as a lot further to go in the short run.

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

Tuesday, April 19, 2016

We are all helicopter pilots now

In Ben Bernanke's famous 2002 helicopter speech, he made the point that the Fed has numerous tools to fight deflation, even if interest rates was at the zero bound:
The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
He went on to say that the coordination of fiscal and monetary policy amounted to a helicopter drop of money:
Each of the policy options I have discussed so far involves the Fed's acting on its own...A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
In his latest blog post, Bernanke expanded on that point. Monetary policy has limits by itself. Helicopter money is fiscal + monetary policy:
In more prosaic and realistic terms, a “helicopter drop” of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock. To get away from the fanciful imagery, for the rest of this post I will call such a policy a Money-Financed Fiscal Program, or MFFP.
He concluded that helicopter money is not necessary in the US, but they may be useful tools in other parts of the world:
Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out.
Consider the Bernanke helicopter money prescription. The government spends by borrowing and the central finances the spending by buying up the debt and printing money. It sounds positively Japanese. Abenomics, anyone?

The full post is available at our new site here.

Sunday, April 17, 2016

My roadmap for 2016 and beyond

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 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 seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" 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 this 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: 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


A roadmap, not a forecast
There has been a number of new subscribers who have come onto the site and I thought that it would be useful for me to review my outlook for the remainder of 2016 and into early 2017. I would characterize it as a roadmap, rather than a forecast, as there are far too many moving parts for this to be an actual forecast.

My base case scenario calls for the US equity market to form a cyclical top in 2016. The market is likely to rise and make marginal new highs this year, led by late cycle sectors such as capital goods and resource extraction. As inflationary pressures become evident, the Fed will respond with a series of rate hikes, which have the potential to push the American economy into recession. With European growth still fragile and Chinese growth decelerating and beset by a debt overhang, such Fed actions could drag there rest of the world into recession as well. Risky assets such as stocks would not behave well in such an environment and a major downleg in stock prices is well within the realm of possibility.

An analysis based on the Morningstar median stock fair value estimate, which shows the market to be trading at about fair value, is consistent with my roadmap. On one hand, the lack of gross under-valuation is unlikely to see stock prices rally significantly for the rest of this year. On the other hand, past history has shown that the market has been able to advance even under adverse conditions of over-valuation. Therefore a scenario of modest market gains, followed by a loss of macro momentum from changes in Fed policy, is well within the realm of possibility.


Let me expand on those points.

The full post is available at our new site here.

Friday, April 15, 2016

More signs of unbalanced Chinese growth

The latest Chinese GDP release came in right in line with expectations at 6.7%, but the growth came at a cost. I had written about this problem in my previous post, Big Trouble with 5-year China?). The Chinese authorities appear to be up to their old tricks again of using credit to drive growth, which is a worrisome sign.

The markets had been signaling this shift in policy for several months. My New China-Old China pairs had been rolling over in favor of Old China, where "New China" is represented by stocks exposed to the Chinese consumer and "Old China" is represented by financial stocks.


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

Thursday, April 14, 2016

Free report: Why gold bulls shouldn't buy gold stocks

Revealed: Why gold stocks have lagged gold, even as bullion rallied. Free report here.



Wednesday, April 13, 2016

A possible pause in the uptrend

Mid-week market update: Let me make myself absolutely clear, I remain intermediate term bullish on US equities based on the points I made in past remarks (see Equities in a macro sweet spot and The trend is your friend (breadth, seasonality and sentiment too)). As the SPX struggles with a technical resistance level at about 2080, there are signs that the market may be due for a temporary pause in the uptrend for the following reasons:

  • Negative divergence in breadth and momentum indicators
  • Price mean reversion in a post option-expiry (OpEx) week 
This is purely a tactical trading call with a time horizon of 1-2 weeks.

The full post is available at our new site here.

Monday, April 11, 2016

How worried should investors be about insider selling?

A reader raised a question after my generally bullish weekend post (see Equities in a macro sweet spot). The latest report from Barron's of insider activity had shown that readings had risen up into sell signal territory. How worried should investors be about this development?


Insiders tend not to be short-term traders and they have long time horizons. The issue of capital gains vs. short-term trading gains are always on their minds, which means that their holding period is at least one year. If they sell, they have to worry the wash sale rule. So should you react to a single data point of insider activity?

The full post is available at our new site here.

Sunday, April 10, 2016

Equities in a macro sweet spot

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 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 seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" 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 this model has shown turnover rates of about 200% per month.


The signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


The earnings recession is over!
Back in the depths of the February market lows, Morgan Stanley strategist Adam Parker had become so despondent that he wrote that the "only bull case for equities was the was no bull case" (via Zero Hedge). I responded with a post (see Dear Morgan Stanley, here is the bull case) indicating that the bull case was a growth surprise:
If Parker had read my commentary last weekend, he would have understood the bull case (see Profit by thinking like Big Money). To put it very simply, the bull case for stocks can be summarized in two words: “Growth surprise”.
Subsequent to that post, the market seems to be starting to wake up to the growth surprise possibility. Today, most of the hand wringing about an imminent recession is gone as stock markets around the world have surged from their February lows. Nevertheless, I am still seeing widespread signs of investor skepticism, which represents potential buying power that can propel stock prices to new highs as growth recovers.

The full post is available at our new site here.

Friday, April 8, 2016

Free report: How to spot short-term market bottoms with an 87% accuracy

In case you missed it, you can get my free report on my uncanny short-term stock market bottom spotting technique that showed an 87% since 2010 by clicking on this link.

Thursday, April 7, 2016

How vulnerable is the market to dwindling buybacks?

After I wrote my last post about the GAAP gap, which addressed many of the concerns about shortfalls in earnings quality (see The GAAP gap as Rorschbach test), I had a number of discussions about the vulnerability of the stock market to buyback activity. I had been meaning to write more on this topic, but Cullen Roche and Ben Carlson both beat me to it with some balanced perspectives on fundamentals behind buybacks. Nevertheless, here is my two-cents on the topic.

The concerns about buybacks gained prominence from a post from Josh Brown, who highlighted analysts from HSBC showing that buybacks accounted for much of the equity demand since 2008. As the market enters a buyback blackout period during Earnings Season, could the stock prices weaken as this key demand slackens?


Despite the above chart, the relationship between buybacks and equity returns is tenuous at best. Let me explain why.

The full post is available at our new site here.

Tuesday, April 5, 2016

How far can this pullback go?

Mid-week technical update: In my weekend market commentary, I wrote that I was intermediate term bullish on equities (see The trend is your friend (breadth, seasonality and sentiment too)). However, my inner trader was tactically watching the relative performance of the cyclical sectors for signs of market weakness.

Now that cyclical stocks have weakened and, in particular, oil prices seem to be rolling over, the key question is how much further can the current pullback go?

An examination of the daily SPX chart shows that it closed about 1% above a key support zone, bounded at the upper end at about 2040 and the lower end at the 200 day moving average (dma) at 2015. RSI-5 (top panel) flashed a short-term sell signal, but readings are not oversold yet indicating further downside potential.



Will the decline stop at 2015-2040 or is this the start of a deeper correction?

The full post is available at our new site here.

Monday, April 4, 2016

What does the crowded long position in bonds mean for stocks?

I encountered a couple of interesting observations about the bond market on the weekend. First, Tom McClellan pointed out that the latest Commitment of Traders report on bond futures shows that the commercial hedgers, who are thought to be the "smart money" are massively short the bond market.


As well, Mark Hulbert observed that bond market timers are showing an off-the-charts level of bullishness on bonds, which is contrarian bearish.


Right, the bond market is cruisin' for a bruisin'. Since the main focus in these pages is on the stock market, the BIG QUESTION for equity investors: "What would a weak bond market mean for the stock market?"

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

Sunday, April 3, 2016

The trend is your friend (breadth, seasonality and sentiment too)

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 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 seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" 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 this model has shown turnover rates of about 200% per month.


The signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


The trend is your friend
My trading model turned bullish on stocks on February 28, 2016 (see the above chart of out-of-sample trading model signals and The market bottom 2-step: 1 forward, 1 back). Since then, the stock market has been rising and I see few reasons for investors to deviate from a bullish position.

The Trend Model analyzes global stock markets and commodity prices to see how risk appetite is evolving. This week, I take my readers for a tour around the world to show how risk appetite is improving. In addition, I find that improving breadth, positive seasonality and skepticism about the rally are also supportive of further market gains.

The full post is available at our new site here.

Wednesday, March 30, 2016

Updates on the Brexit, energy and SPX trades

Mid-week market update: Rather than the usual mid-week market technical comment, I thought that I would present updates on a number of trades that I had suggested in the past:
In addition, Tadas Viskanta at Abnormal Returns made a compilation of blogger wisdom about smart beta, which includes my contribution (see The dirty little secret behind smart beta investing). There's lots of good stuff there. The consensus seems to be that while smart beta funds and ETFs have their uses, they are no magic bullets and investors have to understand exactly what they're getting into when they buy.

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




Site Notice
The new site is now re-open for new subscribers. We closed our site to new subscribers in January in order to better control the rapid growth of our community. After listening to feedback and making a few tweaks to the site and the content, such as the addition of a mid-week technical update, the site is now re-open for business.

You can subscribe for 1 year (US $249.99), 1 month (US$24.99)  or 1 day (US$4.99);. Even if you are not ready to subscribe, you can always sign up for email notification of free posts as they are free and available to the public two weeks after publication.

As a reminder, here is a sample of some of past posts:



We would love to see new members in our community. Come over and take a look.

Monday, March 28, 2016

The GAAP gap as Rorschbach test

I've been meaning to write on this topic but I hadn't gotten around to it. For several weeks, I have seen warnings about deteriorating earnings quality. The gap between corporate earnings as defined by Generally Accepted Accounting Principles (GAAP) and operating earnings (earnings without the special bad stuff) has been widening to levels not seen since the last market crash.

Here is a chart from Zero Hedge which showed that the gap between GAAP and Non-GAAP earnings is at its worst since 2008.


The level of write-offs are absolutely horrendous.


On the other hand, this chart from Goldman Sachs is suggestive that these earnings "gaps" occur at the height of bear markets. If we are already through the worst of these writeoffs, could such a development be actually equity bullish?


Urban Carmel also pointed out that outside of recessions, the "GAAP gap" actually isn't that bad on a historical basis.


Interpreting the GAAP earnings quality gap is like the Rorschach inkblot test. Bullish or bearish? What`s the real story?

The full post is at our new site here.




Site Notice
The new site is now re-open for new subscribers. We closed our site to new subscribers in January in order to better control the rapid growth of our community. After listening to feedback and making a few tweaks to the site and the content, such as the addition of a mid-week technical update, the site is now re-open for business.

You can subscribe for 1 year (US $249.99), 1 month (US$24.99)  or 1 day (US$4.99);. Even if you are not ready to subscribe, you can always sign up for email notification of free posts as they are free and available to the public two weeks after publication.

As a reminder, here is a sample of some of past posts:



We would love to see new members in our community. Come over and take a look.

Sunday, March 27, 2016

Watching the USD for stock market direction

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 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 seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" 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 this model has shown turnover rates of about 200% per month.


The signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on (upgrade)*
  • 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


How the USD tells us about the stock market
I have been asked in the past to describe my brand of market analysis, which can be characterized in a number of ways. Technicians would call my approach inter-market analysis. Fundamentally driven investors may regard me as a global macro or cross-asset analyst. That`s because all markets are inter-connected and to simply focus at any single stock, sector or market in isolation misses the big picture. Analyzing different components of the big picture also allows me to write about topics as diverse as the US equity market, the term structure of the VIX Index (see Sell Rosh Hashanah?), Europe (see The costs of Spain's astounding recovery: Bug or feature?) and China (see Big Trouble with 5-year China).

To illustrate my point, I would like to show why I believe that the US Dollar holds the key to the medium term outlook (6-12 months) for US equities. As the chart below shows, the Trade Weighted Dollar has seen a clear breach of an uptrend line, which has bullish implications for equity bulls.



The full post is at our new site here.



Site Notice
The new site is now re-open for new subscribers. We closed our site to new subscribers in January in order to better control the rapid growth of our community. After listening to feedback and making a few tweaks to the site and the content, such as the addition of a mid-week technical update, the site is now re-open for business.

You can subscribe for 1 year (US $249.99), 1 month (US$24.99)  or 1 day (US$4.99);. Even if you are not ready to subscribe, you can always sign up for email notification of free posts as they are free and available to the public two weeks after publication.

As a reminder, here is a sample of some of past posts:

We would love to see new members in our community. Come over and take a look.

Wednesday, March 23, 2016

A shallow pullback?

Mid-week technical update: I wrote on the weekend that I expect that the stock market would continue to rise on an intermediate term basis, but some short-term weakness was likely (see A repeat of the failed Oct/Nov rally of 2015?). What I did not expect was to see a short-term buy signal after the brief weakness that we saw today (Wednesday).

In retrospect, it was easy to see that a pullback was coming. This hourly chart of the SPX shows negative divergences on RSI-5 and RSI-14, which set up the conditions for the fall in prices.



The full post is available at our new site here.