Tuesday, May 24, 2016

The correction is (probably) over

Mid-week market update: About two weeks ago, my inner trader turned cautious on the US stock market (see my tweet and subsequent post Tactically taking profits in the commodity and reflation trade). I had cited as reasons the weakness from China, the commodity markets and, later, Europe (see Waiting for the storm to pass), which was based on inter-market and cross-asset analysis. (Though my inner investor remained constructive on stocks.)

Since then, the SPX weakened to test an important technical support at 2040, which represents the neckline of a potential head and shoulders formation. (As all good technicians know, a head and shoulders formation isn't complete until the neckline is broken.) While the market did break 2040 last week on an intra-day basis, neckline support held. In addition, the NASDAQ Composite confirmed the strength today by staging an upside breakout through resistance.


At the time of the bearish trading call, I said that I would turn bullish if:
  • The US stock market got oversold and sentiment models flashed a crowded short reading; o
  • The stock markets improved in Europe or Asia.
Let's consider what has happened since then.

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







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Monday, May 23, 2016

Yield curve: Correlation vs. causation edition

Further to my last post (see Three steps and a stumble?), I would like to clear up some misconceptions about how I interpret the yield curve and its investment implications. Much of the confusion revolves around the idea of correlation vs. causation. Yield curve inversions don't cause anything. Yield curve inversions are a signal (correlation) of certain effects that have important investment implications.

In this post, I will address the following topics:
  • Yield curve and recessions
  • Yield curve and credit conditions
  • Yield curve and equity bear markets
The full post can be found at our new site here.






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Sunday, May 22, 2016

Three steps and a 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 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 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 bullish 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 any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


Some good news and bad news
The market action last week played out roughly as I expected. Stock prices were choppy and displayed a series of lower highs and lower lows, though the technically important 2040 support neckline of the head and shoulders pattern did not break decisively (see Waiting for the storm to pass). The short-term trend remains down and key intermediate term indicators has not reach oversold levels, as measured by the NYSE McClellan Oscillator (NYMO) breaching the -80 level and VIX Index moving above its Bollinger Band, which suggests that the current corrective action isn't finished.


There was some good news and bad news as stocks declined...

...specifically, I would like to explore the possibility of the bearish three steps and a stumble scenario, which follows the old trading adage of three Fed tightening moves will tend to lead to a stock market stumble. This scenario is becoming a real possibility as the US economy is still in a fragile state.

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




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Thursday, May 19, 2016

A cautionary tale for quants and systems traders

How would you feel if the average doctor was right 55% of the time? What if a "superstar" doctor, the one whose new patient waiting list stretched out for 1-2 years, was right 60-70% of the time?

That's how thing work in investing. A "good" quantitative factor, or system, is often acceptable if it has a 55% success rate. If you get a 65% success rate, you are a superstar. Some systems have success rates of less than 50%, but the average value of their wins dwarf the average value of their losses.

Finance quants are often said to suffer science envy. They employ scientific techniques to find alpha, but they do it in an environment where the signal-to-noise ratio is very low. Let`s not kid ourselves, we know what day traders, swing traders and system traders really do.


By contrast, the signal-to-noise in the sciences tend to be higher. Viewed in isolation, that can be a cautionary tale for all quant researchers and systems traders who think that they may have found their path to riches.

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



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Wednesday, May 18, 2016

What's spooking the stock market?

Mid-week market update: No, it isn't just a more hawkish Federal Reserve that's spooking the stock market. Stock prices were been falling before Fedspeak and the latest FOMC minutes sounded a more hawkish tone. The SPX staged a successful test of its 2040 neckline support of its head and shoulders pattern today. In fact, today`s action could be interpreted constructively as it is experiencing a minor positive divergence on RSI-5.



Don`t blame the Fed. Market weakness is a symptom, not the cause of the retreat.

I turned more cautious on the stock market last week because of growing market fears of a slowdown in China (see Tactically taking profits on the commodity and reflation trade). There seems to be a bifurcation starting to occur in the global economy. The US macro picture looks fine as the American economy is motoring along, as evidenced by the latest news of the April rebound in industrial production. Outside the US, the picture looks far less rosy.

The latest BoAML Fund Manager Survey revealed the top two tail-risks on fund managers' minds were Brexit and China, which did not appear as a source of concern in the previous month's survey. It's no wonder that the markets are getting spooked.


Here's how I am preparing myself and how I would watch for the turn upwards, should it come.

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





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Monday, May 16, 2016

A better way to trade the China slowdown

China has been undergoing a series of stop-start growth spurts mini-cycles, courtesy of credit driven stimulus programs (chart via RBS):


The size of the latest Q1 financing induced boom was extraordinary, as it hinted at panic by the authorities. For some perspective, credit expansion in Q1 2016 was somewhere between the GDP of Indonesia and Mexico:



Much of the extra liquidity sloshing around the system has created a great ball of money that has bounced around from one asset class to another, such as property, stocks and commodities.


Coming off a sugar high
I have written about the market fears of China slowdown before (see Tactically taking profits in the commodity and reflation trade), the data coming from last weekend seems to confirm that the sugar high of credit driven stimulus is starting to wear off (via Bloomberg):
The April readings marked a sharp swing in fortunes, especially in new credit: where March saw aggregate financing jump by more than all economists had forecast, April’s number undershot all 26 predictions. Such gyrations -- long a feature of the nation’s stock market -- add to the challenge for policy makers and foreign investors seeking to get a read on an economy caught in a multi-year slowdown and struggling to stabilize.
Total social financing plummeted to levels not seen since 2013 (Deutsche Bank via Business Insider):



Things got so bad that the PBoC felt compelled to reassure the markets that it would continue to support the economy through monetary policy (via Bloomberg):
China’s central bank reassured investors that monetary policy will continue to support the economy after a sharp slowdown in new credit last month, and said the lending slump was temporary.

The deceleration in the growth of new yuan loans in April was mainly due to a pick-up in a program to swap high-cost local government debt for cheaper municipal bonds, the People’s Bank of China said in a statement on its website on Saturday. No less than 350 billion yuan ($53.6 billion) of such swaps were conducted last month, while aggregating financing growth was affected partly by a decrease in corporate bond issuance, according to the central bank.
The full post can be found at our new site here.





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Sunday, May 15, 2016

Waiting for the storm to pass

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 to look for changes in 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 bullish 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: 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.


Don't panic, it's only a correction
My last blog post created a bit of a stir among readers as I was inundated with questions (see Tactically taking profits in the commodity and reflation trade). To reiterate, I made a trading call to get more cautious based on a developing slowdown coming from China, which was signaled by falling commodity and Asian stock prices.

At worst, this growth scare will result in nothing more than a minor US equity correction. The intermediate term outlook remains bullish. How would you feel about equity prices if I told you:
  • Earnings are continuing to recover
  • Fed policy is dovish and equity friendly
Put simply, stock prices depend on two factors. The first is earnings, or the E in the P/E ratio - and earnings are growing. The second is the P/E multiple, which is a function of the outlook for interest rates and future growth, both of which are showing equity friendly tendencies.

Investors just have to wait out the storm.

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



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Wednesday, May 11, 2016

Tactically taking profits on the commodity and reflation trade

Mid-week market update: Regular readers know that I have been bullish on the commodity and reflation trade (see A possible generational low in oil and energy stocks and The road to a 2016 market top). On the weekend, I postulated three separate short-term scenarios for the stock market  (see *Sigh* Another growth scare):
  1. The growth scare recedes and the market pushes upwards to test and possibly exceed the all-time highs;
  2. The growth scare continues, which results in a choppy range-bound market; or
  3. The growth scare intensifies and the market breaks support, with a measured SPX target of 1970-1980.
It seems that circumstances are converging towards scenario 2 and 3. It`s time to make a call to take trading profits in both the long SPX and commodity positions. The combination of excessive market positioning and weakness in China are raising red flags, from the viewpoints of cross-asset and inter-market analysis.

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


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Monday, May 9, 2016

When will the market start to discount a Trump presidency?

Let me make myself very clear. As a Canadian, I have no horse in the American presidential race, but Donald Trump is a clown. He is a loose cannon on deck. He could also become the next president of the United States.

So when does the market start to discount the potential effects of a Trump presidency?



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



Site notice
We would like to announce our "Sale in May" event, where you can get US$50 off the first year of an annual subscription. This offer is only available to the first 100 who sign up or until May 31, whichever comes first. Anything like this we do usually sells out fast so I suggest that you sign up ASAP before missing this golden opportunity.



For more details, click here to get your secret coupon code.

Sunday, May 8, 2016

*Sigh* Another growth scare!

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.


Price vs. fundamental momentum
The stock market got another growth scare last week when it weakened last Tuesday, after a dismal set of PMI reports, and ended with a Non-Farm Payroll miss in the US Employment report. I was reminded of an article by Kurt Feuerman and James Tierney Jr. of AllianceBernstein entitled Don`t Confuse Price with Business Momentum:
Momentum is a funny thing. Share price momentum isn`t necessarily an indicator of business momentum. Sometimes a stock is falling simply because investors are taking profits after its outperformance or because a portfolio is changing its risk profile in a volatile market. There are countless reasons why share prices move.

Last year's narrow market is a case in point. Investors might assume that the underperformance of a large swath of the U.S. stock market means that most companies are in bad shape. There is, however, another plausible interpretation: It could also mean that there are a lot of buying opportunities in undervalued companies, ones that have a much better business than is widely believed.
In other words, don`t confuse price momentum with fundamental momentum. So what's the trend in macro and fundamental momentum?

Oh PUH-LEEZ! How real does the latest growth scare look to you?



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





Site notice
We would like to announce our "Sale in May" event, where you can get US$50 off the first year of an annual subscription. This offer is only available to the first 100 who sign up or until May 31, whichever comes first. Anything like this we do usually sells out fast so I suggest that you sign up ASAP before missing this golden opportunity.



For more details, click here to get your secret coupon code.

Wednesday, May 4, 2016

What's the pain trade?

Mid-week market update: In the short run, the SPX has pulled back and appear to be about to test its 50 day moving average (dma) at 2040, while experiencing a positive divergence on RSI-5.



The SPX saw a Golden Cross last week - and the right way to trade these signals is to use the faster moving average as a trailing stop. Until the 50 dma is breached in a definitive way, my inclination is to give the bull case the benefit of the doubt.

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




Site notice
We would like to announce our "Sale in May" event, where you can get US$50 off the first year of an annual subscription. This offer is only available to the first 100 who sign up or until May 31, whichever comes first. Anything like this we do usually sells out fast so I suggest that you sign up ASAP before missing this golden opportunity.



For more details, click here to get your secret coupon code.

Monday, May 2, 2016

Will an oil spike kill the stock bull?

I recently wrote about my scenario for a market top in 2016 (see My roadmap for 2016 and beyond), which goes something like this:
  1. Unemployment is now at 5.0%, which is a point at which the economy historically started to experience cost-push inflation.
  2. Inflation edges up, which is already being seen in commodity prices.
  3. Initially, the Fed is content to let inflation run a little "hot" because of what it perceives to be slack in the labor market, but as inflation and inflationary expectations tick up...
  4. The Fed finds that it is behind the curve and responds with a series of rapid rate hikes.
  5. The economy slows and goes into recession.
  6. Stock prices fall as the probability of a recession spikes and a bear market begins.
The biggest variable is timing. I believe that we are roughly at phase 2 of this process. Despite the possibility of a market top on the horizon, it is too early for investors to get overly defensive right now. There is still money to be made as growth expectations ramp up (see How the SP 500 could get to 2400 this year).

Then I came upon a note from a reader, who used a rule-of-thumb of an 80% run-up in oil prices as a precursor signal to a recession and bear market. 80%??? Crude oil bottomed in February at about $27 and we are nearly there! (He later amended that comment to an 80% year-over-year change in oil prices.)

The discussion led me to the work of James Hamilton, who showed that oil shocks have tended to precede economic recessions. If that is indeed the case, then how far is the American economy from a recession now that oil prices have spiked?

The full post is available at our new site here.



Website notice
We would like to announce our "Sale in May" event, where you can get US$50 off the first year of an annual subscription. This offer is only available to the first 100 who sign up or until May 31, whichever comes first. Anything like this we do usually sells out fast so I suggest that you sign up ASAP before missing this golden opportunity.



For more details, click here to get your secret coupon code.

Sunday, May 1, 2016

Don't go away in May

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.


Strong momentum = Bullish
Call it what you want: momentum, broad based breadth, price trend. Despite the short-term consolidation shown by the stock market, the signs of positive momentum make it difficult to be intermediate term bearish.

I can see it in the trading signals of my Trend Model, which turned bullish soon after the February bottom. The prolonged length of the signal is indications of momentum, trend and powerful breadth thrust.


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


Website notice
We would like to announce our "Sale in May" event, where you can get US$50 off the first year of an annual subscription. This offer is only available to the first 100 who sign up or until May 31, whichever comes first. Anything like this we do usually sells out fast so I suggest that you sign up ASAP before missing this golden opportunity.



For more details, click here to get your secret coupon code.

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.