A Momentum Renaissance?

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 Asset Allocation 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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.


The latest signals of each model are as follows:

  • Ultimate market timing model: Sell equities
  • Trend Model signal: Neutral (upgrade)
  • Trading model: Neutral

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


A MoMo revival

Despite my expectations, the market took on a risk-on tone in the past week, and momentum is making a return. The relative performance of price momentum factor ETFs have been strong since their bottom in early September, and most have made new recovery highs.




Bullish breadth thrusts

While the price momentum factor describes relative returns, i.e. whether momentum stocks are outperforming the market, absolute price momentum has made a comeback too. 


Ed Clissold of Ned Davis Research pointed out that the market achieved a “breadth thrust”, which he defined as over 90% of stocks over their 10 day moving average (dma). Such conditions have historically been very bullish for stocks.



The market also flashed a rare Zweig Breadth Thrust buy signal as of the close on Thursday. The market has to become oversold on the ZBT Indicator, and reach an overbought reading within 10 trading days. Breadth conditions eked out an overbought condition last Thursday, which was the last day of the 10 day window. This is a rare buy signal, and there were only two in the last six years. Historically, ZBT buy signals are very bullish, and tend to resolve in bullish manners in the following weeks, and even over a year.



The most recent “failure” of the ZBT buy signal occurred in 2016, when the market rose weakly after the signal, but soon weakened to re-test its previous lows.



Trend Model upgrade

Two weeks ago, my Trend Asset Allocation Model was downgraded from “neutral” to “bearish” (see Time to de-risk). At the time, I cautioned that these are trend following models, and these models tend to be slow to react and they will never spot the exact top or bottom. In addition, trend following models run the risk of whipsaw should prices reverse. This is the condition we face today.


Since the downgrade, global markets have taken a firmer tone. In addition, cyclically sensitive commodities such as industrial metals have also rebounded to test the old highs after a brief period of weakness.



In addition, cross-asset signals from foreign exchange markets have also shifting to a marginal risk-on tone. The USD Index has weakened and breached both its 50 dma and a key support level, which was the site of a recent upside breakout. The USD has been inversely correlated to stock prices (bottom panel), and the highly sensitive AUDJPY cross (red line) has also confirmed the bullish recovery.



New Deal democrat monitors a series of economic indicators and divides them into coincident, short leading, and long leading indicators. His unusual comment this week confirmed the strength spotted by the Trend Model.

This week I added “best” pandemic readings for many of the indicators (in particular except for interest rates), and I will probably add more next week. Doing so has indicated that almost all of them have had their best readings in the past five weeks, and about half of those this week or last week. Thus, while the course of the pandemic continues to be the decisive issue for the economy, for now that indicates slow improvement has continued. 

In short, the Trend Model is capturing the sudden rebound of global asset prices, namely the reversal of the risk-off trend that was evident two weeks ago.



Key risk: Giddy sentiment

The key risk of this bullish about-face is another whipsaw, as global asset prices have become increasingly volatile and correlated. Short-term sentiment is getting a little giddy, and the market may find it difficult to advance significantly in such an environment.


In particular, the signals from the option market are disturbing. Individual investors (dumb money) tend to use single stock options to trade and speculate, while institutions and professionals (smart money) use index options to hedge their positions. The chart below shows that the 50 dma of put/call ratio (top panel) is very low, which is contrarian bearish. As well, the spread between the equity put/call ratio (CPCE) and index put/call ratio (CPCI) is also nearing a historical low, which is also a bearish signal.



The term structure of implied volatility is also instructive. Last week’s rally pushed near-term option implied volatility down, while longer term volatility remains elevated. Implied volatility rises sharply just after the November 3 election peaks out in mid-December, indicating continuing concerns about the possibility of a contested election with no clear results. The latest sharp decline in near-term volatility may be an indication that risk is not correctly priced.



Macro Charts observed that large speculators are in crowded short positions in Treasury bonds, and in the USD, “Extreme Bond AND Dollar positioning could be a big source of instability here – impacting all risk assets.” Much of the fast-money crowd is already all-in long the risk-on and reflation trade from a cross-asset analytical perspective.



The cover of Barron’s featured a story on the cyclically sensitive industrial stocks. Does this represent a contrarian magazine cover warning on the cyclical reflation theme?




Heightened expectations

One of the narratives that have been the catalyst for higher prices is the possible passage of a fiscal stimulus bill. The market tanked when Trump tweeted that he was cutting off negotiations with House Speaker Pelosi over a stimulus package. He then reversed course later in the week and called for an agreement. Bloomberg reported that Republican Senate Majority Leader McConnell shot down that idea and indicated that any deal is unlikely before the election:
Senate Majority Leader Mitch McConnell said the differences are likely too big and the time is too short for Congress to agree on a new comprehensive stimulus package before the election, despite President Donald Trump’s renewed interest in striking a deal.


“I believe that we do need another rescue package, but the proximity to the elections and the differences of opinion about what is needed are pretty vast,” McConnell said at an event in his home state of Kentucky.


He also said that while both sides agree on the need for aid to U.S. airlines, that too is unlikely to happen in the next three weeks.
Market expectations a fiscal stimulus bill may be too high.


Across the Atlantic, the relative return of the small cap FTSE 250 to the large cap FTSE 100 is testing a key relative resistance level (bottom panel). This ratio is an important barometer of Brexit sentiment, as small caps are more sensitive to the UK economy than large caps.



This is another example of heightened expectations. The deadline for a smooth Brexit is approaching quickly, and negotiators are working furious to arrive at a limited deal, which is a significant retreat from the comprehensive Withdrawal Agreement that UK Prime Minister Boris Johnson backed away from.


Expectations may be too high on both sides of the Atlantic.



More October surprises?

Looking to the week ahead, it’s difficult to know how the stock market will react in the coming weeks. We have seen numerous October Surprises in 2020 to last several elections. Historically, the month of October has not been equity friendly during election years.



I am monitoring is the NASDAQ 100, which is a key barometer of large cap growth stock leadership. The NASDAQ 100 to S&P 500 ratio is testing an important rising trend line. A trend line violation could be the signal for a risk-off episode, as technology and technology related sectors comprise nearly 50% of S&P 500 weight.



In conclusion, the renaissance of absolute and relative momentum factors is a positive development for equity prices. However, the combination of event risks, excessively frothy short-term sentiment, and uncertain fundamental underpinnings of the recent rally, the odds of a bullish resolution may be not much better than a coin toss despite the historical evidence.


Stay nimble, keep an open mind to all possibilities, and stay tuned for either signs of bullish confirmation, or bearish reversals.


70 thoughts on “A Momentum Renaissance?

  1. My brilliant son pointed me to the perfect analogy of the 2020 stock market especially the current situation.

    HumbleStudents will remember the tragic death of JFK Jr in a light plane crash at night during a visibility blackout. Experts surmised that he fell prey to going into a spin and trusting his instincts rather than his instruments. It seems that with no visibility, one’s instincts are wrong.

    This year and now our instincts and our instruments are being tested constantly as they often have been in opposite directions. The resurging pandemic causing economic weakness, gridlock blocking support for workers, with rioting heading into a sure-to-be shit-show on election night would have one’s instincts screaming caution. Yet the instruments say turn that stick and fly into the spin.

    In the case of flyers, the decision is life or death. With investors who stay in cash following instincts when markets follow the instruments and go up, they only lose opportunity. If the instruments are wrong and the market plunges, one loses capital that is hard to replace.

    I remember a quote, “The smart people who didn’t lose all their money in 1929, lost it all in 1930.”

    This is a true dilemma and as Cam says, it’s a coin-toss.

  2. One key to deciding to trust the instruments, is that markets look six months ahead. Where will the current stressors be at in six months? If polls showing a Dem sweep are correct, visibility of cures for the current woes are coming in six months or less.

    Don’t get me wrong my friends, a Dem sweep has all kinds of long term problems. My focus is intermediate term.

    1. Instruments like put to call ratios, dumb money to smart money, massively elevated VIX futures, the “shit show” you are referring to, massive rise in gold, may be more believable than the headline index numbers, in the short to intermediate term.
      I am going to read the book by Professor Stephanie Kelton, FWIW.

    1. Read an interesting article that said the two extremes work on the pandemic, China’s TOTAL lockdown or Sweden’s open rules with cautious citizens but anything in between has people falling back on old habits as they tire of the threat. That seems to be the case almost everywhere, even counties that did well initially and then reopened. We are not patient peoples.

        1. The truth is, that there is a lot we don’t know. Makes me think of Jurassic Park and the mathematician Ian? and his comments. To me, this is why we have had changes in recommendations, because we just don’t know.
          Wearing masks, washing hands have little downside.
          Social distancing for some is a bigger sacrifice, but we know from experience with crowded chicken coops and other situations where animals are sadly crowded that outbreaks of disease are a problem, the Diamond Princess had 712 cases out of 3700 passengers and crew. So social distancing sounds like a good idea.
          It’s weird when watching movies and seeing all these people in crowded places and noticing they are not wearing masks…yeah, life used to be like that.
          Tectonic change perhaps, but I also marvel at how in many movies there are no smartphones. Not all change is bad, not all is good, we have to adapt.

  3. Get behind me FOMO!
    Put it on ignore.
    These are risky times, and although the market may go much higher, we might look back and see that the drop in Feb/March was a preshock and the big one when it happens will be larger and as fast if not faster, so don’t go all in. Keep a lot safe on the sidelines.
    Ulysses tied to the mast was able to resist the siren call, we need to do the same. Hedging with puts could help, but because of the volatility they are expensive!
    But ask yourself if we are in normal times, if the answer is no, then reel in the risk so that when the big one happens you can buy at great prices…but I have no idea as to when this will happen it might take years, and to be honest I wish it never did because I think there will be hell to pay

  4. The last strong rally in stocks started on July 15, two weeks after quarter end and the beginning of earnings season. Next week, we reach the same point in this quarter.

    Sensitive weekly indicators I follow, ECRI and RecessionAlert have seen their indexes fall ECRI (for 2 weeks) and RecessionAlert (5 weeks). Before that they were up and up as the economy recovered.

    The impasse on a support programs in Congress might be stalling the economy. Last quarter, companies reported bad results with high forecasts in the earnings season. This quarter could show the opposite and stall this market.

    Friday was a strange day for my Tactical Factor research. The Vulnerable subindex for virtually all indexes, industry or country fell when each of their Sturdy Index rose. This led to the overall price index going up but showing bad internals.

    If the economy is stalling and starting to fall back, the stocks in the Vulnerable Indexes will be the ones to lead us down. I’ll be monitoring this daily.

    This was the first and only sign that this rally had any problems at all and might just be a one day blemish.

    The upcoming earnings season may be a challenge. Economists at one large firm, dropped their fourth quarter GNP estimate from a 10.0% to a 2.5% growth rate recently. Company’s forward guidance might disappoint during earnings calls. The next couple of weeks are key.

    1. Thanks Ken. The US economy is largely running on money printing. I have my doubts whether a stimulus is a done deal.
      I would be curious to see what your share with your Vulnerable and Sturdy indices.

    2. Ken, Thank you for sharing your insights. Really appreciate them. Looking forward to your data on the Vulnerable/Sturdy indexes in coming weeks.

      Agree with DV on money printing. I think the stimulus may be delayed post-election or even until late Jan. But it is coming. The ride may be bumpy in the near-term but the stocks will remain elevated because of the expectations of fiscal stimulus under the next administration, if not sooner.

      ZIRP, QE and now the fiscal stimulus (MMT) for infrastructure and clean energy; what is there not to like for the next few years.

  5. Cam, If yesterday’s question of “Why Are Stocks So Strong ? ” was meant to be rhetorical, you probably should skip this, because it provides an answer. It starts by telling you things you already know, but then presents views you may not have considered.

    How Jack Bogle Broke the Stock Market :


  6. September 23, 2020 at 3:20 pm

    Short term and Intermediate term indicators are getting oversold. A 10 % to 15 % pullback is normal in a bull market. Therefore we should be receptive to the possibility that we find a bottom at these levels. Cam where would you reserve your position and go long the SPX and NDX?
    Rajiv says:
    September 23, 2020 at 3:22 pm

    sorry reverse. It self corrected. Technology!!!

    Cam: I am posting this previous post which was at the day of the exact bottom not to brag. God knows I have made many mistakes in my trading career. Only, to point out that one needs to have a contingency plan if things happen which one does not foresee. The market keeps marching upwards. Ultimately, the only thing that matters is price and that is going up regardless of all the indicators.

    John Maynard Keynes
    The late, great economist John Maynard Keynes always said, “When the facts change, I change my mind.”

    This rally from the lows has been strong and unrelenting. A simple trend trading strategy has worked regardless of the misgivings. As a professional one needs to have a stop where one reverses the position or considers the alternative.

  7. Wow – another gap-up open.

    Trimming NET above 47.

    I don’t really have much else going on, as my outlook is negative. But hey – the market doesn’t care about my outlook. I’m happy to be wrong.

    1. rxchen2 you must be in CA. I am in Tiburon. I hope the early bird gets the worm.



    2. One thing I still struggle with, even after >30 years of trading – regardless of how well I do, it’s difficult to stay happy for long. The market plays with our emotions.

      I’m now status post my best stretch ever. A couple of weeks ago, I had scaled back into positions on a Thursday, watched them tank the following morning – but rather than take the loss I opted on instinct to add to positions in the hole, going from 17% invested to 93% invested – closed all positions 1-2 trading days later for a record gain (due to position size).

      Over the next week and a half – 2 for 2 buying into downdrafts on smaller position sizes.

      This morning- unhappy being underinvested.

      That’s one price we pay for being emotional homo sapiens.

  8. Strong open. Not exactly sure why my outlook remains negative – no interest in buying anything this morning.

    1. Agreed. I was long TQQQ. However, took a profit much to early. Has gone up everyday for the last 5. Feel like pulling all my hair out. Whatever is left after 30 years of trading.

  9. One line volatility strategy takes profit 10/12/20. Sharpe ratio 4.02 annual. Note that in most instances, the rally continued more than twice the duration of the average holding period of 19 trading days of winning trades. This shows that even a simple one liner strategy could make nearly as much as buy and hold but stayed in the market only 17% of the time with a much lower draw down and draw down duration. No losses over the last 2 years 9 months studied. This strategy could easily be optimized further but remained like this for simplicity.


  10. Cam
    Can you give some estimates for Q 3 EPS?
    Tech shares may do well in the coming earnings parade, but I remain worried for the rest of the market. I also wonder if the PE ratio are slowly approaching PE ratios we saw circa year 2000.

  11. Obvious short squeeze on nasdaq reinforced by Zweig Breadth Thrust buy signal.

    Prepare for “good overbouht” period.

  12. ZBT that didn’t turn out is not a good reason to avoid a long trade. Oct 2015 study.
    The following chart showed what happened to ZBT after its formation on 10/5/15. As Cam correctly pointed out ZBT failures do occur and from this strategy analysis triggered by ‘mini-ZBT’ thrusts, about 25% of these early mZBTs turned out not to be profitable swing trades. However, that is not really a good reason for not taking the trades. As the example on 10/5/15 showed, there were many chances to enter and exit the trade before the trend goes south. The ZBT rally for 10/5/15 actually lasted nearly a month, until it topped on 11/4/15. By that time, this strategy had already taken profit at around 8% gain and if a trader would just exit using the daily Parabolic SAR, that would have gained more than 9%. The following strategy is more complicated but it studied over 10 years of data and kept the drawdowns to a minimum by using better entries. The annualized Sharpe ratio is 1.97.

  13. ‘Today will be the first time in history* that $SPY gapped up at least 0.25% at the open and added at least 0.25% from open to close for 4 straight days.’  The aforementioned condition has happened 8 times before in the last 15 years if it was 3 days in a row.  That was what Sentimentrader had tweeted.  To find out the strategy of buying with 3 time in a row of gap up and gains, here are the results.  87.5% of the time profitable. Average trading days in winning trades 119, losing trades you’ll know in about 23 days.  19% of the time in the market.  Max drawdown is low at 4.4% for trade close to trade close. Something to think about if there is not much to do sitting and waiting in a trend. Short Term (ST) models have all given up trying to short this up trend.

  14. Starter position VXX at the close. Can’t say I have a high degree of confidence in the trade, but I like the risk/reward tradeoff here.

    1. Adding to positions in NIO/ BIDU.

      Reopening a position in AAPL.

      Reopening positions in XLE/ XLF.

      Taking a swing at WU.

  15. The market feels ready to rock ‘n roll.

    There was a degree of panic earlier with the AAPL selloff, which provided a nice catalyst to transition into buy mode.

  16. 12058 was the all time weekly closing high for the Nasdaq 100. The equal weighted version of the NDX already closed at new daily highs. So far it seems we are holding above that 12058 level.
    Long term treasuries (TLT) seems to have held their 200dma and are bouncing now, whether this is due to excpected economic slowdown or trust in the Fed buying enough bonds to keep rates low is to be determined, but for now it is what it is.

  17. Taking even the core positions in NIO and NET off here.

    Sometimes it’s just common sense to take gains when ST gains become unsustainable (at least IMHO).

  18. SPY filled a gap ~347.35, and back above yesterday’s low. DIA didn’t quite fill the gap @ 284.41 (but @ 284.58 you would need a magnifier to spot the difference), and still below yesterday’s low..

    Sticking with both positions for now.

  19. Short Term (ST) model entering a long trade at $SPX 3491 this afternoon after losing a few times at trying to short (41% of the time short trades profitable). ST model long trades are 21 out of 21 times profitable over the last 4 months with a 5.44% maximum drawdown.

  20. It is always surprising how well a simple one line strategy can work (code shown on the chart picture). Such a strategy has a 19% annual return over the last ~3 years, 70% return so far with 12 trades and zero losses. Updated chart that will show how the volatility strategy will enter at the open tomorrow (10/15/20) on the $SPX that is currently at 3488. Sometimes this strategy could be early if price is below the 20 day MA. The close to close max drawdown is 8.4% with 0 actual loss.

    1. Correction, this strategy is trading the $NDX in the link provided but similar one line strategy can also be used to trade the $SPX.

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