Preface: Explaining our market timing models
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 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.
- Ultimate market timing model: Buy equities
- Trend Model signal: Bullish
- 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 those email alerts is shown here.
Subscribers can access the latest signal in real-time here.
What’s wrong with this picture?
A failure of leadership?
A tiring bull
It’s the 10th anniversary of “Margin Call” and yesterday I hosted a live chat with its director, J.C. Chandor, as well as Citigroup strategist Matt King. The film traces a blow-up at a big bank that’s reminiscent of what happened in the 2008 subprime crisis. King famously penned a research note just before the collapse of Lehman Brothers, arguing that the big problem for U.S. banks was short-term funding secured by subprime and other collateral.
In “Margin Call,” the bank’s senior executives don’t realize they’re sitting on a powder keg until a junior risk manager stumbles on the numbers by chance. That scenario always seemed a little far-fetched to me, but King brought up some anecdotes from 2008 that showed just how much senior leaders seemed to be unaware of the scale of the problem they faced. As he put it:
“I myself remember having a conversation with desk heads in early 2008 on CDOs of asset-backed securities, and they were being relatively incredulous at the idea that if the junior tranches went, the whole structure was likely to go (I actually wrote another research piece that hardly anyone remembers!)”
So how much has changed on Wall Street in the past decade? We recently saw banks handle another — albeit much smaller — blow-up in the form of Archegos. There were huge losses from that but no broader contagion, a testament to post-crisis regulation on capital and leverage. Is the system safer? King argues that there are some things that give him pause in the current environment, notably the March 2020 drama in the world’s biggest funding market:
“More subtly but just as importantly, what the periodic bouts of illiquidity in Treasuries are suggestive of is investor herding. The real recipe for a liquid and stable market is a heterogeneous market: Buyers and sellers, bottom-up investors and top-down investors, mark-to-market investors and buy-and-hold investors.
Somehow what we seem to have done post-2008 is to take a whole load of steps, which are individually designed to make the system safer, but collectively have killed off that heterogeneity and made for one-sided markets. The bottom-up, value-based, non-mark-to-market investor — they’ve been killed off by a decade of quantitative easing making everything more expensive and by regulators demanding everyone take a risk-based approach to capital. That gives you a market in which investors get herded into a broad-based reach for yield that they don’t really believe in. And that gives you those pockets of illiquidity: We don’t get one and two-standard-deviation movements any more — we either get zero or we get 16.”
Weak, but not catastrophic
On a relative basis, defensive sectors are not acting well, indicating that the bears haven’t seized control of the tape.