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 that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here
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 is 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: Buy equities
- Trend Model signal: Bullish
- Trading model: Bullish
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.
The S&P 500 tests overhead resistance
The S&P 500 has been trading sideways since mid-April, with overhead resistance at roughly the 4200 level. While the market action in the past week has been frustrating for both bulls and bears, I believe the index should be able to advance past the 4200 level to test the old highs and probably make marginal new highs in early June. My bullish view is supported by the behavior of the VIX Index, which has convincingly fallen below its 20 dma after recycling from above its upper Bollinger Band.
So far, the S&P 500 seasonality is tracking well this year. We have seen a March low, followed by an April rally and weakness in May. If the market continues on this roadmap, the index should correct in late June after it rises to an all-time high in the next two weeks.
As well, the relative performance of defensive sectors have weakened and several have violated relative support levels. These are signals that the bulls have regained control of the tape.
A different kind of rally
pointed out that one-third of NASDAQ stocks have flashed MACD buy signals, which is another important indicator of underlying strength.
pointed out that large speculators (read: hedge funds) are still net short the NASDAQ 100 futures. Growth stocks are poised to climb the proverbial Wall of Worry.
When might the growth stock rally end? Keep an eye on market breadth, such as the percentage of NASDAQ 100 stocks above their 50 dma or the NASDAQ McClellan Oscillator, to reach overbought levels as signals to become more cautious.
In light of the rising underlying strength in NASDAQ 100 names but a negative RSI divergence in the S&P 500, the S&P 500 may move sideways in the next two weeks while the market undergoes an internal rotation from value to growth.
One important test of market psychology will occur Friday with the release of the May Employment Report. As a reminder, the market had expected the gain of 1 million jobs in April and there were whisper numbers that Non-Farm Payroll would come in as high as 2 million. Instead, NFP inexplicably missed expectations with at 266K print. There is a good chance the April figure would be revised substantially upwards and the May NFP gain could bounce back with a gain of over 1 million jobs against a more modest expectation of 620K. How will the stock market react under such a scenario. Will good news be good news or bad news?
In summary, I believe the stock market is poised for additional advances in early June. Expect value stocks to take a breather, and a counter-trend rally by the lagging growth names. However, be prepared for the possibility for the S&P 500 to churn sideways for the next two weeks as the market undergoes an internal rotation from value to growth stocks.
Disclosure: Long SPXL