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 bsoe 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: Neutral
- 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.
A reversal bottom
Last week, I lamented that the stock market appeared to be fearful, but not panicked
. Be careful what you wish for, you might just get it.
On Wednesday, the S&P 500 violated a key neckline support level of an apparent head and shoulder pattern. On Thursday, the Russian Army crossed into Ukrainian territory and conducted what Putin called a “special military operation”. Global markets adopted a risk-off tone and S&P 500 futures were down -2.5% overnight. The index opened deeply in the red but recovered strongly on the day on high volume to form a classic reversal bottom.
If war is what it took, I’ll never ask the market gods for panic again.
Market internals are supportive of a bullish reversal. Even though the large-cap S&P 500 briefly violated support, the mid-cap S&P 400 and small-cap S&P 600 both held support, which is a constructive development.
On an intra-day basis, three of the four components of my Bottom Spotting Model had flashed buy signals, only to see one of the models reverse itself as the VIX Index closed below its upper Bollinger Band.
Even before the shooting began, sentiment models were supportive of a short-term bottom. The AAII bull-bear spread had fallen to -30, which is consistent with signs of panic bottoms.
II sentiment tells a similar contrarian bullish story. The bull-bear spread had fallen to just above zero and bearish sentiment had spiked to levels that were indicative of panic.
As well, Macro Charts
pointed out that the traded value of put options had spiked and the traded value of call options had plunged.
Selected industries of interest
Here are some indutries to consider in the current heightened geopolitical risk environment.
Ukraine is the breadbasket of Europe and the war is likely to curtail production. Instead of buying an agricultural products ETF, I prefer to focus on companies that support the agricultural industry (MOO). The ETF is holding above absolute support and recently staged an upside breakout through relative resistance.
Another obvious industry is that benefits in the current environment is aerospace and defense, which broke up through a relative downtrend and exhibiting positive relative strength.
Finally, cyber security stocks represent a group that has been overlooked in the current environment but they are starting to catch a bid. They violated an important relative support level but recently recovered above relative support turned resistance. This is an industry that could show significant potential for outperformance.
In conclusion, a short-term bottom is probably in, but it’s difficult to predict short-term market fluctuations in the current circumstances. The situation on the ground in Ukraine is highly fluid and a jittery market is highly sensitive to headline risk.
Investors could focus on agriculture (MOO), aerospace and defense (ITA), and cyber security (HACK) for outperformance opportunities in the current elevated geopolitical risk environment.
Disclosure: Long TQQQ