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.
No lack of volatility
This stock market certainly does not lack volatility. The VIX Index underwent a recent series of upper Bollinger Band rides (shaded zones) while exhibiting positive RSI and MACD divergences.
The next known source of volatility starts on March 15, the Ides of March, as the FOMC convenes for its regularly scheduled meeting.
Sentiment models remain in the fear zone this week. The AAII bull-bear spread is under -20, which constitutes a buy signal indicating a high level of anxiety.
The Investors Intelligence bull-bear spread is also negative, which is another contrarian bullish signal.
Keep an eye on the VIX Index. The VIX closed Friday at 30.75, which makes 10 consecutive days above 30. Bill Luby
at VIX and More observed that a recycle below 30 is historically bullish, though the buy signal hasn’t been triggered yet.
Can Europe show the way?
You can tell a lot about market psychology by the way it reacts to the news. European stocks, which are the most sensitive to Russia-Ukraine war news, traced out a bullish island reversal on high volume last week when hopes rose that a ceasefire to evacuate civilians would be declared. The market retreated when ceasefire negotiations fell apart, but the island pattern remained intact.
Gold has acted as a risk-off asset during this crisis and GLD printed a bearish island reversal last week. I interpret this as an encouraging sign for the bulls.
The news from the front
I may be clutching at straws, but there are some glimmers of hope from the developments in the war. An Estonian journalist recounted a discussion with an Estonian military analyst in a Twitter thread
. The conclusion: “The danger is far from over but there is reason for a very cautious optimism. Russian advance has clearly stalled.”
Since last [Saturday] it’s been relatively stable on the fronts. There is an expectation of a reforming of RU units and a new line of attack, but so far little evidence of it. “If Russia doesn’t achieve a remarkable advance by end of week, difficult to see how it should come at all.”
The [southern] line of attack has split in 2, one advancing twd Mykolaiv, the other to Kryvyi Rih. This is serious risk to RU forces as the supply lines, which we already know are crap, will be dragged even longer. “This leaves the Ukrainians plenty of chance to ‘beat them to pieces’.
The question is if Moscow today forces Lukashenko to send in the troops from Belarus, but BY troops’ motivation is even lower than that of RU. “The Western-Ukrainian national & anti-Russian environment would be extra hostile towards them.”
The idea of bringing in Syrian fighter is extra desperate. “One thing is to fight in the narrow streets of Arabian cities. It’s something else in Kyiv or Kharkiv where the boulevards are 100m wide.” Also refers to cold climate and low morale of Syrians.
About possible mobilization in RU. That was on the agenda last Friday in Fed Council and duma but allegedly high-ranking military re-convinced Putin. “Reserve units have no training, they even don’t have enough uniforms for them.”
“They’ve included very few reservists in Zapad exercises. Of the few thousand they usually include, the officers complain about them “messing up” the exercise.”
Fatigue of RU units “massive”. A third has been replaced, but incoming units have even worse quality. Another third has been destroyed, killed or wounded. Re-formation of units doesn’t have a good impact on combat capability.
Ukraine’s counter-offensive has so far been small-scale but when RU stalls, they have resources to start pressing. First aim would be to drive RU out of country in the North (Kyiv and Kharkiv). It will be more difficult to gain back ground in South, also because of terrain. “In steppe you will be an open target from air.”
Regarding Russia’s shortage of missiles. “Putin was told he had 10,000 missiles. In fact, he had 1,000. It’s peculiar he didn’t remember how he was lying to his own bosses as a young KGB officer. Such lying is common in the culture.”
In addition, Fortune
reported that two hardcore pro-Putin guests, Karen Shaknazarov and Semyon Bagdasarov, appeared on a Russian prime time TV talk show and acknowledged the impact of sanctions, military failures, and called for an end to the invasion. This is a pre-taped TV show and is usually carefully orchestrated. Their remarks sound like the Russian elite showing their dissatisfaction with the war and looking for an exit ramp.
The first criticism came from Karen Shakhnazarov, a filmmaker and a usually reliable state pundit who had previously signed a letter in support of Putin’s annexation of Crimea. But on Solovyov’s show, Shakhnazarov said, “I have a hard time imagining taking cities such as Kyiv. I can’t imagine how that would look,” and noted that Putin’s invasion risked isolating Russia.
He called for an end to the conflict, the Telegraph reported
, saying, “If this picture starts to transform into an absolute humanitarian disaster, even our close allies like China and India will be forced to distance themselves from us.”
He added, “This public opinion, with which they’re saturating the entire world, can play out badly for us…Ending this operation will stabilize things within the country.”
Later during the broadcast, Semyon Bagdasarov, a Russian member of parliament, also criticized the invasion of Ukraine, and likened it to Afghanistan, an embarrassing military blunder for Russia that some analysts believe was a catalyst for the fall of the Soviet Union.
“Do we need to get into another Afghanistan, but even worse?” Bagdasarov asked, adding that in Ukraine, “there are more people, and they’re more advanced in their weapon handling.”
“We don’t need that. Enough already,” he said.
Shakhnazarov added that the Russian army has achieved its goals. Donbas is “liberated”. NATO only benefits from the protracted conflict. He called for an end to the operation. In other words, declare victory and go home.
These developments are encouraging. We have seen that even the hint of a ceasefire has sparked strong equity rallies. The news of a deal would be the catalyst for a melt-up. However, the risk is a stall in the Russian advance could provoke further escalation, such as the use of chemical weapons, in the war. Such a development could spook the markets even more.
Fed policy expectations
As the FOMC prepares to meet in the coming week, Fed Funds futures expectations have turned even more hawkish. The market now expects the equivalent of seven quarter-point rate hikes by December.
Have market expectations become too hawkish? In light of the stock market’s inability to fall further in the face of bad news, is sentiment washed out?
These are all good questions. This cycle is very different from the working experience of most investment managers. Reported inflation has spiked to a 40-year high, pressures are global, and inflationary expectations are also rising. On top of that, the supply shock from the Russia-Ukraine war is creating a high level of uncertainty. The stock market has held up remarkably well in light of these risks.
Traders will have to weigh the constructive signals from technical and sentiment indicators against the risk of further escalation in the war. Investors should remain cautiously positioned, as the Fed cycle will dominate intermediate-term equity price trends. Traders can play the odds and tilt bullish, but be mindful of the risks and size positions accordingly.
Disclosure: Long TQQQ