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
47 thoughts on “Beware the Ides of March”
Thanks Cam. In your last post you suggest increasing
allocation to Treasuries. Does this mean the Trend Model signal is turning bearish from current neutral? Regards.
For a must-see geopolitical perspective on the Ukraine crisis, search YouTube for ‘John Meersheimer’. I refer specifically to the 2014 talk after the Crimean grab, which is amazingly current. (I have not yet viewed the 2021talk.)
We’ve all been in Vladimir Putin’s shoes at some point in our lives. An embarrassing public blunder, a major error in judgment, or the realization that we’ve made promises we are no longer able to keep.
Sure, he’s done all of this on a grander scale – but then he’s the President of Russia.
He’s also just a man – no different from the rest of humanity. He’s probably past the point of beating himself up and looking for a solution that preserves his legacy and leads to better setups in the future.
Here’s how I envision the exit.
After a good night’s sleep, he arrives at a solution. He’s able to look in the mirror without flinching while he shaves. He asks for a large breakfast. He looks out the window at the streets below with renewed ‘love’ for his country/ countrymen and renewed confidence in his position and his authority.
He summons a few ministers he can trust and starts the ball rolling. What’s his solution? I have no idea. Maybe he shifts the entire responsibility to intelligence officers who misled him as to what Ukrainians wanted. In any case, he’s out and back to the business of being Vladimir Putin.
All wild speculation, of course. I’m just trying to put myself in the shoes of someone who’s cornered and needs a door to open behind him.
As children we were taught about crossing the road: first look right, then left, then right again before crossing. As adults we have absorbed the lesson of watchfulness, so no-one follows the letter of the instruction any more. Price-RSI divergence is another such thing: if you have absorbed the principle, you can dispense with the relic. (And, by the way, a divergence or not, positive or negative, was no conclusion, it was the evidence for a conclusion.)
I am sure we have all had secondary school education. The slope of a (price) line is its momentum, and we can actually tell by visual inspection whether the slope is changing or not. (Candles make it more difficult.) The RSI chart depicts momentum, with frills: it distorts it so that it is limited top (100) and bottom (0), and it averages the momentum a bit (e.g. 14 or 5 periods). The RSI is a different depiction of information already contained within the price graph.
If the RSI reads above 50%, momentum is (has been) positive, and the arrow next to the price graph would be pointed up, and vice versa below 50%. So surely we can dispense with the price arrow, and therefore with divergences? If the same RSI point is the end of a line that slopes downward, it means the momentum is falling. It could be above 50 and falling, in which case upward momentum is stalling, or it could be below 50 and falling, in which case downward momentum is increasing, etc.. If your RSI arc crosses the 50 line, you would not be assessing momentum change – it would be obvious. So why talk about divergences at all, often with unstated conclusions?
Original usage of divergences was for simple price curves (monotonic – meaning varying but never reversing.) There are serious pitfalls for trying to assess (average) momentum trends across several material ups and downs, and it would usually have no predictive value. That is extending a principle beyond its validity. Please present references to the contrary (if any).
RSI-MACD divergence? Please!
Not exactly sure why RSI/ MACD divergences would not provide useful information.
1. Price is, of course, the bottom line.
2. When looking at price movements over time, any calculation(s) that helps to summarize changes in the strength, direction, momentum, and duration of a trend is helpful. RSI/ MACD are attempts to summarize such information in a single variable over time.
3. As with any measurement of change, it’s possible to drill down further and analyze changes in the rate(s) of change + changes in the changes of the rate(s) of change…derivatives of derivatives of derivatives ad infinitum.
4. The usefulness of such derivatives probably diminishes with each iteration.
5. However, if we’re able to see that the momentum of a momentum indicator begins to slow over time – does that not provide useful information? Whether it adds predictive value can be debated – but I’m assuming that ‘divergences’ in RSI/ MACD have been analyzed/ studied over sufficient periods of time that technicians find them to be better than a coin toss in predicting reversals.
Obviously, not presenting a contrarian reference – just a contrarian viewpoint.
I am saying that if you are interested in what momentum is doing, you only need to use your eyes, or consult the RSI. What is it then going to help to bring in MACD?
You are talking in principle, but woolly. a/ Have you seen other technicians use RSI-MACD divergences? b/ Can you spell out the principles whereby one learns about momentum changes from it, similar to that done for RSI-price?
No, and no. But Cam incorporates them into his analyses, and I have no issues with his trading record.
Above all, I am saying assessing momentum changes over multiple cycles is invalid, also if it should involve MACD.
The quest of each and every trader is the same. Some are day traders, swing traders, momentum traders and so on. Tools used are different in each case – a friend who is a full time day trader uses terms like weak high/low, liquidation breaks, halfbacks, VPOCs etc. Swing trader ( a service I used in the past, unsuccessfully) use patterns to find entry/exit/stops.
Cam has a unique method of combining macro, sentiment, historical, charts and indicators such as RSI, Bollinger Bands etc for his trades. I have personally made more money following his signals than any other method. My head spins with all the charts and indicators but I know it works for me. The great benefit is also when to be on the sidelines. That is just as important.
Here is an illustration of when working across multiple material ups and downs with arrows doesn’t work:
In StockCharts set up $SPX; daily; solid line; 3 months; RSI5 and RSI14. By inspection and especially considering the trend of highs, we can conclude that negative momentum is worsening.
RSI 5 and 14 agree, for the last 3 days: below the 50% line, trending downwards. Even RSI 50 agrees: below the 50% line from ~Feb, 2, and moving downwards (accelerating).
If we place the arrow tails on Feb, 2, then for any arrow head placement up to the present, both RSI and price arrows always point down. (What is that, negative divergence?) However, the answer remains essentially the same for the last month. The only conclusion is momentum is negative. But there is no indication whether it is accelerating downwards or turning upwards – useless. (It is more meaningful to have a shorter term perspective anyway for looking for momentum changes.)
Divergences are a lot like chart patterns. Sometimes they work, sometimes they don’t. They don’t predict how big a move is coming either, but they should not be totally ignored and can be incorporated into support/resist lines and also if we are seeing higher highs/higher lows (or the opposite).
It’s similar with channels, they hold until they don’t and when they break is it just a break or a more significant change? So if we break the resist line across the highs from New Year’s is it just a rally, or is it like in Oct 2021 when the market went on to new highs? We’ll see over the next few months
Credit spreads can be helpful, because credit is what makes or kills companies.
Possible Outcomes of the Russo-Ukrainian War and China’s Choice
by US-China Perception Monitor March 12, 2022March 12, 2022
The article was penned on March 5, and translated on March 12.
Thanks for that article. Does clarify a lot of stuff for CCP, as to how to make it’s moves in this situation. However, 1-2 week period for China to pick a side has come and gone, if we assume that the article is talking about 1-2 weeks of fighting.
I strongly believe we will experience higher than expected interest rates coming out of the Fed over the foreseeable future. Why? This week Canada announced 630,000 jobs were created in February. With American economy ten times bigger imagine if the Fed announced six million new jobs there.
Canada and the US are on similar paths and I expect to see very strong jobs numbers there as its economy also opens after Omicron too. That means the Fed’s Dual Mandate of promoting jobs and fighting high inflation are clearly in play with higher interest rates and QT.
I also see this week, the Fed Funds futures are hitting new highs after a sharp pullback due to war fears now in the rearview mirror.
This is a solid Winter forecast.
During Winter season my investment choices are very tilted to Absolute Return strategies rather than Momentum. Momentum is for finding outperforming sectors in a bull market. When Spring comes and a new bull market is born, there will be plenty of gains to be made easily in a safe investment environment.
What are Absolute Return Strategies? Long/short Alternatives (I like BTAL Anti-Beta), Gold bullion, Cash, buying a single inverse ETF to offset a long position (for example long MOO/ long similar amount S&P 500 Inverse ETF). I don’t go net short (leave that to hedge funds).
I would totally avoid corporate bonds. The yield spreads are blowing out, not just junk but also BBB. Government bonds used to be an Absolute Return asset but now they go down as the market falls. This year bonds AND stocks fell 5% together in price for the first time in forever.
Commodity stocks aren’t an Absolute Return item. They are a speculation, maybe a great one but risky. But they are consciously separate from the Absolute Return portion of the portfolio.
One huge disappointment this week was the plunge in Staples ETF. Seems a number of global brands are losing money on writing off Russian assets and other international disruptions. Just goes to show even a normal haven can be a problem when Winter hit.
This RU invasion has forced a lot of hands. Now everyone has a chance to see which side everyone else is. Expect more and faster decoupling and realignment. A few things stand out.
1. Russia military is exposed. By extension, so is China. Level of corruption of Chinese military is several magnitudes higher. Two countries share similar culture.
2. India loses the benefit from world’s decoupling from China. I used to think India would gain from this decoupling, but not anymore moving forward.
3. A stronger and more coherent western alliance.
Nothing is permanent, of course. But from all these future movements we can gain some investment insight.
A 52-wk low for QQQ is now just ten points away.
Still no sign(s) of panic, at least IMO.
I think we close green.
Bonds aren’t doing any better.
China/ BABA/ FXI-> I can make a case for panic there.
I was wrong about the green close.
My thoughts at this point:
(a) Back in the red ytd. But well ahead of the indexes.
(b) Currently about 25% invested – just enough to reap significant benefits if/when the markets reverse, yet also enough to hurt when it sells off.
(c) Should the market transition into something more than a ‘normal’ correction, I’m considering a couple of alternatives. I would probably add to positions in the wake of real panic (which IMO we have yet to see). I would probably exit positions and move to cash if it appears we’re in for an extended bear and/or a recession.
Bottom line-> I still think we’re at a decent buy point (and not a ‘get out ahead of the next drop’ sell point).
I am somewhat surprised that Cam has not exited the TQQQ trade. I played it with options that are almost worthless. May reenter post Fed meeting.
Cam exhibits a relatively high pain threshold, which he undoubtedly also backstops with appropriate position sizing.
If it makes anyone feel better – many of active funds I occasionally look at for comparison purposes are doing just as bad or worse than the SPX.
(a) Fidelity Magellan. -19% ytd.
(b) Vanguard Total World Stock Market (probably the simplest version of a La-Z-Boy portfolio). -13% ytd.
(c) Fidelity Asset Manager 50%. -9% ytd.
(d) The ‘target date’ funds for employees who plan to retire within the next few years are all down about -9%.
The indexes could challenge all-time-highs again in a heartbeat. Just waiting for the right catalyst. Terrific entry prices on many, many stocks.
Adding second allocations to FXI/ BABA. I think we’re reached the capitulation point in those two assets.
The action this morning is a good example of why I begin scaling into positions ahead of reversal confirmations. The indexes may of course simply turn over yet again. However, if a durable rally begins today, I’m not forced to chase entries.
Nice red to green moves in FXI/ BABA.
^VIX closes under 30 after 10-11 days above 30.
-Hang Seng +1672 points (+9%).
Doesn’t get any better than that.
Exactly why I begin scaling in ahead of reversals. No way would I be able to chase gaps up like those.
Will be adding successively to allocations in SPY/ QQQ/ VT pre/post Fed as opportunities arise.
Already in and out of several leveraged ETFs.
TQQQ/ SOXL/ SPXL.
Why am I playing leveraged funds? Days like this occur once in blue moon, and I’m taking full advantage of it. We’re in the midst of transitioning from the kind of negative sentiment last seen during the depths of the pandemic. Hopefully back to the exuberance last seen in January.
Traders are scrambling to reposition this morning. We may well see a short squeeze following the Fed announcement regardless of the outcome.
Closing the majority of positions in BABA here.
Taking profits on 50% of positions in FXI here.
Scaling back into trading positions in SPY/ QQQ.
TQQQ/ SPXL off.
Adding TQQQ/ SPXL.
Leveraged funds worked well in the morning due to the one-way move. Much more difficult to navigate here. Closing and switching into second trading allocations of SPY/ QQQ.
All positions off here. I’m going to call it a wrong take on post-Fed market direction and preserve the day’s gains here.
To be clear, now out of all positions including the ones with a longer time frame. Which means I was faked out in the short term. It happens.
Still managed an overall +3.8% gain over two days – much of it due to very ST trading in leveraged funds. So nothing to complain about.
Now 100% cash.
Based purely on the fact that I was neatly faked out – I’m going to predict that markets move much higher from here.
For instance – BABA now @ 102. FXI +20%! On 4x average volume.
Bottom line->I had it right, and then allowed the crowd to take away my positions.
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