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 prices. 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: Sell 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.
So much for the BoE
The market took a risk-off to begin last week until the BoE announced a surprise intervention to buy gilts with maturities of 20 years or more “on whatever scale is necessary” in order to stabilize markets. Global markets rallied for all of one day and the S&P 500 weakened for the rest of the week. So much for BoE intervention.
As the S&P 500 violated support on Friday, the midcap S&P 400 and the smallcap Russell 2000 did not confirm by holding their respective support levels. Should you believe the breakdown?
Here are seven reasons why traders should grit their teeths and buy stocks.
Buy signals everywhere
I am seeing short-term buy signals everywhere. Investors Intelligence bull-bear spread has turned negative again, which have tended to signal good long entry points. Bullish sentiment has fallen to lows not seen since 2016.
The AAII bull-bear remained roughly unchanged at an extreme bearish reading for a second consecutive week.
reported that four out of five components of Sanford Bernstein’s Composite Sentiment Indicator, volatility, put/call ratio, investor survey and equity fund flow data, have reached negative extremes.
The Zweig Breadth Thrust Indicator reached an extreme oversold level comparable to the levels last seen during the COVID Crash. Readings recycled to neutral on the day of the BoE intervention but returned to oversold the next day. While there is no guarantee that oversold markets can become more oversold, the odds indicate a favorable risk/reward for bullish positions.
Rob Hanna of Quantifiable Edges
reported that his Capitulative Breadth Indicator (CBI) reached 13 last Tuesday. Historically, readings above 10 have been strong buy signals.
As the S&P 500 probed its lows last week, improvements in breadth appeared beneath the surface. Net NYSE and NASDAQ highs-lows turned up even as the market weakened, which is a constructive sign for equities.
Best of all, insiders are buying as the market fell.
Bullish, but beware of tail-risk
In conclusion, market omens are lining up for a strong relief rally. While the intermediate-term trend is still down after a bounce, traders should be prepared for a rip-your-face-off rally that could happen at any time. The Trend Asset Allocation Model has finally turned risk-off. In light of the likely relief rally and the poor performance of the bond market which has not been diversifying for equity holdings this year, I am putting the signal change on hold. I will re-evaluate market conditions in two weeks and make a decision on the model signal.
To be sure, tail-risk is still present. The Guardian
reported that Ukrainian intelligence believes the threat of Russian use of tactical nukes are “very high”.
In an interview, Ukraine’s military intelligence put the threat of Russia using tactical weapons against Ukraine at “very high”. A nuclear weapon is about 100 times more powerful than the type of rockets Russia has used against Ukraine so far, said Vadym Skibitsky, Ukraine’s deputy intelligence chief.
“They will likely target places along the frontlines with lots of [army] personal and equipment, key command centres and critical infrastructure,” said Skibitsky, about Russia’s use of tactical nuclear weapons. “In order to stop them we need not just more anti-aircraft systems, but anti-rocket systems.
“But everything will depend on how the situation develops on the battlefield.”
In that case, the 1962 Kennedy Slide and Cuban Missile Crisis market template could come into play. As a reminder, the market tanked in early 1962, rallied, and fell again into a second low that coincided with the Cuban Missile Crisis. But the Cuban Missile Crisis low did not undercut the initial low.
Disclosure: Long SPXL