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: Neutral
Update schedule: I generally update model readings on my site on weekends. I am also on Twitter at @humblestudent and on Mastodon at @firstname.lastname@example.org. 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.
Dissecting the sources of European strength
As investors wait for the resolution of the debt ceiling talks, I would like to pivot away from the U.S. market and focus on the sources of underlying European strength. As regular readers are aware, we have been bullish on European equities for some time (see The market leaders hiding in plain sight
Here is the major reason we are bullish. The Euro STOXX 50 staged a relative breakout from a long base in early 2023. France has been the leader among the major core and peripheral European countries, along with Italy and Greece. However, Germany has been the laggard, testing a key relative resistance level.
I analyzed the sources of European equity strength and show why the latest move is sustainable. The possibility exists that this could be the start of a major bull leg in Europe, much like how the U.S. FANGs led global markets in 2008.
One surprising source of European strength has been financial stocks. European financials have been on a tear relative to U.S. financials (top panel). This doesn’t mean that they were immune to banking crisis fears. It’s just that European financials managed to hold a key relative support zone, while U.S. financials, and U.S. regional banks in particular, weakened.
The relative strength of this sector compared to the U.S. has resulted in strong relative performance of markets with high bank weights such as Italy and Greece.
The other strong market in Europe is France. Looking beneath the hood, it is the luxury goods companies that have led French equities upward. Shares of companies like Hermès and LVMH have risen strongly, thanks to spending by the high-end Chinese consumer. Here is Hermès, which has outperformed global consumer discretionary stocks and the MSCI All-Country World Index (ACWI).
LVMH has a similar technical pattern.
I interpret these technical patterns as the market signaling a cyclical recovery from a downturn in Europe, while the U.S. slips into recession.
Special cases to watch
Here are two special cases that investors should watch. Poland has been a major staging ground for Western aid to Ukraine since the start of the Russo-Ukraine War. MSCI Poland recently rallied to a new recovery high and it has been performing well against both Euro STOXX 50 and ACWI. This is a bullish indication of fading geopolitical risk premium and possibly in anticipation of a successful Ukrainian counter-offensive this spring and summer.
No discussion of Europe is incomplete with the U.K. History shows that the relative performance of large-cap U.K. stocks was highly correlated to the relative performance of energy stocks, mainly because of the significant weights of energy in the large-cap U.K. index. The two began to decouple in 2021 and seriously bifurcate in early 2022, reflecting increasing nervousness over the British economy. This was confirmed by the relative underperformance of U.K. small-cap stocks that began in late 2021.
More recently, energy stocks lagged ACWI in 2023 while U.K. large-caps were flat. As well, small-cap relative performance has bottomed against large caps. This is may be an early sign that the U.K. market is bottoming and this is a bullish set-up, though not an actual buy signal, for U.K. equities.
The strength in the UK economy is coming from a surprising source. The Economist
featured an article highlighting the outperformance of the British service sector, while its goods sector lagged.
In conclusion, European stocks staged a relative upside breakout against global stocks from multi-year bases, which makes us bullish on the region. An analysis of the region shows that different sources of underlying strength are sustainable into the future. The possibility exists that this could be the start of a major bull leg in Europe, much like how the U.S. FANGs led global markets in 2008.