A Trend Asset Allocation Model review – Humble Student of the Markets

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: Buy equities (Last changed from “sell” on 28-Jul-2023)
Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)
Trading model: Bullish (Last changed from “neutral” on 10-May-2024)

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter 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 Trend Model review

Over the course of several discussions with readers, it was apparent that some didn’t understand the Trend Asset Allocation Model, otherwise known as the Trend Model. This is a model that applies trend-following principles to a variety of global markets and commodities to form a composite signal.

While a history of out-of-sample weekly signals are available dating back to 2013, there is no actual portfolio return track record. However, a simulated strategy of using the out-of-sample signals to either overweight or underweight the S&P 500 by 20% around a 60% S&P 500 ETF (SPY) and 40% 7-10 year Treasury ETF (IEF) would have yielded significantly better returns with 60/40 like risk.

This week I review the model’s internals to reveal why I am bullish on equities.

A trip around the world

The Trend Model uses a variety of global equities as its input. So let’s take a quick trip around the world.
Starting with the U.S., the Dow, S&P 500 and NASDAQ Composite achieved all-time highs last week, which trend-following models interpret as a bullish signal.

Across the Atlantic, both the Euro STOXX 50 and FTSE 100 have reached all-time highs, which is another bullish trend-following signal.

The Asian markets present a mixed picture. China and Hong Kong are recovering from recent lows. Beijing’s latest initiatives to rescue its troubled property market should put a bid under Chinese and Hong Kong equities. Japan made a new recovery all-time high in local currency terms, but the Yen has been weak and its market is still relatively weak for foreign investors. Taiwan has been strong, thanks to its exposure to the semiconductor industry, but Korea and Australia have mostly traded sideways for the past few months.

The mixed picture in Asia can be better seen on a relative return basis. When compared to the MSCI All-Country World Index (ACWI), China and Hong Kong are just starting to recover from relative downtrends. Japan is weak in USD terms, and the other Asian markets are trading sideways on a relative basis.

Commodity strength = Economic expansion

In addition to monitoring global equity markets, the Trend Model also uses commodity price signals as a signal of trends in the global economy.

A quick overview of the commodity markets show that commodities are showing moderate strength and they are trading above key moving averages. The cyclically sensitive copper/gold ratio has surged because of a squeeze in the copper price, but the more diversified base metals/gold ratio has been trading sideways.

A global economy in expansion

In summary, we have:

New all-time highs in U.S. equities;
New all-time highs in European equities;
A mixed picture in Asia; and
Moderate strength in commodity prices.

Putting it all together, this is a picture of an expanding global economy, which should be bullish for risk appetite.

Moreover, sentiment indicators are turning bullish, but readings are not excessive. As an examples, the latest BoA Global Fund Manager Survey shows that the equity weights of global institutions are rising, but conditions cannot be described as a crowded long, which would be contrarian bearish.

As well, the relative performance of IPOs shows a definite lack of investor enthusiasm for risk, which is contrarian bullish. The market’s animal spirits are still dormant.

That’s why the Trend Model is bullish on equities.

The week ahead

Looking to the week ahead, the major sources of possible volatility is the NVIDIA earnings report on Wednesday and the FOMC minutes on Thursday.

The NVIDIA report will undoubtedly have a major say in how the semiconductor stocks and the S&P 500 trades. The Semiconductor Index is at a crossroad as it tests overhead absolute and relative resistance.

My inner trader is staying with the bullish momentum trend and he is long the market. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

Disclosure: Long SPXL

1 thought on “A Trend Asset Allocation Model review”

yodoc2003 says:

May 20, 2024 at 8:39 am

In an earlier comment I mentioned the corporate maturity wall coming in 2025 2026.
A recession is usually signaled by a rise in unemployment (is it called Hahn’s rule?).
What causes the unemployment? People may quit jobs for another but not many voluntarily quit for keeps. I suspect the biggest reason is losing your job and not finding another. This would fit with the increased number of people doing multiple part time jobs.
So what happens when we start hitting that maturation wall? Will there be a lot of layoffs because the debt burden is too high?
In the past there has never been such an acute rise in interest rates. Just like many homeowners are house locked by their mortgage rates that are sub 3 %, perhaps some companies are also locked into aging refis and holding off in the hope of a better rate down the road. What would the impact on jobs be if they refi at the last minute so to speak at an unacceptable rate?
I think the market was heading for a crash in 2019 but the pandemic and trillions of free money, stimulus checks , PPP dollars pushed the day of reckoning back.
Unless the gov’t gets another excuse to spray trillions in our general direction the debt that companies and individuals carry will eventually weigh on us.
But not this year I don’t think.

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