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: Neutral (Last changed from “bullish” on 26-Jul-2024)
- Trading model: Neutral (Last changed from “bearish” on 19-Sep-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.
Stimulus!
The market has seen a number of shocks from global central banks. First, the Federal Reserve announced a jumbo half-point rate cut. The bigger surprise was the package of unanticipated stimulus measures from the PBOC. This was followed by a pledge from Beijing to support the economy with fiscal measures.
Here is a review of the winners and losers. The biggest winner has been gold, which has benefited from falling real rates. Gold broke out to fresh all-time highs, not only in USD, but also in many other currencies. Most notably, it achieved a new high in Swiss Francs (CHF), which is known to be a hard currency.
The winners
Another qualified winner is the S&P 500, which broke out to all-time highs, but I have concerns. The market is exhibiting a negative RSI divergence and breadth isn’t broadening out.
If equities are rising on the promise of central bank stimulus, shouldn’t liquidity be expanding? Instead, liquidity indicators are flat even as stock prices rose.
Another quick-and-dirty real-time indicator of liquidity is Bitcoin, which is showing a similar pattern of flat liquidity and negative divergence against the S&P 500.
On the other hand, price momentum is strong. The accompanying chart shows the NYSE McClellan Summation Index (NYSI), which recently exceeded 1000. In the past 20 years, there have been 19 similar episodes. The market went on to continue rising in 12 (green vertical lines) and either consolidated or staged a short-term pullback in the other seven (pink lines).
Stock prices were usually higher on a 6-12-month time frame, though no model is perfect. There were two notable false positives, in 2010 (Greek Crisis of 2011) and in 2020 (COVID Crash), but they were attributable to exogenous events.
From a global perspective, the biggest equity market winners are China and other emerging markets. Be aware, however, that the Chinese stock market isn’t the Chinese economy, as the stock market isn’t very financialized compared to the rest of the world.
That’s why I monitor other markets, such as commodities, as indicators of Chinese economic health.
Another qualified winner is commodities, which had been recovering even before the news out of China. However, the cyclically sensitive copper/gold and base metal/gold ratios (bottom panel) are in a depressed trading range.
The losers
Understandably, the biggest loser has been the bond market. Bond yields edged up after the Fed decision and the yield curve steepened.
Key risks
So where does that leave us?The markets have taken on a risk-on tone on the news of global central bank stimulus. Gold has rallied most of all as real rates fell, equities rose and bond prices fell. But the risk-on psychology is stretched and fragile. While the long-term bullish trend is quite real, the consensus is susceptible to reversals should growth disappoint in the near term. Investment-oriented accounts should stay bullish, but trading accounts should be prepared for short-term setbacks.
The risk of an east coast port strike as an October surprise that could hobble the economy is becoming very real (see Politico report for more details). The union is prepared to begin the strike as soon as October 1.
An equally worrisome development is the decline of the S&P 500 forward 12-month EPS estimate, which fell -0.23% last week after a steady rise. I will monitor this development in the coming weeks to see if it’s a just data blip or a concerning trend of stalling fundamentals.
An interesting observation. In my 9/15 post I felt that gold was a crowded trade and was ready to stall. I was wrong and gold has continued to go up relentlessly. However, I felt that Natural Gas was the area that had more potential. Here are the results gld: 238.73 -245.02 up 2.635% Ung:14.36-16.37 up14%.