My 2017 report card

In Free by Cam Hui

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 Model is an asset …

Should you be worried about an elevated Shiller P/E?

In Free by Cam Hui

In my discussions with investors, the Cyclically Adjusted P/E (CAPE), or Shiller P/E, has come up numerous times as a risk for the U.S. stock market. The current reading of 32x is only exceeded by the peak during the NASDAQ Bubble, and it is higher than the levels seen before the Crash of 1929. Does this mean that the risk …

Embrace the Blow-off (but with a stop-loss discipline)

In Free by Cam Hui

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 Model is an asset …

The VIX also rises

In Free by Cam Hui

Deep in the recesses of my memory from my youth, I recall reading an Ernest Hemingway quote that went something like this: How did you go bankrupt? Two ways. Gradually, then suddenly. From The VIX Also Rises The VIX closed at an all-time low last week. Anyone who bought volatility in the last couple of years would have suffered the …

NAAIM buy signal update

In Free by Cam Hui

I had highlighted an unusual contrarian buy signal in my last post (see Round number-itis at 2500). NAAIM sentiment, which is reported weekly, turned anomalously bearish last week and fell below its lower Bollinger Band. Past episodes of such occurrences have turned out to be very good contrarian buy signals.     The reading last week was anomalous because every …

The surprising conclusion from top-down vs. bottom-up EPS analysis

In Free by Cam Hui

Mid-week market update: Business Insider recently highlighted an earnings warning from Strategas Research Partners about possible earnings disappointment for the remainder of 2017 and early 2018. Expect a deceleration in EPS growth because of base effects: A big part of Strategas’ argument stems from the fact that the period against which current earnings are compared — the first half of …

Correction ahead

In Free by Cam Hui

Mid-week market update: Narrow trading ranges are often technical signs of sideways consolidation, followed by further upside. In this case, bulls are likely to be disappointed, as market internals point to a correction ahead.     I am reiterating my tactically cautious view that has been in place for the last two weeks (see Curb your (bullish) enthusiasm) for the …

How Covel inadvertently exposed the chasm between investors and traders

In Free by Cam Hui

As a rule, I don’t do book reviews. However, regular readers know that I am a big fan of trend following models and I use them extensively in my asset allocation work. When a publicist offered a free review copy of Michael Covel’s Trend Following, 5th Edition: How to Make a Fortune in Bull, Bear and Black Swan Markets, I …

Goldman’s “The death of value” and what being contrarian means

In Free by Cam Hui

Recently, Ben Snider at Goldman Sachs published a report entitled “The Death of Value”, which suggested that the value style is likely to face further short-term headwinds. Specifically, Snider referred to the Fama-French value factor, which had seen an unbelievable run from 1940 to 2010 (charts via Value Walk).     Goldman Sachs went on to postulate that the value …

Peak smart beta?

In Free by Cam Hui

A recent comment by Michael Mauboussin of Credit Suisse that nailed the dilemma of active managers, namely that using traditional approaches to alpha generation is akin to mining lower and lower grade ore: Exhibit 1 shows that the standard deviation of excess returns has trended lower for U.S. large capitalization mutual funds over the past five decades. The exhibit shows the …

The market`s hurdles to sustainable new highs

In Free by Cam Hui

Mid-week market update: So far, my recent VIX based buy signal has worked out according to plan (see A market top checklist). I emailed subscribers the buy signal from the trading system on Friday, which was triggered when the VIX Index rises above its upper Bollinger Band and then mean reverts below.     If history is any guide, stock …

How I learned to stop worrying and love the low VIX

In Free by Cam Hui

Investor angst has been rising over the low level of the VIX Index. A simple glance at Google Trends tells the story of rising anxiety.     The VIX Index fell to single digits last week, though it recovered to above 10 by the end of the week. Nevertheless, current levels represent multi-year lows.     James Picerno at Capital …

The right and wrong ways to use Rydex sentiment

In Free by Cam Hui

Rydex funds (now Guggenheim) were early pioneers in offering bull and bear funds, as well as to encouraging switching between bull and bear funds. This innovation attracted short-term traders who had previously been shunned by other mutual fund families. Consequently, Rydex fund assets became an important measure of short-term trader sentiment. Over the years, I have seen numerous analysts using …

Is the gold/platinum ratio flashing a buy signal for stocks?

In Free by Cam Hui

Mark Hulbert recently highlighted an equity buy signal from an obscure indicator, the gold/platinum ratio. The signal is based on a research paper by Darien Huang, an academic at Cornell.     The rationale behind the indicator goes something like this. Both gold and platinum are precious metals, which have defensive characteristics during equity bear markets. But platinum has more …

A passive index fund built to outperform?

In Free by Cam Hui

A long time reader sent me this Seeking Alpha article entitled “Monish Pabrai Has Created An Index Fund Built To Outperform”, which described a “passive index fund” built using the following three investment themes deployed in three portfolio buckets: Share buybacks: Companies that are buying back their own shares Selected value manager holdings: The holdings of 22 selected value managers, …

A toppy market, but not THE TOP

In Free by Cam Hui

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 Model is an asset …

A track record update

In Free by Cam Hui

I have had a number of subscribers ask me to extend the chart of my longer term calls, which had only gone back two years. The chart below shows the highlights of my posts back to 2013, which are intended for investors with a 6-24 month time horizon. I haven’t been always right. On occasion, I was early, late, or …

Negative real yields = Equity sell signal?

In Free by Cam Hui

A reader asked me my opinion about this tweet by Nautilus Research. According to this study, equities have performed poorly once the inflation-adjusted 10-year Treasury yield turns negative. With real yields barely positive today, Nautilus went on to ask rhetorically if the Fed is behind the inflation fighting curve.     Since the publication of that study, The January YoY …

What’s wrong with the VIX?

In Free by Cam Hui

Mid-week market update: Increasingly, I have seen cases being made for an equity market correction. This Bloomberg article, “Five charts that say not all is well in the markets” summarizes the bear case well. Uncertainty is at a record high: The number of news stories using the word “uncertainty” is surging. Wall Street vs. Washington: While the Global Economic Uncertainty …

The ways your trading model could lead you astray

In Free by Cam Hui

I have had a number of discussions with subscribers asking for more “how to” posts (see Teaching my readers how to fish). This will be one of a series of occasional posts on how to build a robust investment process. For traders and investors, one of the challenges is how to build a robust discipline that works well through different …