Pairs Monitor: Correlations converging to 1?

I recently suggested a number of long/short pair trades as a way of achieving performance in an uncertain and choppy market. Inflation hedge vehicles have begun to underperform, and the subsequent performance of the pairs is revealing of the factors driving the current market environment.   The four regional pairs were based on a theme...

A 2022 inflation tantrum investing roadmap

In the wake of the hot January CPI print, I have had a number of discussions with readers about the most advantageous way of positioning an equity portfolio in a rising rate environment. The most obvious strategy is to use an allocation similar to the Rising Rates ETF (EQRR) is to tilt towards value and...

A “penny wise, pound foolish” application of the Trend Model

I received a number of responses to the post on the 2021 report card on my investment models. While most were complimentary, one reader asked me for a more aggressive formulation of the Trend Asset Allocation Model.    As a reminder, the signals of the Trend Model are out-of-sample signals, but there are no portfolio...

A 2021 report card

The year 2021 is nearly complete and it's time to issue a report card for my three investment models. Going in order of short to long time horizons, these are: The Trading Model; Trend Asset Allocation Model; and The Ultimate Market Timing Model. All showed strong results.     The Trading Model The weakest result...

How small caps are foreshadowing the 2022 market

Small-cap stocks have lagged their large-cap counterparts in 2021. Even as the S&P 500 steadily rose to fresh highs this year, the Russell 2000 and S&P 600 finally staged upside breakouts in November out of a multi-month trading range, but they have struggled to hold those breakouts. Small-cap relative performance peaked in March, but they...

Will portfolio rebalancing sink equities?

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...

Outside-the-box risk control = Better returns

After last week's wild market swings, it's time to have a sober discussion about risk control. I know that risk control isn't a sexy topic, but better portfolio risk control can lead to better overall returns.     The framework of analysis will not be the conventional description of risk as it is stylistically shown...

My 2020 report card

Now that 2020 has come to an end, it's time to deliver the Humble Student of the Markets report card. While some providers only highlight the good calls in their marketing material, readers will find both the good and bad news here. No investor has perfect foresight, and these report cards serve to dissect the...

My inner trader returns to the drawing board

Mid-week market update: To paraphrase Emperor Hirohito when he broadcast the Japan's decision to surrender in World War II to the nation, "My inner trader's returns have not necessarily developed to his advantage in 2020". While the trading system was correct in spotting the major downdraft this year and the initial recovery, it was wrong to...

Buy the breadth thrusts and FOMO stampede?

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...

Factor review: Narrow leadership and its implications

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...

Factor investing: Theory vs. practice

As regular readers know, I have been an advocate of taking an overweight in cyclical exposure in equity portfolios (for the latest update, see Adventures in banking). While I continue to believe that the approach is sound, the reality has been less than fully satisfactory in the US. Among the cyclical groups, the semiconductors are...

An upcoming seismic shift in factor returns

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...

Whatever happened to the Momentum Massacre?

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...

Market breakout = FOMO surge?

Mid-week market update: Last week's upside breakout through resistance was impressive. Since then, the market has consolidated above the breakout level, but a FOMO (Fear Of Missing Out) rally has yet to materialize. In the past, such surges have been accompanied by a series of "good overbought"  5-day RSI readings, signs of buying stampedes from...

Fun with quant: Pure and naïve factors

A reader alerted me to a CNBC report of a bullish analysis by Bespoke's Paul Hickey: Bespoke Investment’s Paul Hickey believes a market hot streak is unfolding. The independent market researcher is building his bullish case by zeroing in on the Citi Economic Surprise Index, which is built to measure optimism in the economy. In...