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?
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
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
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
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?
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?
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
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
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?
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?
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
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 …
Top-down meets bottom-up: How expensive are stocks?
Recently, I have seen several variations of market analysis concluding that stocks are expensive based on forward P/E ratios. Here is a tweet from Jeroen Blokland. David Rosenberg characterized the current equity environment as picking up pennies in front of a steamroller. Blokland followed up the above tweet with an additional comment indicating that earnings growth is badly …
A 2016 report card
As 2016 has drawn to a close, it’s time to review the report card from my 2016 calls. My inner investor performed very well, though my inner trader suffered a number of hiccups. Overall, I had a solid year in 2016. My inner investor: Steadfastly bullish The chart below depicts the key highlights of my investment calls, which are based …
Dangerous over-valuation, or a New Era?
Business Insider recently featured a chart from Vanguard Group founder Jack Bogle, who observed that the market cap to GDP ratio has become highly elevated to its own history starting about 1996. You might recall that the market cap to GDP ratio was also said to be one of Warren Buffett’s favorite equity market valuation metrics, though he has been …
Is a recession just around the corner?
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 allocation …
Why a crowded VIX short isn’t equity bearish
Mid-week market update: Two weeks ago, I had forecast a minor stock market pullback as the SPX neared 2200 (see The market catches round number-itis). The corrective move hasn’t happened and remain in a tight trading range. The one bright spot for the bull case is stock prices haven’t fallen in response to bad news, such as the surprising shortfalls …
Three key macro factors to watch in today`s market
I have spent a lot of time in these pages writing about the influence of macro-economic factors on market analysis. Indeed, Matt King at Citigroup recently highlighted the growing importance of macro factors on the equity market (chart via Bloomberg): Here are three key macro factors that I have been watching now for clues to the direction of the …
How to beat Wall Street analysts at their own earnings game
In the past few months, I have received a lot of feedback and criticism over my use of forward 12-month EPS estimates, such as the chart below that appeared in last weekend`s post (see Brexit panic: A gift from the market gods?). I would like to clarify why this form of analysis matters and this is a valuable technique to …
A cautionary tale for quants and systems traders
How would you feel if the average doctor was right 55% of the time? What if a “superstar” doctor, the one whose new patient waiting list stretched out for 1-2 years, was right 60-70% of the time? That’s how thing work in investing. A “good” quantitative factor, or system, is often acceptable if it has a 55% success rate. If …
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