Wednesday, August 24, 2016

The market catches round number-itis

Mid-week market update: On the weekend (see The market's hidden message for the economy, rates and stock prices), I wrote that the short-term outlook was more difficult to call than usual. On one hand, we were seeing broad based strength, which argued for an intermediate term bullish call. On the other hand, Urban Carmel pointed out that the market has a tendency to pause when it nears a round number. In this case, the hurdle is 2200 on SPX.




The latter scenario seems to be winning out. The market is catching a case of round number-itis for the following reasons:
  • Macro momentum became "overbought";
  • Overly bullish short-term sentiment; and
  • Deteriorating short-term breadth.
I would caution that this is purely a tactical call of a short-term SPX correction of no more than 3-5%. As I wrote two weeks ago: Be patient, it's hard to argue against the intermediate term bullish trend.


The full post can be found at our new site here.

Tuesday, August 23, 2016

A second chance on Europe

About three weeks ago, I wrote about opportunities in European equities (see Worried about US equities? Here's an alternative!). I pointed out that stock prices in Europe were far cheaper than US, the fears about European integrity and financial system were overblown, and the market seemed to be ignoring signs of a growth recovery.

Since then, the FTSE 100 has moved to new recovery highs since the Brexit vote.


The Euro STOXX 50 has rallied through a downtrend resistance level and it's has retreated to test support.



American investors can see a similar pattern on the USD denominated ETF (FEZ).



If you missed the first opportunity to buy into Europe, this may be your second chance.

The full post can be found at our new site here.

Sunday, August 21, 2016

The market's hidden message for the economy, rates and stock prices

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 model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


The message from inter-market analysis
I have always believed in listening to the markets. Technical analysis is useful as it can be a way of discerning the market's hidden message, especially when performing inter-market analysis, otherwise known as cross-asset analysis.

I have found point and figure charts to be particularly useful tools because they filter out a lot of the price noise, especially when markets trade sideways in a tight range as they have recently. As an example, my recent post that featured a SPX weekly point and figure chart got a lot of attention (see Be patient). Since I performed that analysis, not much has changed. The latest weekly chart pattern remains unambiguously bullish on an intermediate term basis. It also tells the bullish story of powerful price momentum, TINA (There Is No Alternative) and FOMO (Fear Of Missing Out), all rolled into one.


I reviewed my charts using this technique in order to get a fresh point of view and what I found astonished me. Over and over again, I was getting a lot of chart patterns like this from a single market sector.


Bullish or bearish? The charted instrument is in a well-defined uptrend, but there is overhead resistance nearby. While I interpreted it bullishly, I wanted to be sure. A Twitter poll showed that the crowd agreed with me.



This results of this analytical approach was in effect a hidden message from Mr. Market. More importantly, the message has crucial medium term implications for the economy, interest rates, stock prices, and the likely trajectory of Fed policy.

The full post can be found at our new site here.

Wednesday, August 17, 2016

Waiting for the consolidation to end

Mid-week market update: The intermediate term outlook that I've been writing about for the past few weeks hasn't really changed (see Get ready for the melt-up and Party like it's 1999, or 1995?). The stock market continues to enjoy a tailwind based on the combination of overly defensive investors and a growth turnaround which is leading to a buying stampede.

The Dow, SPX and NASDAQ made simultaneous new all-time highs (ATHs) on Friday, August 5, 2016 and repeated that feat again this week on Monday, August 15, 2016. Ryan Detrick of LPL Research pointed out that such events tend to be bullish. The chart below shows past instances of simultaneous new highs.


The table below details stock market performance after such events. Current circumstances are consistent with my buying stampede thesis.


However, it is not at all unusual for stock prices to trade sideways after breakouts to ATHs. As long as the consolidation action is benign, the path of least resistance is up. The minor market weakness in the last couple of days is also consistent with my view of sideways consolidation.

The full post can be found at our new site here.

Tuesday, August 16, 2016

Jackson Hole preview: Fun with statistics

As we await the Fed`s annual Jackson Hole symposium on August 25-27, Bloomberg highlighted a research paper by Fed economist Jeremy Nalewaik. Nalewaik found that inflation and inflationary expectations had tracked each other well but started to diverge in the mid 1990's.


This paper is important to the future of Fed policy, as it pushes the Fed towards a lower for longer view where inflationary potential is far lower than previously expected:
“Movements in inflation expectations now appear inconsequential since they no longer have any predictive content for subsequent inflation realizations,” Nalewaik wrote.

He cites as a potential explanation for this a hypothesis offered in a 2000 paper co-authored by Yellen’s husband, Nobel prize-winner George Akerlof, who wrote that “when inflation is low, it may be at most a marginal factor in wage and price decisions, and decision-makers may ignore it entirely.”

Akerlof’s and Nalewaik’s research jibe nicely with ideas that St. Louis Fed President James Bullard has injected into the debate on the rate-setting Federal Open Market Committee this year.
If this paper becomes a major focus at the Jackson Hole meeting, then the Fed is likely to tilt towards a take-it-slow view on raising interest rates. However, I would argue that this analytical framework is highly sensitive to how the Fed picks its input variables. One wrong move could result in a policy error of major proportions.

The full post can be found at our new site here.

Sunday, August 14, 2016

Party like it's 1999, or 1995?

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 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 model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


How close are we to a market top?
I am used to getting abused for my market views, but the abuse is starting to turn into agreement - and that's a cautionary flag. I haven't always been a bull, here is a summary of my major market calls since January 2015.


When I was cautious in the first half of 2015, I got hate mail (see Why I am bearish (and what would change my mind)). When the market corrected in August/September 2015 and I was constructive on stocks, I got hate mail (see Relax, have a glass of wine and Why this is not the start of a bear market). When I turned bullish in January 2016 at the height of the market panic, a lot of people thought I was an idiot (see Buy! Blood is in the Streets). When I reiterated my bullish views as the market moved sideways in June before the big breakout, there was much skepticism that stock prices could go much higher (see How the SPX can get to 2200 and beyond).

Now that the broad market averages are seeing new all-time highs, market psychology has shifted from skepticism to grudging acceptance of the bull case. This got me worried. Am I becoming consensus and part of the crowd? Does this mean that the market is about top out?

For some perspective on this question, the Dow, SPX and NASDAQ all made simultaneous new highs last Thursday. The last time this happened was December 31, 1999, which was shortly before the ultimate top in March 2000, indicating that the market may be in a high risk zone. On the other hand, Ryan Detrick highlighted analysis showing simultaneous new highs in all three indices tend to be bullish.


Coincidental new highs is reflective of bullish price momentum, Detrick pointed out that the market saw a total of 25 simultaneous new highs in 1995.



So should we party like it's 1995, which was a sustained bull move, or late 1999, which marked a blow-off top?


I believe that the answer depends on the timing of a recession caused bear market, which is a function of the Federal Reserve's reaction to economic and market developments.

The full post can be found at our new site here.

Wednesday, August 10, 2016

Be patient

Mid-week market update: Is this the pullback and correction that I've been anticipating? If so, how far can it go?

Be patient.

Take a look at this weekly point and figure SPX chart. Is there any doubt that the intermediate term outlook is bullish?


While my inner investor remains bullish based on the intermediate term trend, my inner trader is cautiously bullish and not all-in as there may be some near-term choppiness ahead.

The full post can be found at our new site here.

Tuesday, August 9, 2016

Brexit: Fantasy vs. reality

I am seeing an unusual level of rising anxiety over the political implications of Brexit. Last week, Stratfor published a report entitled "Brexit: The First of Many Referendum Threats to the EU", which detailed the threats of additional referendums to the future of Europe.

Jim Rogers, writing in the Daily Reckoning, also painted a dire picture of the world after Brexit:
Are we at a point right now where it feels like it’s accelerating. People all over are very unhappy about what’s going on. If you read history, there are a lot of similarities between now and the 1920s and ’30s. That’s when fascism and communism broke out in much of the world. And a lot of the same issues are popping up again.

Brexit could be a triggering moment. This is another step in an ongoing deterioration of events. It’s also an important turning point because it now means the central banks are going to print even more money. That may prop the markets up in the short term...

The European Union as we know it is not going to survive. Not as we know it. Britain voted to leave, and France could very well be next. Why France? One of the main reasons is because the French economy is softer than the German economy. At least in Germany people are still earning money and making a living, despite all the recent turmoil. In France, the same malaise that’s settling over the U.S. and other places is settling in. And it’s going to spread.

There is no place to hide with what’s coming. I’m not saying it’s coming this year, or even the next. I can’t give a specific date. But imbalances are building up to such a degree, they just can’t continue much longer.
In addition, Philippe Legrain fretted about Brexit opening the door to European disintegration in an essay in Project Syndicate.

I beg to differ. In fact, the Brexit experience has made Europe stronger, not weaker.

The full post can be found at our new site here.

Sunday, August 7, 2016

Breakout, or fake-out?

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 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 model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


A global growth rebound
The SPX broke out to another all-time high on Friday in response to the positive surprise from the Employment Report. The upside breakout followed a false breakdown out of a narrow trading during the same week. The key question for traders is, "Is this an honest-to-goodness breakout, or just a fake out?"

Indeed, there is an intermediate term bullish case to be made. I've been writing for the past few weeks about how the combination of overly defensively oriented investors and a US growth surprise is leading to a FOMO (Fear of Missing Out) rally in US equities. Now it seems that the growth surprise is spreading around the world. As the chart below shows, the Global Purchasing Managers Index (PMI) is turning up, which is a positive sign for global growth.



On the other hand, short-term technical indicators are flashing signals of extreme caution. The market appears to gotten ahead of itself and a pullback may be in order before stock prices can rise sustainably. The chart below from Sentiment Trader shows that sentiment is at an optimistic extreme, which is a worrisome sign (annotations in red are mine).



The full post can be found at our new site here.

Wednesday, August 3, 2016

Buy the shallow pullback

Mid-week market update: After spending over two weeks in a narrow trading range, the SPX broke down out of that range yesterday and tested technical support at the 20 day moving average (dma), which was also the mid-Bollinger Band mark. At the height of the decline, the index had fallen 1% and the market was flashing short-term oversold signals.

When the market steadied soon after the open on Wednesday, I tweeted:


It appeared that the market had successfully tested 20 dma support:


In addition, short-term breadth measures (via IndexIndicators) had retreated to oversold levels that a bounce was likely.


Those conclusions are based on the combination of an intermediate term backdrop of economic and fundamental growth and powerful price momentum. Under such circumstances, market pullbacks are likely to be shallow and further all-time highs would probably follow soon afterwards.

Let me expand on those points.

The full post can be found at our new site here.

Monday, August 1, 2016

Worried about US equities? Here's an alternative!

I have a suggestion for value oriented investors who are uncomfortable with my market blow-off thesis for US equities (see How to get in on the ground floor of a market bubble and Get ready for the melt-up). What about buying Europe?

Valuation metrics for European stocks are certainly cheaper. The SP 500 trades at a price to book ratio of 2.7 and forward P/E 18.4. By contrast, FTSE Europe trades at a P/B of 1.6 and forward P/E of 15.9 and the Euro Stoxx 50 trades at a P/B of 1.3 and forward P/E of 13.5.

The full post can be found at our new site here.

Sunday, July 31, 2016

Get ready for the melt-up

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 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 model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


A brighter tomorrow
No, the "brighter tomorrow" of the title does not refer to the better future promised by American politicians during this election season, but the brighter future for equity prices over the next 6-12 months. It appears that the market bubble scenario that I outlined a few weeks ago is well on its way to becoming a reality (see How to get in on the ground floor of a market bubble). The following factors are combining to create an environment that could see the market melt-up:
  • Positioning: Investors have been caught leaning the wrong way. They are just starting to play catch-up, but sentiment remains overly skeptical.
  • Growth surprise: A US recovery has caught most people off-guard (though I in the minority when I was bullish during the market panic in January, see Buy! Blood is in the streets!).
  • Central bank accommodation: The Federal Reserve has been ultra-cautious in its policy of interest rate normalization, which is an enabling factor for equity price gains.
While I am starting to have concerns about equities on valuation grounds, the market is likely undergoing a blow-off phase where if participants hold their noses and buy, they could enjoy some truly bubbly profits.

The full post can be found here.

Thursday, July 28, 2016

Is Chinese growth stalling?

I have long had much respect for the folks at Lombard Street Research (LSR) for their unusual non-consensus calls. Back in the days of the Tech Bubble when everyone was focused on the likes of Cisco Systems, Lucent, Nokia and other technology darlings, they had said "watch China" as the next engine of growth. That turned out to be the Big Call that made me forever remember them.

It was therefore with great interest when a Bloomberg story came across my desk indicating that LSR believed that China may be in a liquidity trap. While Chinese M1 growth has been picking up sharply, LSR`s estimate of the growth the broad money M3 has been slowing, which led to the conclusion of a possible liquidity trap.


The full post can be found at our new site here.

Wednesday, July 27, 2016

Is the consolidation over?

Mid-week market update: After the stock market rally off the panic Brexit bottom that took SPX to new all-time highs, the market has been in a tight trading range for the last 10 trading days.

As the chart below shows, the 5-day RSI, which is a useful short-term trading indicator,flashed a sell signal several days ago as it retreated from an overbought reading into neutral territory. This "should" have pushed the index down further, especially with the slightly hawkish tone from the Fed today. The logical initial support level is the mid-Bollinger Band, or 20 day moving average (dma), which is rising quickly but current stands at 2140. The next support would the the breakout level at about 2120.


However, the slightly hawkish statement from the FOMC was not enough to push the market below the tight consolidation range. A market with a weaker tone would have fallen to at least test the initial support level, but it hasn't. The key question for traders is, "Is this consolidation or corrective period over?"

The full post is available at our new site here.

Monday, July 25, 2016

FOMC preview: How hawkish the tone?

As we approach another FOMC this week, much of the short-term tone of the market will depend on the Fed. In order to analyze what the Fed is likely to do, let`s begin with their mandate, which is price stability (fighting inflation) and full employment. In addition, the Fed has taken on a third objective of financial stability.

When I look at what`s happened since the Brexit vote, all signs point to a renewed path towards interest rate normalization. Therefore it would be unsurprising to see the FOMC statement take a more hawkish turn. Expect the post-meeting buzz to focus on one or two rate hikes for the remainder of 2016.

The full post can be found at our new site here.

Sunday, July 24, 2016

In the 7th or 8th inning of the bull market

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 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 model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.



Value meets Growth and Momentum
No, I am not turning bearish on stocks despite the title of this post. However, the value side of my inner investor is starting to get a little nervous. The market has risen to a level that can be described as either fair value or slightly overvalued. In addition, the behavior of "smart" investors like insiders are also raising cautionary flags that serve as early warning signs of limited upside potential.

On the other hand, the US economy is undergoing a growth revival, which is helpful for higher stock prices. In addition, the market is experiencing powerful momentum in the form of a FOMO (Fear of Missing Out) rally that's still in its early stages. The irrational exuberance scenario that I postulated two weeks ago (see How to get in on the ground floor of a market bubble) is becoming my base case. Under those circumstances, stock prices can rise further than anyone expects.

My preliminary conclusion is we are seeing the late stages of a market blow-off that will ultimately mark the top of the bull market that began in March 2009. We are in the 7th or 8th inning* of this bull and there are still gains to be made, but longer term investors should start to begin to exercise some caution.

* For readers unfamiliar with baseball, a normal game lasts 9 innings. If the score is tied after the 9th inning, then extra innings are played until a winner is determined.

The full post can be found at our new site here.

Friday, July 22, 2016

The Trump Arbitrage Trade

The reaction to Donald Trump`s speech to the Republican convention has been highly bifurcated. Mainstream media and analysts mostly reacted with horror and raised cautionary notes about his campaign of fear (see The New York Times and The Economist), while social media lit up with "I would totally vote for this guy" messages.


To be sure, Trump's speech was extremely dark in tone for the presidential candidate of any major party. Here are some key excerpts that painted a picture of a failing America:
Homicides last year increased by 17% in America’s fifty largest cities. That’s the largest increase in 25 years. In our nation’s capital, killings have risen by 50 percent. They are up nearly 60% in nearby Baltimore...

The number of police officers killed in the line of duty has risen by almost 50% compared to this point last year. Nearly 180,000 illegal immigrants with criminal records, ordered deported from our country, are tonight roaming free to threaten peaceful citizens.

The number of new illegal immigrant families who have crossed the border so far this year already exceeds the entire total from 2015. They are being released by the tens of thousands into our communities with no regard for the impact on public safety or resources...

Household incomes are down more than $4,000 since the year 2000. Our manufacturing trade deficit has reached an all-time high – nearly $800 billion in a single year. The budget is no better.

President Obama has doubled our national debt to more than $19 trillion, and growing. Yet, what do we have to show for it? Our roads and bridges are falling apart, our airports are in Third World condition, and forty-three million Americans are on food stamps...

Not only have our citizens endured domestic disaster, but they have lived through one international humiliation after another. We all remember the images of our sailors being forced to their knees by their Iranian captors at gunpoint...

In Libya, our consulate – the symbol of American prestige around the globe – was brought down in flames. America is far less safe – and the world is far less stable – than when Obama made the decision to put Hillary Clinton in charge of America’s foreign policy.
Never mind the pundits who fact checked Trump and pointed out the distortions. If you are a believer in the Trump message and you weren't sure if he will win, what would you do with your portfolio?

The answer is to buy gold. That viewpoint sets up the Trump Arbitrage: If you believe in Trump's assessment of America, you would buy gold. If you thought that things aren't as bad as the Trump view, you would buy stocks. You would buy hope - and innovation.

The Trump Arbitrage trade is either gold, or stocks. Here is the gold vs. equities pair trade, which remains largely range-bound for most of this year.



Here is how I would evaluate the Trump Arbitrage Trade.

The full post can be found at our new site here.


Wednesday, July 20, 2016

When will the bulls take a breather?

Mid-week market update: As stock prices have recovered strongly off the Brexit panic bottom to make a new all-time high, there are numerous signs that the market is ready to take a breather. In all likelihood, a period of sideways consolidation or minor pullback is on the horizon.



The full post can be found at our new site here.




Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:

Monday, July 18, 2016

Demographics Apocalypse Now?

When I was a boy, I can remember the Zero Population Growth (ZPG) movement, which was a response to the Club of Rome's Limits to Growth Mathusian thesis of "the world has limited resources, but human population is rising exponentially and therefore ecological disaster looms". Somewhere along the way, birth rates fell in response to global industrialization, rising incomes and changing incentive structures. In an agrarian society, children are potential units of production. They can be put to work in the fields and support you in your old age. In an industrialized society, children are cost centers. It was no wonder that birth rates fell as the emerging market economies boomed.

Today, ZPG has been realized (and more). Human global population will stabilize and shrink some time in the 21st Century. In fact, global population is about to reach an inflection point in the not too distant future as the number of old people will soon exceed the number of young children (via Business Insider):


A demographic shift like this raises all sorts of questions. For investors, it brings into the question of future returns as Baby Boomer demand for retirement income starts to dominate capital market returns and strain government retirement benefits. For policy makers worldwide, the issues are how to fund retirement benefits, as well as how to structure policies to transition to an aging society.

The full post can be found at our new site here.




Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:

Sunday, July 17, 2016

All systems flashing green for the bulls, but...

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 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 model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


The all-time-highs explained
Regular readers know that I have been bullish on stocks for quite some time. It was therefore gratifying to see the stock market catapult to new all-time-highs. Just in case you were wondering why stock prices have been rallying in the face of Brexit uncertainty, the blogger Jesse Livermore pretty much nailed the reason with this tweet:


I also suggested last week that the market was on the verge of a growth surprise (see How to get in on the ground floor of a market bubble). The combination of an equity market friendly policy environment and positive growth surprises are acting to push stock prices higher.

The full post can be found at our new site here.






Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike: