Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: Regular readers know that I have been tactically cautious on stocks in the last two weeks, but I don’t want to give the impression that I am wildly bearish. In fact, the SPX is on the verge of a long-term buy signal, marked by the positive monthly MACD reading. Should the index close at or close to current levels by month-end, it will have flashed a buy signal that has shown to be highly effective for intermediate and long term investors. 

Before anyone becomes wildly bullish here, some caution may be warranted. 

Waiting for confirmation
First of all, I would warn that the monthly MACD buy signal has not been confirmed by a number of other indices. The broader Wilshire 5000 has not flashed a buy signal yet, though it is very close. 

Global stocks have

President Trump has nominated Judy Shelton as one of the candidates for the open seats on the Federal Reserve’s Board of Governors. While Shelton is a controversial nominee, she is less problematical than the previous two, Herman Cain and Stephen Moore.
While I certainly understand the reasoning behind a gold-backed currency, which is a way to control inflation, I have some difficult questions for Shelton and other supporters of a gold standard. 

A gold standard supporter
There is no denying that Shelton is a supporter of a gold standard. She wrote a WSJ op-ed in 1998 calling for the establishment of a gold standard. Bretton Woods wasn’t good enough.

The best way to do that is to adopt a global gold standard. The Bretton Woods system was a gold exchange standard, not a gold

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: I highlighted a tactical trading sell signal from the VIX Index on the weekend. The VIX had fallen below its lower Bollinger Band,, indicating an overbought market, and mean reverted above the band last Friday. 

As a reminder, the historical study of such episodes since 1990 show negative returns bottom out roughly a week after the signal, which would be this coming Friday. 

I stand by my trading call for a tactical defensive posture. 

Bearish warnings
Other measures of sentiment show a wide range of disagreement. On one hand, the latest Investors Intelligence sentiment shows that optimism is building. Bullishness as risen past past the 2019 peak, and readings are similar to levels last seen in October 2019. 

On the other hand, the TD-Ameritrade

With interest rates at or close to the zero lower bound, here are a couple of examples of limits to the power of central bankers.
The Federal Reserve: Will it still cut rates after the strong jobs report?
The European Central Bank: What are the limits and price of monetary stimulus?

Will the Fed cut rates?
Let us begin with the Fed. After the blow-out Jobs Report, the bond market reacted violently and there were murmurs as to whether the Fed will still cut rates. Let me lay the first concern to rest. Historically, the Fed has telegraphed its interest rate decisions. With the market expectations of at least a quarter-point cut at the next FOMC on July 30-31, the Fed is unlikely to surprise the market.

I would also note that Fed officials had cited US and global weakness, as well as

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: It is said that there is nothing more bullish a stock or an index can do other than to make new highs. Both the DJIA and the SPX made fresh all-time highs today. While that may appear to be bullish, there are plenty of warning signs beneath the surface that this advance may not be entirely sustainable.
One of the missing ingredients in this rally is momentum. The SPX is exhibiting a negative 5-day RSI divergence, indicating flagging momentum even as the index made new highs. In addition, the VIX Index fell below its lower Bollinger Band, indicating an extremely overbought condition. 

Other divergences
Another warning sign can be seen in the risk appetite in the credit markets. Even as stock prices made new highs, the relative price performance of high yield

The results out of the Trump-Xi summit were slightly better than market expectations. Not only do we have a trade truce, a suspension of escalation, but Trump promised that American companies can sell to Huawei.
Now that we have achieved a detente of sorts, the CME’s Fedwatch Tool shows the market is still discounting a 100% likelihood of a quarter-point rate cut at the July FOMC meeting, and a 21.4% chance of a half-point cut. 

Is this for real? Will the Fed disappoint the markets? 

Why the Fed should cut
Let’s consider the factors that argue for and against a cut. The main reasons for a cut is the weakness of the US and global economy. In addition, the trade war is not over, and the Osaka meeting only achieved a truce while tensions remain high. This creates a high level of

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: Gold staged an upside breakout from a multi-year base, which got a lot of technicians excited. The point and figure chart upside targets range from about 1630 to the mid-1700s, depending on how the parameters are set. 

Before you pile in and buy, let me educate you on the causes of this move, so that you can make a reasoned decision. Think of this as the case of a dog and his tail. Gold is the tail, and it is wagging very rapidly. Figure out why before taking action. 

What inflation?
Gold bugs have pointed to gold as an inflation hedge, but this chart showing gold prices and inflationary expectations disprove that theory. Even as gold prices rose, inflationary expectations have been falling. 

Don’t buy gold if you are using it as an inflation hedge.

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: As I expected, the Fed unveiled a dovish hold at its June FOMC meeting, as predicted by Tim Duy:

The Fed is likely to turn more dovish this week and open up the possibility of a rate cut. I think they still need more data to justify a rate cut. Another jobs report alone the lines of the May report would go a long way toward supporting that cut in July.
Out with “patience”, and in with “act as appropriate to sustain the expansion”* as the new mantra of monetary policy. The greenback feel, and the bond market reacted with a bull steepening. Interest rates fell across the board, but the yield curve steepened. 

However, this sets up a difficult Catch-22 for Fed monetary policy makers.
* Colloquial translation: “An ounce of prevention is worth a pound of

Marketwatch recently reported that Morgan Stanley’s Business Conditions Index had deteriorated to levels last seen during the 2007-08 financial crisis. Wow! Is this an alarming signal, or contrarian? 

In reality, it was a lesson for data analysts in quantitative analysis. 

Looking for confirmation
When I see a surprising result, I look for confirmation. To be sure, CEO confidence has fallen off a cliff. 

On the other hand, NFIB small business optimism has been on fire. 

What’s the real story here? Is there a severe bifurcation between big business (CEO) and small business (NFIB) confidence? Wouldn’t the Morgan Stanley index be more reflective of the big business rather than the small business outlook?
I was able to obtain some of the details behind the Morgan Stanley

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: I wrote last week that the market gods were favoring the equity bulls, The relief rally would likely last about another week (see How far can this rally run?), but the market is likely to remain range-bound until the trade tensions are resolved.

In conclusion, until these trade tensions are resolved, expect the market to remain range-bound and move in reaction to the latest headlines. This suggests that traders should adopt a position of “buy the dips” and “sell the rips”. If history is any guide, I expect the current rally to peter out some time next week, with the most probable peak occurring about mid-week.
The market has rallied substantially since last Wednesday. It is now mid-week, and the market appears to be stalling at resistance. Is this simply a test

Value investing has taken it on the chin in the last decade, as the style has badly lagged the market. Callum Thomas documented how value discount has grown over the last decade. The discount has fallen to levels last seen at the height of the NASDAQ Bubble, when internet related stocks came crashing to earth, and value stocks outperformed.

Is this the time to buy Value? Here are a couple of suggestions of how to participate in the value style in a way that performed well despite the style headwinds of the last 10 years.

Give it to Warren
One way is to just give your money to Warren Buffett. While Buffett’s investing style is not value investing in the classic sense, the shares of Berkshire Hathaway has performed roughly in line with the market over the last 10 years. That’s quite

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: I had been making the point for the past week that this market is oversold and ripe for a relief rally, and the rally finally occurred. From a technical perspective, the market rallied through a downtrend line, which is a sign that the bulls have seized control of the tape. However, the bulls shouldn’t overstay their welcome. Until the trade tension overhang is lifted, this market is likely to remain volatile and range-bound. One characteristic of this uncertainty are the numerous gaps that can be found on the hourly chart. 

Nevertheless, how long can this rally last, and how far can it run? I considered a number of historical studies to arrive at some estimates, and here is what I found. 

The CBI buy signal
I highlighted analysis from Rob Hanna at

Tim Duy thinks that Trump is trying to weaken the economic outlook sufficiently so that the Fed has no choice but to cut rates. The markets adopted a risk-off posture as a consequence of Trump`s announcement that he plans to impose tariffs on Mexico. The entire Treasury yield curve, with the exception of the very long end at 30-years, is at or below the Fed Funds target rate. The market is now anticipating between two and three quarter point rate cuts by the end of 2019.
The story here is that market participants anticipate the Fed will need to cut rates to maintain the expansion. The Fed has so far resisted this story, but the odds favor them moving in this direction. The simple fact is that the Fed reacts systematically to a changing forecast. Financial markets are signaling the the

I just want to publish a quick note. Panic is in the air.
Investors are piling into the safe haven of USTs. The 5-day plunge in 2-year Treasury yield has not been exceeded since the stock market bottom of 2008. 

Callum Thomas` weekly (unscientific) Twitter poll is in record net bear territory. Not only that, the 4-week moving average is also at a record low. Past short-term stock market bottoms have coincided with either the weekly low, or the 4-week average low. Take your pick. 

Lastly, Rob Hanna at Quantifiable Edges observed that his Capitulative Bottom Index (CBI) spiked 10 points on Friday. Absolute readings of 10 or more have been buy signals, so a 10 point CBI spike is nothing short of astounding.

The Quantifiable Edges CBI has spiked over the last few days. After

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: The headlines look dire, and so does the market action. Relative performance analysis shows that defensive sectors have become the leadership, but as the October to December selloff shows, they are coincidental indicators and offer no predictive power as to future market direction. 

What should you do? Today, I look through the market turmoil and offer some suggestions of industry groups that appear to stand up well independent of their beta characteristics. These group have the potential to be the leaders in the next upturn. 

Potential new leadership
Here are some potential leadership candidates to consider. We all know that Healthcare stocks were spooked by the prospect of Medicate-for-all in April. The market forgot all about that scare when prices

This is the second part of a two part series on the unusual market pattern that we have been undergoing (see part one, Peak fear or Cold War 2.0). While the market may have discounted a substantial amount of the first-order effects of a trade war, the tail-risk of the loss of business confidence in a full-blown trade war is difficult to measure. In addition, the US and China may be on the verge of Cold War 2.0, which would disrupt and bifurcate technology platforms and supply chains.

Cold War 2.0?
The Economist recently devoted a special report to how a trade war is becoming a Cold War 2.0:
Fighting over trade is not the half of it. The United States and China are contesting every domain, from semiconductors to submarines and from blockbuster films to lunar exploration. The two

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: It appears that the stock market is may be range-bound until Trump and Xi meet in Japan in late June. A high level of uncertainty is the order of the day, with short-term direction will be determined by the latest news or tweet.
As the chart below shows, the range is defined by a level of 2800 on the downside, and 2895-2900 on the upside. From a technical perspective, direction cannot be determined until either an upside or downside breakout is achieved.

There is some hope for the bulls. The market is forming a nascent inverse head and shoulders formation, with a measured target of 2980 on an upside breakout. As good technicians know, head and shoulders formations are not complete until the neckline breaks. The current pattern can only be interpreted as a

The headlines look ominous. The US has dispatched a carrier task force to the Persian Gulf, and a second one is due to arrive soon. The State Department ordered the evacuation of all non-essential personnel from Iraq:

The U.S. State Department has ordered the departure of non-essential U.S. Government employees from Iraq, both at the U.S. Embassy in Baghdad and the U.S. Consulate in Erbil. Normal visa services at both posts will be temporarily suspended. The U.S. government has limited ability to provide emergency services to U.S. citizens in Iraq.
We had a threatening Presidential tweet over the weekend. 

Reuters reported that Exxon Mobil is evacuating foreign staff from an Iraqi oilfield near Basra:

Exxon Mobil has evacuated all of its foreign staff, around 60 people, from

Preface: Explaining our market timing modelsWe 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 a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: There are numerous signs that the US equity market is making a short-term tradable bottom. Firstly, the market is washed out and oversold. While oversold markets can become more oversold, we saw some bullish triggers in the form of positive divergences on the hourly SPX chart.
Even as the index fell, both the 5 and 14 hour RSI made higher lows and higher highs. In addition, the VIX Index failed to make a higher high even as prices declined. Possible upside targets are the three gaps left open in the last few days. 

Bullish setups everywhere
There were many bullish setups in the last few trading days. Rob Hanna at Quantifiable Edges pointed out last Friday that his Capitulative Breadth Index (CBI) hit 10 last Thursday. Historical studies show a definite

I wrote yesterday (see Why investors should look through trade tensions):

Calculated in economic terms, China would “lose” a trade war, but when calculated in political cost, America would lose as Trump does not have the same pain threshold as Xi.
Based on that analysis, I concluded that it was in the interests of both sides to conclude a trade deal, or at least a truce, before the pain became too great. In addition, the shallow nature of last week’s downdraft led me to believe that the market consensus was the latest trade impasse is temporary, and an agreement would be forthcoming in the near future.
I then conducted an informal and unscientific Twitter poll on the weekend, and the results astonished me. The poll was done on Saturday and Sunday, and a clear majority believes that it