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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

In bull markets, valuation generally doesn`t matter very much unless it reaches a nosebleed extreme, such as the NASDAQ Bubble. In bear markets, valuation defines the downside risk in equity prices. 

As the Powell Fed has signaled it is dead set on a hawkish policy that does not preclude inducing a recession, valuation will matter soon. The 10-year Treasury yield stands at 2.8% and the S&P 500 forward P/E is 19.0. The last time the 10-year reached these levels was 2028 when the forward P/E traded mostly in a range of 15-16 but bottomed at a panic low of 13.6. The previous episode of a similar 10-year yield was in H2 2013 when the forward P/E was in the range of 13.5-15. 

All else being equal, this implies downside risk of -15% to -30% for the S&P 500. That’s why US equity

Mid-week market update: In case you missed it, the market recently flashed a Hindenburg Omen last week. The criteria for the Omen was succinctly explained by David Keller as:
The market is in an established uptrend;
A sharp expansion in both new highs and new lows, indicating indecision; and
A momentum break.

To be sure, Hindenburg Omens aren’t bearish until we see a cluster of Omen signals within a short period. Since last week’s Omen was a singular event, we should only treat it as a warning and not an actionable signal.

Instead of a sharp expansion in individual stock new highs and lows, Willie Delwiche observed a sharp bifurcation in new highs and lows by industry, which is not surprising in light of the current backdrop of weak economic growth expectations and strong

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

Take a look at this mystery chart. Is that a bullish or bearish pattern? This chart is just the start of my nine reasons to be bearish on risk assets. My analysis is mainly based on real-time pricing signals from the market and relies less on fundamental or macro analysis.  

This is a time for investors to be cautious and think more about risk than return. That said, I offer one silver lining in all the dark clouds. There is one (sort of) reason to be bullish.

A failed geopolitical risk rally

Sometimes it’s useful to view a chart upside down. The mystery chart is MSCI Poland in USD, which I use as a proxy for geopolitical risk. The Polish market bottomed out in early March as Russia-Ukraine war fears peaked. Unfortunately, the rebound had no legs and began to fade in April.

Mid-week market update: There had been some recent buzz around the positive effects of price momentum on stock prices (see The breadth thrust controversy). In particular, Ed Clissold at NDR highlighted several breadth thrust buy signals, which are based on the positive effects of price momentum. Since then, the equity rally has fizzled and the major market indices across all market cap bands are struggling just below key resistance levels. More importantly, today’s weakness left the S&P 500 just below its 200 dma. 

Momentum, Schmomentum!

What bad breadth looks like

Here are some reasons to be concerned. Technical analysts like to talk about breadth. An analysis of different flavors of Advance-Decline Lines shows that the S&P 500 A-D Line has been holding up well, with the

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

An unusual divergence has appeared between the VIX Index and MOVE, which measures the implied volatility of the bond market. While MOVE has spiked, VIX has fallen. 

The difference in the two indicators can be explained by two forces that affect markets today, namely geopolitical risk and macro risk as defined by the Fed cycle. The decline in the VIX and equity rally reflects a compression in geopolitical risk premium in light of constructive Russia-Ukraine discussions, while the elevated nature of the MOVE Index reflects the market’s concerns about the Fed’s tightening cycle.

I pointed out a month ago that Wars are equity bullish, but there’s a catch. History shows that stock markets have recovered from sudden geopolitical shocks, with the exception that the war or insurrection

Mid-week market update: Before the war began, I wrote that investors should Buy to the sound of cannons. Historically, investors have been rewarded by buying sudden geopolitically related downdrafts. The corollary is “sell to the sound of trumpets”, or news of peace. 

US equity indices across all market cap bands staged upside breakouts through resistance yesterday and they pulled back today to test the breakout levels.

Is peace at hand? Are the trumpets sounding?

Falling geopolitical risk

The market rallied yesterday on the hopeful news of Russia-Ukraine negotiations. The Ukrainians made a proposal of neutrality under the following conditions:

Ukraine would be neutral and agree not to join alliances like NATO or have foreign troops on its soil, but would have security

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

The Russia-Ukraine war has dealt an unexpected shock to the global economy and markets. Even as the world began an uneven recovery from the COVID Crash of 2020 and inflation pressures began to rise, the war has spiked geopolitical risk premiums and exacerbated supply chain difficulties and added more inflationary pressures. From an economic perspective, rising inflation and inflation expectations are forcing central bankers to react with more hawkish monetary policies, which raise recession risk. 

It’s not a pretty picture. Now that we know what war looks like, let’s engage in some scenario planning. Imagine peace. How would the global economy and markets react?

The price of war

Let’s begin with the current situation report. About a month into the invasion, the Russian

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

Did the stock market make a meaningful bottom last week? Financial markets had been taking a risk-off tone coming into the week, but when the Powell Fed was slightly more hawkish than expected, the market rallied.  

The S&P 500 was -14.6% peak-to-trough on an intraday basis in 2022. Ed Clissold of Ned Davis Research pointed out that the characteristics of cyclical bears and recession bears have been very different. Cyclical bears that don’t involve a recession tend to be shorter in length and less severe in magnitude compared to recession bears, though “most non-recession bears include a recession scare”.

Here are some ways of spotting a durable market bottom.

The Fed’s rosy scenario

If we were to cut through all the noise, it’s the Fed cycle that mainly dominates the

Mid-week market update: The bears have exhibited great expectations for risk assets. Ed Clissold of Ned Davis Research observed that the NDR Crowd Sentiment has been at a sub-30 reading, which is historically bullish. However, he pointed out that momentum is negative and hedged with “sentiment is extremes differ cycle to cycle, so it’s best to wait for sentiment to begin to reverse”. 

Bearish sentiment

Sentiment indicators have indeed been extreme for some time. Investors Intelligence bears exceeded bulls for the third week. Such conditions have historically marked short-term bottoms in the past.

The latest BoA Global Fund Manager survey also shows that managers have gone extremely risk-off, which should be contrarian bullish.

Fed expectations

Chartists can analyze

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

Some chartists have recently become excited over the commodity outlook. Setting aside the headline-driven rise in oil prices, the long-term chart of industrial metals like copper looks bullish. Copper is tracing out a cup-and-handle pattern breakout that targets strong gains in the years ahead. Moreover, the one-and the two-year rate of change, which is designed to look through the effects of the COVID Crash, are elevated but not out of line with past bull phases. 

The point and figure chart of copper appears equally impressive. The measured target on a point and figure breakout is an astounding 9.50, which is over a double from current prices.

Is this the start of a new commodity bull? I would argue that this is not your father’s commodity bull market.

Bullish chart

Mid-week market update: The S&P 500 put in a potential double bottom when it tested its recent lows while exhibiting a positive RSI divergence. Stock prices rallied on the news of a ceasefire in order to allow civilians to evacuate. 

Is this a durable bottom?

News from the front

The market has been extremely war headline sensitive and it’s impossible to discuss risk appetite without discussing the war. While I am no military analyst, here is a summary of what is known from open intelligence (OSINT) sources.

Here is the good news. Both sides are talking and there is some movement in position. Initially, the Russians had demanded total surrender and regime change when the invasion began. Early this week, the Kremlin softened their position to:

A constitutional change that

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

Much has happened in the space of a week. In the wake of Russia’s Ukrainian invasion, the West has responded with a series of tough sanctions designed to tank the Russian economy. Energy and other commodity prices have soared and this is shaping up to be another energy and geopolitical crisis. The last three episodes resolved in recessions, which are equity bull market killers. Fourth time lucky?

The 1973 Arab Oil Embargo
The 1979 Iranian Revolution
The 1990 Gulf War
The 2022 Russia-Ukraine Energy Shock (?)
The backdrop sounds dire. Nouriel Roubini recently warned of stagflation in a Project Syndicate essay. An analysis from Oxford Economics shows that the shocks will hit the Russian economy, but Europe will not be spared. The US is expected to see the least negative impact from the

Mid-week market update: Will the S&P 500 hold support or will it break? The index is once again testing the neckline of a potential head and shoulders pattern while exhibiting a minor positive RSI divergence. 

Here are the bull and bear cases.

Sentimental bulls

Short-term sentiment models look stretched to the downside, which is contrarian bullish. The bull-bear spread from the AAII weekly survey is at levels that have seen short-term bounces. Readings have only been exceeded to the downside during the GFC and the bear market of 1990. Similar readings were seen during the bear market low in 2002. Investors weren’t even as panicked during the Crash of 1987.

The latest update of Investors Intelligence sentiment shows a spike in bearish readings which resulted in the

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

Four weeks ago, I suggested that investors buy to the sound of cannons. Now that the cannons have sounded, is that still a good idea? 

Yes, but there’s a catch. A detailed list of past crises from Ed Clissold of Ned Davis Research reveals that stock prices usually rebound strongly after sudden shocks such as war. On average, the DJIA is up 4.2% after a month and 15.3% a year later.

Here’s the catch. Consider the following: Jeremy Siegel observed that stocks return about 7% real per annum. Supposing your distant ancestors had invested $100 in equities or equivalent at the time of Augustus Caesar and held the investment for the last 2000 years. Your family would be so obscenely rich that it could have rescued the entire global financial system during the GFC with the proceeds of

Mid-week market update: Trying to spot a bottom here is like trying to catch a falling knife – and at a time of war. Here is what I am watching in order to navigate the turmoil. 

It’s official. We are entering the Biden administration’s “trade talks are going very well with China” phase of market psychology where asset prices respond to every headline in the Russia-Ukraine conflict. Since it’s virtually impossible to predict what’s ahead on the geopolitical front, traders can only focus on technical internals and how stock prices respond to news. 

Virtually every chartist can see the developing head and shoulders pattern in the S&P 500, but that’s not the entire story and investors should look for signs of confirmation from other indicators.

Becoming oversold

I wrote on

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

The past week saw rising anxiety about a flattening yield curve rise to a crescendo. The 2s10s spread narrowed to as low as 40 bps before recovering and ending the week at 46 bps. Coincidentally, the BoA Global Fund Manager Survey showed an overwhelming majority of respondents hold believe the yield curve will flatten.

Even though it hasn’t inverted yet, an inverted yield curve has signaled recessions in the past. This raises two key questions for investors.

What’s the near-term outlook for inflation?
Is the Fed willing to drive the economy into a recession in order to fight inflation?

The Fed’s dilemma

Let’s begin with the good news. The 5×5 inflation expectations (blue line) remains tame, even as current inflation indicators such as core CPI (red line) skyrocket seemingly

Mid-week market update: I wrote on Monday (see Everything but the kitchen sink) that market sentiment was overly stretched on the downside, “If you are short here, you need a catastrophe within the next 10 days, otherwise, you run the risk of a rip-your-face-off relief rally.” 

The relief rally appeared right on cue on Turnaround Tuesday and prices stabilized today in the wake of the release of the FOMC minutes. Before the bulls get too excited, don’t forget that the intermediate trend is still down. The Value Line Geometric Index, which measures the performance of the average stock, broke a long-term support level and is tracing out a falling channel.

Mike Howell at Crossborder Capital also pointed out that global liquidity is drying up. Changes in global liquidity is

I must admit, the bears are trying their best. They’ve thrown everything but the kitchen sink at the stock market: The prospect of a half-point rate hike, an inter-meeting hike, and the looming risk of an armed Russia-Ukraine conflict. 

Despite all the bad news, the S&P 500 is holding above its January lows. What’s next, an asteroid from outer space?

Depressed sentiment

Short-term sentiment is certainly depressed. Two (unscientific) weekend Twitter polls tell the story. Helene Meisler’s weekly poll readings show a high level bearishness.

Callum Thomas’ weekend poll tells a similar story.

How far will the Fed go?

St. Louis Fed President James Bullard appeared in a CNBC interview this morning in which he defended his views and did not walk any of hawkishness back.

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 Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price

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 cyclical stocks. 

Beneath the surface, however, such an approach carries considerable risks owing to growing negative divergences. Instead, I present a framework for managing the inflation tantrum of 2022.

Rising inflation concerns

The main investor concern today is the prospect of higher interest rates. Not only has the Fed revealed a tightening bias, but also the European Central Bank recently made a similar pivot. The economy is on fire and there is plenty of room for the

Mid-week market update: Technical analysis can be highly interpretative. Consider, for example, the bull or bear flag, which is a continuation pattern. For the uninitiated, a bull flag is a pullback within a bull trend and the trend is deemed to have continued when the stock or index stages an upside breakout from the flag. The reverse holds for a bear flag. 

With that brief explanation in mind, did the S&P 500 just break out of a bull flag, or is it still tracing out bear flag?

Bullishness and bearishness are in the eyes of the beholder.

Waiting for a sentiment reset

The principal reason for the bull case is the lack of a sentiment reset. Sentiment remains overly bearish. Jeff Hirsch at Alamanac Trader recently wrote, “Sentiment looks like it’s getting negative enough to