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

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: When the news of the Trump tweets broke, I wrote:

When it comes to unexpected news, my tactical inclination is to stand aside and let the market tell the story, and then reassess once the dust is settled.
In a very short time, the market has gone to a full-blown panic. 

The breadth of the decline has been astounding, and it is unusual to see this level of correlation in a sell-off, especially when the SPX is only -2.1% off its all-time highs as of Tuesday’s highs. This kind of behavior is evidence of a panicked stampede. 

That said, the dust is starting to settle on this trade related downdraft. It is time to assess the situation. 

The latest news
Reuters dropped a bombshell early this morning with a story of how the Chinese had backtracked on their

President Trump surprised the market on Sunday with a tweeted threat: 

Notwithstanding his misunderstanding that tariffs are not paid by the Chinese, but American importers, this tweet sounds like an effort to put pressure on China, just as Vice Premier Liu He is scheduled to arrive in Washington on Wednesday with a large (100+) trade delegation for detailed discussions. News reports indicate that both sides have given significant ground, and a deal may have been possible by Friday.
In response to Trump’s tweeted threat, the WSJ reported that the Chinese may reconsider making their trip to Washington because “China shouldn’t negotiate with a gun pointed at its head”. CNBC subsequently report indicated that the Chinese are preparing to visit Washington, but with the delegation size

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

You may think that institutional money managers run in herds, but that is not necessarily true. Different managers have different mandates that color their views. As well, their geographical base can also create differences in opinions in how their view their world and markets. I analyze institutional sentiment by segmenting them into four distinct groups, each with their own data sources:
US institutions, whose sentiment can be measured by Barron’s semi-annual Big Money Poll
Foreign and global institutions, as measured by the BAML Fund Manager Survey (FMS), which is conducted on a monthly basis;
RIAs, as measured by the NAAIM survey, conducted weekly; and
Hedge funds, as measured by option data and the CFTC futures Commitment of Traders data, though hedge funds are partly represented

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 market strength this week was no surprise to me based on my seasonal analysis I published on the weekend (see Will a volatility collapse lead to a market collapse?). Last week was option expiry (OpEx) week, and OpEx weeks have historically been bullish for stocks. In particular, Rob Hanna at Quantifiable Edges found that April OpEx week was one of the most bullish ones of the year. 

However, last week saw the SPX edge down -0.1%, and my own analysis found that April post-OpEx weeks that saw market declines tended to experience strong rallies (red bars). By contrast, the market had a bearish tilt after strong April OpEx weeks (green bars). 

This historical study was conducted from 1990, and the sample size of losing April OpEx weeks was relatively

It is Easter Monday, a day when Christians focus on the theme of rebirth and resurrection, Healthcare stocks just underwent a near-death experience when the market panicked over the prospect of a Democrat victory in 2020, and the potential negative effects of the implementation of a Medicare-For-All policy.
To be sure, there are costs to be taken out of the system. The US spends more than any other industrialized country on health care, with a lower life expectancy. 

Indeed, the political winds are starting to shift. Axios reported that Republicans are becoming more open to the idea of passing a bill that will lower drug prices:

The White House and top lawmakers from both parties think a bill to lower drug prices has a better chance of becoming law before the 2020 election than

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 would like to address a number of bearish themes floating around the internet in the past few weeks, they consist of:
A low volume stock market rally
Extreme low volatility (remember the VIXmageddon of early 2018)
The closing stock buyback window during Earnings Season, which removes buyback support for stocks

None of these factors are likely to sink stock prices. Here are some reasons why. 

VIXmageddon ahead?
Traders remember the VIXmageddon event of early 2018. Everybody and his brother had shorted the VIX index, and it was easy money until the music stopped. It’s happening again. Zero Hedge, which is our favorite supermarket tabloid for the perma-bear set, pointed out that the Commitment of Futures report shows an extremely crowded short position in

The US equity market has risen more or less in a straight line since the Zweig Breadth Thrust buy signal of January 7, 2019 (see A rare “what’s my credit card limit” buy signal). Technically, breadth thrusts are extremely rarely long-term bullish signals. How far can stock price rise from here? 

Chris Ciovacco made a recent video which studied the market behavior of breadth thrusts that came to a bullish conclusion. He defined a breadth thrust as % of stocks above their 200 dma rising from 10% to over 70% in a short period. This has happened only twice in the last 15 years. The first time was the rally off the Lehman Crisis bottom of 2009, and the next time was the eurozone Greek Crisis of 2011. 

Ciovacco pointed out that the current breadth thrust occurred more rapidly than

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

-week market update: Numerous signs of a new bullish impulse are appearing.
The American economy has sidestepped a recession;
Sentiment is not excessively bullish; and
Price momentum is strong.
It is a truism in investing that you should buy when blood is running in the streets. The latest update of NDR’s Global Recession Model shows the probability of a global recession, which is defined as sub-3% growth, at 96.63%. 

One application of that rule is to buy risky assets when a recession is evident to the public. It seems that we have reached that point, what should we buy? 

Dodging the recession
Let’s start with the good news. Greg Ip at the WSJ wrote that “The World Seems to Have Dodged Recession, for Now”:

If the world was at risk of sliding into recession, policy makers appear

I am somewhat at a loss of why Trump is putting so much pressure on the Federal Reserve. In a recent CNBC interview, CEA chair Kevin Hassett projected that growth would rise again to 3% later this year. “Everything we see right now is teeing us up to have a year like last year – Q1 around 1.5% or 2%, then Q2 goes way north, carries you into a 3% year.”
After the BLS reported a strong than expected March Jobs Report last Friday, Donald Trump repeated his assertion that the Fed should shift to an easier monetary policy (via CNBC):

President Donald Trump said Friday the U.S. economy would climb like “a rocket ship” if the Federal Reserve cut interest rates.
Commenting after a strong jobs report for March, Trump said the Fed “really slowed us down” in terms of economic growth, and that

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: Even as the slowdown gloom overtook the market in the past few weeks, stock prices did not break down. Now, the storm seems to be passing as green shoots of growth are starting to appear.
For equity investors, the most notable change was the reversal in forward 12-month EPS estimates, which bottomed and begun to rise again. This is an indication of the return of bullish fundamental momentum.

The combination of an unexpected growth turnaround and excessively cautious positioning is sparking a “green shoots” risk-on rally. 

The turnaround
Joe Wiesenthal at Bloomberg summarized the current situation well in his Tuesday morning commentary:

Thanks to weakness from abroad, and the briefly inverted yield curve, there’s a lot of anxiety about recession risk. So it

I have two thoughts ahead of the March Jobs Report that investors should consider. Let’s start with the tactical picture of what Friday’s reports might bring.
Recent jobs data has been distorted by the effects of the federal government shutdown, which can make the reported figures nonsensical. Now that the effects of the shutdown are mostly over, we can get a better idea of the overall trend.
One clue comes from the weekly initial jobless claims data, which is reported on a timely basis. As the chart below shows, the week of the February Jobs Report survey coincided with an unusually strong initial claims print, which may have contributed to the shocking miss in the February NFP report of 20K jobs. Initial claims for the March survey week weakened to a level consistent with January’s.

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 characterized this week as a “show me” week for the market, though I had a slight bullish bias (see How the market could melt up). While I remained tactically bullish, a number of unanswered questions remained in light of the yield curve related sell-off that began late last week.
Some of those questions are getting answered. The bulls are still have control of the tape, though the control remains tenuous. The most positive sign is the SPX is holding a resistance turned support zone at about 2800. The market advance last summer was characterized by a series of “good overbought” readings on RSI-5, and pullbacks were halted when RSI-14 reached the neutral zone. The same pattern seems to be occurring today, which is constructive. 

Supportive internals
One

There was some confusion from readers in response to my bullish pivot in yesterday’s post (see How the market could melt up). Much of the confusion was attributable to the bear porn that has been floating around since last Friday from the inverted yield curve when the 10-year Treasury yield fell below the 3-month.
One example came from Ben Carlson at A Wealth of Common Sense, though Carlson did qualify his analysis that the timing of a stock market pullback has varied:

The timing of these market corrections varies widely. In late 1980 and early 2000, the inverted yield curve signaled a quickly approaching stock market peak. In the other three instances, it was almost two years until stocks broke down.

Troy Bombardia has also weighed in with his own analysis of past inversions.

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 instant market reaction on FOMC day can often be deceptive. Instead of a general market comment, I will focus instead on analyzing sectors using sentiment, momentum, and contrarian approaches. As a measure of sentiment, John Butters at FactSet recently analyzed sectors by the number of buy, hold, and sell rankings. 

The sector with the most buy ratings is Energy, but I am going to set aside Energy and Materials from this analysis as commitments to those sectors amount to a bet on commodity prices, which has historically been inversely correlated to the USD. As the chart below shows, the USD Index has been range bound since November, and so has the relative performance of Materials. The relative performance of Energy to the market has also been range

The big market moving event this week on this side of the Atlantic is the FOMC meeting, which concludes on Wednesday with a statement, followed by a press conference by Fed chair Jerome Powell. Ahead of that event, let us consider what market expectations are for Fed policy.
The CME’s Fedwatch Tool shows that the market does not expect any rate hikes for the remainder of 2019, and a slight chance of a cut by the December meeting. 

What about the size of the balance sheet? Callum Thomas conducted an unscientific Twitter poll last week that asked respondents when they expect the Fed to pause quantitative tightening, or QT. The biggest response was Q2, followed by answers in Q3 and Q4 later this year. 

As we approach the FOMC meeting, investors have to be prepared for excessively

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