Mid-week market update: The stock market gapped down on Monday on China Evergrande contagion fears. The technical outlook darkened further Tuesday when a rally attempt failed. The markets took on a risk-on tone this morning when Evergrande issued an ambiguous statement that a coupon due on its yuan-denominated bond. An agreement had been reached with its lenders but the statement didn’t specify the nature of the payment, or when it would be paid.  

While today’s rally is constructive for the bulls, the S&P 500 has yet to fill in the gap from Monday’s downdraft. 

Was that the bottom?

Market bottom models

Three of the four components of my short-term market bottom model flashed signals on Monday. The 5-day RSI was deeply oversold; the VIX had surged above its upper Bollinger

Global markets have taken a decided risk-off tone today. The spark is the China Evergrande implosion. Fears are rising that Evergrande is turning from a liquidity crisis in which the company doesn’t have enough cash to pay its obligations, to a solvency crisis in which the company’s assets are less than its liabilities if it is forced to fire-sale its properties. 

In the US, the S&P 500 had been largely immune to Evergrande news until today. The index decisively violated its 50 dma. Investors are becoming spooked not only over the possibility of an Evergrande contagion but a looming crisis in Washington over the debt ceiling.

Is this a buying opportunity, or a crack in the dam that foretells disaster?

A domestic crisis

Take a deep breath. An Evergrande collapse is unlikely

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 be found here.

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

Stagflation worries are rising. A recent analysis of search activity shows that searches for stagflation have spiked compared to other inflation search terms. 

The latest BoA Global Fund Manager Survey also shows that stagflation concerns are rising.

These fears are misplaced. The conventional mechanisms for stagflation are not present. Instead, investors should be prepared for a different sort of stagflation threat.

What is stagflation?

When investors think about stagflation, they think back to the 1970s, which was a period of high inflation and anemic economic growth. Arguably, the roots of inflation began with Lyndon Johnson’s “guns and butter” policy in his conduct of the Vietnam War and his Great Society programs. The combination of overly expansive fiscal and

13 years ago yesterday, Lehman Brothers fell into bankruptcy. Today, the world is watching China Evergrande collapse in a debt spiral. The overly indebted property developer told China’s major banks that it won’t be able to pay loan interest due Sept. 20. The company has been swamped with protests from individuals who invested in its paper through wealth management products, its employees and suppliers who haven’t been paid, and numerous buyers who paid deposits for properties that haven’t been constructed. 

Systemic risk

How did Evergrande get here? The tale is a familiar one. It overindulged on a debt-fueled expansion spree during the boom years. In addition to property development, which is a high leverage business, the company dabbled in non-core businesses like electric

Mid-week market update: As the S&P 500 revisits the area around its 50 dma, will the weakness persist or will it be halted? The index has found good support at the 50 dma all of this year. Equally constructive is the bull flag pattern being traced out by the S&P 500, though the index hasn’t staged an upside breakout through the flag yet. 

Bespoke pointed out that the most recent losing streak is just the seventh time since the GFC that the S&P 500 closed at a record high and then fell for five consecutive days. The only time the decline didn’t halt was the COVID Crash.

Bearish enough?

Sentiment models indicate that a deep pullback is unlikely. A recent Deutsche Bank survey of institutional investors shows that a 5-10% correction has become the consensus view.

An IHS

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 be found here.

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

Recently, a number of major investment banks have published warnings for the US stock market. The strategists at BoA, Citigroup, Credit Suisse, Deutsche, Goldman Sachs, and Morgan Stanley have issued either bearish or cautionary outlooks. 

On the other hand, Ryan Detrick at LPL Financial documented the effects of strong price momentum on stock prices.

History says that great starts to a year tend to see continued strength the final four months. “Looking at the previous top 10 starts to a year ever, the final four months have gained eight times,” explained LPL Financial Chief Market Strategist Ryan Detrick. “So should we see any seasonal weakness, we’d use it as an opportunity to buy before likely continued strength.”

In these circumstances, I am reminded of Bob Farrell’s Rule 9,

Mid-week market update: There have been two breakouts that may be of significance. The first is an upside breakout of the SPY/TLT ratio. The ratio is pulling back to test its breakout. The SPY/IEF already staged a convincing breakout in late June.  

The second and more obvious breakout is an upside breakout by the 10-year Treasury yield against a falling trend line.

Here are my interpretations of these events.

The SPY/TLT upside breakout should be a risk-on signal. While I am keeping an open mind, I am a little skeptical of this signal.

A review of the relative performance of the top five sectors is uninspiring. The top five sectors comprise about three-quarters of the weight of the S&P 500 and it would be difficult for the market to advance or decline without 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 be found here.

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

When Trump began his trade war with China, the Street’s narrative was “decoupling”. It took a few years, but it’s finally happened. As China’s economic outlook and market deteriorated, it did not drag down the economies of Europe and North America.

To be sure, the news out of China is grim. A series of “common prosperity” crackdowns, financial restructuring, and a slowing economy have combined to tank Asia’s stock markets. The relative performance of the markets of China and her major Asian trading partners against the MSCI All-Country World Index (ACWI) has been weak. With the exception of Taiwan, all have broken key relative support levels indicating relative underperformance against global equities.

The good news is other developed markets have held their ground. That’s what

Mid-week market update: I recently highlighted the possible development of a rare momentum-based Zweig Breadth Thrust buy signal (see The Zweig Breadth Thrust watch). The window for the ZBT buy signal closes tomorrow (Thursday). While the S&P 500 has been advancing slowly, we are unlikely to see the buy signal barring some gargantuan melt-up tomorrow. 

However, the failure of the ZBT buy signal doesn’t mean that the outlook has turned bearish. Instead, the stock market appears to be undergoing a slow grind-up.

Improving internals

From a technical perspective, many of the negative divergences from poor internals have been improving. While the NYSE Advance-Decline Line has not made a fresh high yet despite new highs in the S&P 500, the percentage of S&P 500 and NASDAQ stocks

I was recently asked my opinion on what a safe withdrawal rate for a deferred-tax pension plan managed with the Trend Asset Allocation Model. 

As a reminder, the Trend Model has shown equity-like returns with balanced fund-like risk. The latest update of the model shows another strong month, with a one-month return of 2.5% compared to 1.7% for the 60/40 benchmark and a YTD return of 18.0% compared to a 60/40 return of 12.8% (full details here). Model returns are based on out-of-sample signals, though based on a hypothetical asset mix. 

The base case

Let’s begin with a base case analysis. In 1994, Bill Bengen originated the 4% rule, which has become the industry standard recommended annual rate of withdrawal.  Since then, Bengen indicated that a 4.5% withdrawal rate as a way

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 be found here.

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

Now that a QE taper announcement is more or less baked-in for this year, the next question is when the Fed will raise rates. The July FOMC minutes highlighted the point that the criteria for a taper decision is entirely different from that for a rate hike.

Several participants emphasized that an announcement of a reduction in the Committee’s pace of asset purchases should not be interpreted as the beginning of a predetermined course for raising the federal funds rate from its current level. Those participants stressed that the Committee’s assessment regarding the appropriate timing of an increase in the target range for the federal funds rate was separate from its current deliberations on asset purchases and would be subject to the higher standard, as laid out in the Committee’s

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 be found here.

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

As the infrastructure and budget bills make their way through Congress, I was surprised to see that the latest BoA Global Fund Manager Survey did not mention a corporate tax increase as a key risk to the S&P 500.  

The Biden tax proposals have been well telegraphed and most of the details have been known to the public since March. They call for a partial reversal of the Tax Cuts and Jobs Act (TCJA) corporate tax cuts from the Trump era and the imposition of a corporate minimum tax. An analysis of bottom-up 12-month EPS estimates shows that they have been rising steadily for 2021, which is understandable because individual company analysts won’t cut estimates until they see the exact details of the legislation. However, strategists have penciled in top-down earnings cuts based on

For the crypto folks who embrace the libertarian philosophy of using a medium of exchange not issued by any national government, here are a couple of reminders of what the USD “exorbitant privilege” means in real life. 

First, the Canadian extradition hearing for Huawei CFO Meng Wanzhou finally ended yesterday after nearly three years of drama. Huawei was accused of violating America’s sanctions on Iran, and Meng was arrested at the Vancouver airport based on an American extradition request. In the last three years, she had been battling extradition while under house arrest in a multi-million mansion. 

All of this wouldn’t have been possible if the USD wasn’t the dominant currency of global commerce. The US has weaponized the global banking system as a foreign policy tool.

Mid-week market update: Stock prices have taken a minor and uneven risk-off tone this week. The pullback has been attributable to fears over a Delta variant-related slowdown.  

I beg to differ. Instead, the weakness can be better explained by market technical conditions. The 5-day correlation between the S&P 500 and VVIX, or the volatility of the VIX, had spiked recently. Past instances have resolved themselves with minor bearish episodes in the last three years.

Sentiment readings could put a floor on stock prices. Investors Intelligence %Bulls has retreated and %Bears have edged up. The Bull-Bear spread has fallen to levels consistent with short-term bottoms.

Delta slowdown fears

Evidence of a Delta variant surge in cases had been evident for some time. It’s unclear why

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 be found here.

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

One of my principal tools of market analysis is the use of trend-following techniques to spot changes in macro conditions. My models are seeing some early green shoots in the value and reflation trade. It began with the stronger than expected July Jobs Report. The subsequent tame core CPI print also helped to reinforce the narrative of non-inflationary growth. As a consequence. the value/growth ratio is turning up after exhibiting a positive RSI divergence and relative internals improved. The Russell 1000 Value Index even rallied to a fresh all-time high.

The economic winds are shifting and it may be time for investors to trim their sails.

A value revival

A detailed review of the major value and reflation-sensitive sectors reveals a broad-based recovery. Financial stocks

Mid-week market update: I have been relatively constructive on the stock market in recent weeks, but I am going to do something different this time. Aside from the obvious negative RSI divergences to the rising S&P 500, what are the downside risks to this bull? 

There are many to consider.

Technical warnings

An analysis of market internals reveals a number of cautionary signals. None of them can be classified as sell signals by themselves and each of the negative divergences could resolve themselves in benign manners. In aggregate, however, they do form a picture that all is not well with the bull case.

One of the technical warnings comes from the action of the Dow and the Transports. While the Dow has been making fresh all-time highs, the DJ Transportation Average has been

Gold prices crashed overnight when a flood of sell orders hit the illiquid Asian markets. Prices fell below the 1700 mark but recovered. This has the smell of a margin clerk liquidation, which is often the sign of capitulation.  

Is this an opportunity to buy gold?

The top-down view

The sudden downdraft took me and a lot of other analysts by surprise. Gold prices had everything going for it. On August 8, 2021 Jason Goepfert of SentimenTrader wrote the following constructive comment on gold miners:

Over the past 20 days, an average of fewer than 12% of gold miners were trading above their 50-day moving average, which is now starting to curl higher.

Gold prices had been the beneficiary of cross-asset price support until last Friday. The USD (inverted scale) had shown

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 be found here.

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

There has been much debate over the usefulness and viability of crypto-currencies. Notwithstanding my opinion on the topic, the current crypto-currency ecosystem has an Achilles Heel of Lehman Crisis proportions.  

It’s called Tethers, which is a stablecoin used as a critical piece of plumbing in the offshore crypto markets. This week, I explain:

What is a digital token, or stablecoin?
Why do stablecoins matter in Crypto-Land?
The vulnerability of Tether
Possible solutions

What is a digital token?

There is nothing inherently nefarious about digital token. A digital token is simply a digital way of paying for goods and services that is not issued by a central bank. Unlike a cryptocurrency, a digital token has little price volatility, which is why it’s called a stablecoin.

Mid-week market update: Evidence of a negative seasonal pattern has been circulating on the internet for the S&P 500. As one of many examples, LPL Financial pointed out that the S&P 500 has typically topped out in early August and slides into late September. 

While past performance is no guarantee of future returns, will 2021 repeat the past seasonal pattern? Can the stock market avoid negative seasonality?

Here are the bull and bear cases.

The bear case

In addition to the annual seasonality pattern, Ned Davis Research observed that the seasonal combination of a one-year cycle, four-year Presidential cycle, and 10-year Decennial Cycle patterns looks even uglier.

The negative seasonal pattern is also lining up with widespread bearish breadth divergences.

In

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 be found here.

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

It`s time for another periodic review of sector leadership. For the purposes of analyzing changes in leadership, I use the Relative Rotation Graphs, or RRG charts, as the primary tool for the analysis of sector and style leadership. As an explanation, RRG charts are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again. 

The latest RRG chart shows growth

The Chinese markets panicked on the news of government crackdowns on technology and education companies. As well, Beijing has been working to restrict the flow of credit to property developers in order to stabilize real estate prices. In reaction, foreigners have been panic selling Chinese tech on high volume. 

Despite all of this carnage, the S&P 500 has been remarkably resilient.

China’s about face

Here is the best analysis of China’s policy changes that I have encountered (by Tom Westbrook via Reuters):

The new model appears to place common prosperity, as President Xi Jinping has put it, ahead of helter-skelter growth, investors say.

According to some analysts, it is the most significant philosophical shift since former leader Deng Xiaoping set development as 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 be found here.

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