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

LoFor the longest time, I never “got” crytocurrencies. I never bought into the idea of an urgent need for a currency that is outside the control of the “authorities”, or how you ascribe value to something that had no cash flow. If it has no cash flow, then how do you calculate a DCF value? Here is the perspective from Morningstar:
As with copper ingots, seashells, peacock feathers, and gold before it, cryptocurrency is a medium of exchange, rather than something that creates wealth on its own. It can be used to purchase cash–but it does not earn it. Try as you wish, your bitcoin receipt won’t trigger dividend checks, any more than will a sheaf of peacock feathers or a mountain’s worth of copper.
Assessing cryptocurrencies by calculating the value of their future payments is therefore a

Mid-week market update: In my last post, I suggested that the stock market is headed for a corrective period, though a short-term bounce was possible this week because of its oversold condition (see Correction ahead: Momentum is dying). The market has staged a remarkable recovery this week by surging to test a key resistance level and readings are now overbought. 

The key question then becomes, “Is the correction thesis dead?” 

A review of momentum
The correction call was based on the observation that price momentum was rolling over. In particular, I focused on the narrowing MACD histogram as a sign of weakening momentum. Let us review how MACD has behaved since the relief rally this week. Here is the weekly S&P 500. Past episodes of weakening momentum has seen either the market

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 have been cautious about the US equity market outlook for some time, and the market seems to be finally rolling over this week. The SPX violated an uptrend while failing to rally through resistance. 

In the short rim, stock prices are likely to experience difficulty advancing. However, such episodes of trend line breaches can either resolve themselves through a sideways consolidation or a correction. What is the more likely scenario? 

A mixed leadership message
An examination of sector market leadership doesn’t yield a lot of clues. The top four sectors, Technology, Healthcare, Financials, and Communication Services, make up roughly 60% of the weight of the index. However, their relative performance doesn’t give us many clues to the market direction.

AvFor several months, the BAML Fund Manager Survey shows that global institutions have been piling into emerging market equities.

The purchase of EM equities has been a smart move, as they have been leading the market upwards. However, their time in a leadership role may be coming to an end owing to a series of disappointments. EM started to top out against the MSCI All-Country World Index (ACWI) in early February, and relative performance has been rolling over ever since.

Disappointment everywhere
A glance at the Economic Surprise Index (ESI) tells the story. EM ESI has been declining, indicating that economic releases are increasingly disappointing compared to market expectations.

Yardeni Research, Inc. (YRI) just published their monthly summary of consensus estimate

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: Posting will be lighter than usual, I was hit by a nasty flu bug this week and I am barely recovering.
It was the best of times, it was the worst of times. Two treaties (actually one of them isn’t a treaty but an MOU despite Trump’s objections to the term) have either been signed or about to be signed.
The lessor known agreement is the Treaty of Aachen, signed Macron and Merkel, to revive the EU, and as update to the Franco-German friendship pact the Élysée Treaty signed by de Gaulle and Adenauer in 1963. The Élysée Treaty was one of the key foundations of the European Union. No sooner than the treaty was signed, Der Spiegel wrote about the bickering than nearly scuttled the agreement:
Indeed, despite all the ceremony and pomp in Aachen, fundamental differences

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: For the last few weeks, I have been writing about a possible market stall ahead (see Peering into 2020 and beyond). So far, the pullback has yet to materialize, though risk levels continue to rise as the SPX approaches its resistance zone at 2800-2810. 

Here are some reasons why the market might be defying gravity. 

The bull case
From a technical analysis viewpoint, the bull case can be summarized by healthy positive breadth, and strong price momentum, as evidenced by a breadth thrust.
As the chart below shows, while the SPX has rebounded and it is below its all-time high, both the NYSE and SPX Advance-Decline Lines have made new all-time highs. This is generally interpreted as a bullish development. 

In addition, the % of stocks above their 50 day

Recent top-down data out of China has been weak (see How worried should you be about China?), but there are some signs of healing as the latest round of stimulus kicks in. 

Real-time signs of recovery
While Chinese economic statistics can be fudged, real-time indicators are pointing to signs of recovery. Firstly, the stock market indices of China and her major Asian trading partners are all exhibiting constructive patterns of bottoming. Not reflected in this chart is the 2.7% surge in Shanghai, 1.6% rise in Hong Kong, amid a broad based rally in Asian risk assets Monday based on trade talks optimism. 

What about the Chinese consumer? My pair trades of long new consumer China and short old finance and infrastructure China are signaling better times ahead for the Chinese

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: Stock prices have been rallying as it hit a trifecta of good news. First, a compromise seems to have been made on the avoidance of another government shutdown. As well, Trump has been making encouraging noises about a US-China trade agreement. Either both sides could come to an understanding on or before the March 1 deadline, or the deadline will be extended, which is a sign of progress. Should the announcement of a definitive time and date of a Trump-Xi meeting, that would be an encouraging signal that an agreement has been made, and the formal signing ceremony would occur at the summit.
Lastly, Reuters reported that the Cleveland Fed President Loretta Mester stated the Fed is finalizing plans on scaling back or completely eliminating its program to reduce its

In his 2019 State of the Union address, President Trump said he was seeking “real structural change” to China’s economy:

I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.
In the next breath, he referred to the reboot of NAFTA, which only yielded minor changes:

Another historic trade blunder was the catastrophe known as NAFTA. I have met the men and women of Michigan, Ohio, Pennsylvania, Indiana, New Hampshire, and many other states whose dreams were shattered by the signing of NAFTA. For years, politicians promised them they would renegotiate for a better deal, but no one ever tried, until now.
Our new

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

Stock prices began on a sour note this morning (Thursday) on the fears of a European growth slowdown. They slid further when Trump advisor Larry Kudlow appeared on Fox Business News and said that there’s “a sizable difference” between the US and China’s positions in the trade negotiations. The White House went on to pour cold water on the idea of an imminent Trump-Xi summit and said that the two may not meet before the March 1 deadline.
The two most trade deal sensitive vehicles, Chinese equity ETFs and soybean prices, weakened as a consequence. However, their technical patterns remain constructive. FXI (top panel) remains in an uptrend as it tested a resistance zone after exhibiting a double bottom. Soybean prices are also in an uptrend and they are also testing resistance.

My

Mid-week market comment: The SPX has risen roughly 400 handles since the December 24 bottom, and it is approaching its 200 dma. Can the market stage a sustainable rally above this key hurdle?

Golden clues
For some clues, we can turn to the price of gold. The top panel of the chart below shows that gold prices tend to have an inverse correlation with stock prices, and that relationship is especially true now. When stocks rise, gold falls, and vice versa.

Here are some clues to the likely direction of stocks from gold prices. First, the long-term outlook for gold prices looks impressive. It is formed a multi–year saucer shaped base. The objective on an upside breakout is about 1560 based on point and figure charting.

In the short run, however, the golden rally looks exhausted

As new data has crosses my desk, I thought I would write a follow-up to my bullish demographic analysis published two weeks ago (see A different kind of America First). To recap, I observed that America is about to enter another echo demographic boom as the Millennial generation enters its prime earnings years. 

A study by San Francisco Fed researchers pointed out that this should raise demand for equities from Millennials. This is especially important as the Baby Boomers reduce their equity holdings as they retire. 

I then postulated that rising savings from Millennial should usher in another golden age in US equities.
This is the part where history doesn’t repeat itself, but rhymes. 

A generation of slackers?
I had some pushback from readers to the effect that the new

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 am publishing the mid-week market update early ahead of the FOMC meeting Wednesday, which can create a high degree of volatility.
It has been over a month since the December 24 market bottom, and stock prices have rallied strongly since that bottom. Indeed, price momentum has continued to lift prices even after the Zweig Breadth Thrust buy signal of January 7 (see A rare “what’s my credit card limit” buy signal). 

Marketwatch reported that Morgan Stanley strategist Mike Wilson thinks it’s time to dismount from this stock market rodeo:

Employing a rodeo metaphor, Wilson on Monday urged his clients to “dismount” as the market’s rally since late 2018 is starting to look precarious.
“Maybe the bull ride since Dec. 24 has not gone a full ‘8 seconds’ but we’d

I had a number of bullish comments on China in the wake of my last post (see How worried should you be about China?). Jeroen Blokland pointed out that the market is discounting a lot of weakness in the Chinese economy. 

On the other hand, Caterpillar shares cratered today on jitters of a China slowdown. This brings up the question, “Are Chinese stocks a contrarian buy opportunity?” 

Valuation support
Indeed, there is valuation support for Chinese stocks. Callum Thomas highlighted the low P/E ratios of the China A-Share market. Historically, such valuations have been good low-risk entry points. 

Near-term fundamental momentum
Another reader (thank you, Ken) pointed out that the OECD leading economic indicators are bottoming for China, while they are still falling for the US

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 Zweig Breadth Thrust buy signal occurred a little two weeks ago. For those who jump onto the bullish bandwagon, it has been an exhilarating ride. This week, the inevitable pullback has arrived. The SPX breached a key uptrend on the hourly chart yesterday (Tuesday), and it could not hold the morning good news rally induced by the positive earnings reports from Comcast, IBM, and United Technologies.

How far can this pullback run?

The bear case
There is a case to be made for a deeper correction, perhaps all the way to test the December lows. OddStats posted some bear porn, based on the historical behavior of the VIX. The forward returns look downright ugly.

Andrew Thrasher also made the case for a re-test of the December lows, based on the extreme

The latest BAML Fund Manager Survey shows that institutional managers have been piling into emerging market equities while avoiding the other major developed market regions. 

Indeed, there is good reasoning behind the bullish stampede. Callum Thomas showed a series of charts supportive of the EM equity bull case. For one, developed market M-PMIs have been falling while EM PMIs have been mostly steady. 

On a relative basis, EM/DM equity performance are showing signs of a long-term double bottom consistent with the double bottom pattern of the last cycle. 

The cyclical to defensive stock ratio in EM appear to be bottoming. This ratio led the downturn, could it be signaling a risk-on revival? 

Should you follow suit into EM stocks? 

What cyclical rebound?
There is some

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: Since my publication detailing the Zweig Breadth Thrust buy signal (see A rare “what’s my credit card limit” buy signal), I have been inundated with questions about the possible twists and turns of the market after such a signal. I discussed this issue extensively in 2015 (see The Zweig Breadth Thrust as a case study in quantitative analysis), my conclusion was:
What can we conclude from examining the data? Perturbing the data can yield different ZBT signals, Even discounting the different versions of the ZBT buy signals, I think that everyone can conclude that we saw a bona fide ZBT buy signal last week.
The question then becomes one of what subsequent returns were and how much can we rely on ZBT to take action in our portfolios. My conclusion, which agrees with

President Trump has threatened to impose a State of Emergency in order to get his Wall built. Can he do that? Analysis from The Economist indicates that there is historical precedence for such actions:
Presidents do have wide discretion to declare national emergencies and take unilateral action for which they ordinarily need legislative approval. A “latitude”, John Locke wrote in 1689 (and his writings influenced the US constitution), must be “left to the executive power, to do many things of choice which the laws do not prescribe” since the legislature is often “too slow” in an emergency. American presidents have, for example, suspended the constitutional guarantee of habeas corpus (Abraham Lincoln during the Civil War), forced people of Japanese descent into internment camps (Franklin

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