Mid-week market update: Don’t get me wrong, I am still bullish. The Wilshire 5000 flashed an important MACD buy signal on the monthly chart at the end of October. While MACD sell signals have been hit-and-miss, buy signals have historically resolved themselves in strong gains with minimal drawdowns. 

The MSCI World xUS Index also flashed an interim monthly buy signal, assuming that it stays at these levels by the end of November. 

These are all unequivocally bullish signals for stock prices in the longer term, but short-term conditions suggest that the market is nearing a stall zone. 

Minor stall ahead?
Tactically, there are a number of signs that it may not be wise to add to long positions here. The SPX traced out a doji candle on Monday on a gap up, which can be a sign of

Preface: Explaining our market timing modelsWe maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Asset Allocation 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

Mid-week market update: Now that the Fed has cut rates a third time, and the upside breakout in the SPX and NDX are holding, what’s next? 

Are the series of precautionary cuts over? 

Dissecting the rate cut
Now that Brexit risks have subsided, and trade tensions are receding as the US and China have more or less had a “phase one” trade deal in place, does the Fed need to cut further? To be sure, Chile announced this morning that it was pulling out of hosting the APEC summit because of ongoing street protests, so Trump and Xi won’t be able to sign any “phase one” agreement on the sidelines, but if there is a deal, both sides will find a way for the agreement to be signed.
Arguably, inflation pressures are moderate but steady. Today’s release of quarterly core PCE prices, which is

I have written before how a strong USD can be a negative for global financial stability. There are  many EM borrowers who have borrowed in the offshore USD market, and a rising USD puts a strain on their finances.
In addition, FactSet reported that companies with foreign domestic exposure have exhibited worse sales growth than companies with domestic exposure. 

The USD Index staged an upside breakout out of a multi-year cup and saucer pattern with bullish implications, which was bearish for global risk appetite. More recently, it fell below the breakout line, which should be bullish for global assets. Indeed, the bottom panel shows that the relative performance of EM stocks is making a broad based bottom, just as the USD weakened. 

Here is the scary Halloween story to be told

The markets began to take on a risk-on tone on Friday when the news that American and Chinese negotiators had “made headway on specific issues and the two sides are close to finalizing some sections of the agreement”. Bloomberg went on to report today that the text of the “phase one” agreement is basically done, and the agreement will be signed when Trump meets Xi at the APEC summit in Chile in mid-November:

China said parts of the text for the first phase of a trade deal with the U.S. are “basically completed” as the two sides reached a consensus in areas including standards used by agricultural regulators.
The Saturday comments followed a call Friday with Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. The trade

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 Asset Allocation 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

Mid-week market update: At week ago, I identified two technical triangle formations to watch (see Why small caps are lagging (and what it means)). Since then, both the SPX and NDX have struggled at key resistance levels despite a generally positive news background of earnings beats, and now they have moved sideways through a rising trend line. The obvious short-term downside target are the gaps to be filled below (shown in grey). 

The market seems to be afflicted with a case of SPX round number-itis, where the index advance stalls when it reaches a round number. 

Weakening NASDAQ
Notwithstanding the all-time high exhibited by AAPL, most of the weakness is attributable to the lagging performance exhibited by the high octane go-go stocks, such as internet, social media, and IPOs.

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 Asset Allocation 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

Mid-week market update: One of the investing puzzles that has appeared in the last few months is the mystery of small cap underperformings. The USD Index has been strong over the last three months, which should create an earnings headwind for large cap multi-nationals with foreign operations. Instead, the relative performance of megacaps have been flat to up over this period, while mid and small cap stocks have lagged. 

I unravel performance at a sector level, and discovered some unexpected insights about possible market direction.
A review of large and small cap sectors reveals that much of the difference in performance can be attributable to large cap FAANG stocks. In addition, the relative performance of small cap sectors shows some bullish green shoots. The cyclically sensitive

No, the “moment of truth” in the title has nothing to do with the preliminary trade deal announced by Trump last Friday. I have been showing concerns for some time about the market`s valuation. Based on Friday`s close, the market was trading at a forward P/E ratio of 16.9, which is above its 5-year average of 16.6 and 10-year average of 14.9. 

If stock prices were to advance from current levels, the E in the P/E ratio has to improve. Earnings Season starts in earnest this week as the big banks begin reporting tomorrow. That’s the “moment of truth” for stock prices. 

Are expectations too low?
Brian Gilmartin, who has been monitoring market earnings at Fundamentalis, thinks that “expectations seem far too subdued and pessimistic” after companies guided EPS estimates lower for Q3.

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 is a trader’s adage, “Sell Rosh Hashanah, Buy Yom Kippur”. As many in the Wall Street community are Jewish, staying out of the stock market during the Jewish high holidays may make some sense. Jewish traders and investors wind down at rosh Hashanah, the Jewish New Year, and return after Yom Kippur, the Day of Atonement, which is today.
Indeed, this year’s market weakness began just around Rosh Hashanah. Moreover, the market’s decline was halted yesterday right at trend line support, and rallied today. 

Is it time to buy Yom Kippur. 

An orderly decline
Here is what’s bothering me about the “Sell Rosh, Buy Yom” narrative. The market has been undergoing an orderly decline. As a consequence, neither market internals nor sentiment has reached panic washout

For years, I have been publishing the readings of my Trend Model on a weekly basis. As a reminder, the Trend Model is a composite model of trend following models as applied to global stock prices around the world, as well as commodity prices. 

The model has three signals:
Bullish: When there is a clear upwards, or reflationary, global trend
Bearish: When there is a clear downwards, or deflationary, global trend
Neutral: When the trend signals are not discernible
The first derivative of the Trend Model, i.e. whether the signal is getting stronger or weaker, and combined with some overbought/oversold indicators, has performed admirably as a high turnover trading model (see My Inner Trader and this ungated version for non-subscribers). However, I have never produced a full report card

Our trade war factor has been heating up, though readings remain in neutral. A secondary index (red line) measures Sheldon Adelson’s Macau casinos operator LVS against other gaming stocks (inverted). As Adelson is a major Republican donor, and the casino licenses expire in 2022, the licenses represent another form of backdoor pressure that Beijing can apply to trade relations. 

Chinese and American negotiators are scheduled to meet again on Thursday, October 10 for another round of trade negotiations. There have been conciliatory gestures on both sides, but what are the chances of a deal? 

What does Trump really want?
It is difficult to see how a comprehensive deal could be agreed on, as it is highly unclear what Trump really wants. On one hand, the transactional Trump is focused

Preface: Explaining our market timing modelsWe maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, “Is the trend in the global economy expansion (bullish) or contraction (bearish)?”
My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model

Mid-week market update: Regular readers will know that I have been relatively cautious on the stock market outlook for several weeks, and my inner trader has been short the market since September 13, 2019 when the SPX was over 3000. The index violated the 50 dma, broke support at 2960 and filled the gap at 2940-2960 yesterday. The decline was sparked by a miss on ISM Manufacturing PMI, which Jeroen Blokland pointed out is closely correlated to stock prices.

Lost in the bearish stampede was the observation of IHS Markit economist Chris Williamson that Markit M-PMI had been strong; ISM had overstated growth during the 2016-18 period; and ISM is maybe understating growth now.
Divergence is possibly related to ISM membership skewed towards large multinationals. IHS Markit panel is

BLS will be publish the September Jobs Report this Friday. This report will be important for a number of reasons, and it will answer some key questions for investors and policy makers.
First, the unemployment rate has been troughing. If history is any guide, a rising unemployment rate after a trough has been signals of recessions. This was documented in the Sahm Rule, which was developed as a way to trigger automatic stabilizers and a real-time recession signal. 

The Sahm Rule triggers a signal “When 3-month moving average national unemployment rate exceeds its minimum over previous 12 months by 0.5 pct points”. A similar technique is also used at iMarket Signals as a recession warning. Currently, there is no recession in the forecast. 

Leading indicators
Besides the headline

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 writing in these pages about the remarkable muted equity market volatility. Indeed, Luke Kawa observed on Monday that realized volatility had fallen to historical lows.

Recent developments indicate that volatility may be about to return to the markets. This reminds me of the lyrics of a song that I vaguely remember from my youth:
Where have you gone, Vol-a-tility?A nation turns its lonely eyes to you…Woo woo woo…

Event-driven volatility
Stock prices opened Tuesday on a slight upbeat note, until Trump made a highly assertive speech at the United Nations on trade that was directed mainly at China. Even China’s latest conciliatory gesture to allow limited tariff exemptions for the purchase of American soybeans failed to move the markets.
Later in the

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: Subscribers received an alert last Friday that I had turned tactically cautious on the market. So far, this has been a fairly predictable market with few surprises.
Rob Hanna at Quantifiable Edges documented how stock prices have been during FOMC days when the SPX closed at a 20-day high the day before. That’s because the market had risen in anticipation of a positive announcement from the Fed, and the reaction is at best a coin toss. 

Today’s roller coaster market action was no surprise. That said, the late day rally was likely sparked by a misinterpretation of Powell’s comment about the balance sheet which traders took to mean another round of quantitative easing is imminent. . As a reminder, “organic balance sheet growth”, which is the term Powell used,

As the market reacts the weekend attack on Saudi oil facilities, the level of anxiety is mounting. Forbes published an article on Sunday entitled “Attacks on Saudi Arabia are a recipe for $100 oil”.
Bloomberg that this represents the biggest disruption to global oil supply since the Iraqi 1990 invasion of Kuwait.

As visions of the 1974 Arab Oil Embargo and the ensuing recession dance in traders’ heads, this is a timely reminder that the FOMC is meeting this week. Should the supply curtailment become prolonged, how should policy makers react to supply shocks? As well, there is a case to be made that the world is facing more than just one supply shock. 

Supply shocks explained
What is a supply shock? Nouriel Robini explained it this way in a Project Syndicate essay:

Over time,

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: Last week’s upside breakout through resistance was impressive. Since then, the market has consolidated above the breakout level, but a FOMO (Fear Of Missing Out) rally has yet to materialize. In the past, such surges have been accompanied by a series of “good overbought”  5-day RSI readings, signs of buying stampedes from TRIN, only to see the rally stall when the 14-day RSI becomes oversold.

Will the upside breakout lead to a FOMO surge? Let us consider the possibilities.

A short-covering rally
So far, the internals suggest that the market strength has mainly been attributable to a short-covering rally, and a FOMO surge has yet to materialize.
The market had gotten into a crowded trade of becoming overly defensively positioned, and overly short the high beta

A reader alerted me to a CNBC report of a bullish analysis by Bespoke’s Paul Hickey:

Bespoke Investment’s Paul Hickey believes a market hot streak is unfolding.
The independent market researcher is building his bullish case by zeroing in on the Citi Economic Surprise Index, which is built to measure optimism in the economy.
In the week ending Friday, the index flipped into positive after spending more than 100 days in negative territory. Hickey contends the move suggests investors are feeling more confident about the economy’s direction, so there’s a good chance stocks will rip higher.
“There are five prior periods that we’re talking about. One, three and six months later, the S&P was higher four out of five times,” Hickey told CNBC’s “Trading Nation” on Friday. “When we looked at when

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: Global markets have taken a decided risk-on tone today on the news that Hong Kong leader Carrie Lam has withdrawn the controversial extradition bill. As well, the revolt in the British parliament has lessened the chances of a chaotic no-deal Brexit on October 31. On the other hand, the market was hit by some somber news earlier in the week, when the PMI reports revealed a slowing global economy.
In the meantime, US equity prices remain range-bound. 

Should we interpret these developments as net bullish or bearish? The answer is, “Yes” 

The bear case
The bear case is easy to make. You would have to be from Mars to know that Chinese economic statistics are unreliable, but investors can glean some hints on China by observing the economies of her major Asian

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 stock market is continuing its pattern of sideways choppiness within a range, bounded by 2825 to 2930, with a possible extended range of 2790 to 2950. 

My inner trader continues to advocate for a strategy of buying the dips, and selling the rips. On the other hand, my inner investor is inclined to remain cautious until we can see greater clarity on the technical, macro, and fundamental outlook. 

Buy the dips
In the short run, breadth is sufficiently oversold that current levels represent decent long side entry point for traders (indicators are as of Tuesday night`s close). 

Longer term (1-2 week horizon) indicators are displaying a constructive pattern of higher lows and higher highs. 

In addition, Callum Thomas` (unscientific) poll of equity

Former New York Fed president Bill Dudley penned an explosive and shocking Bloomberg op-ed today:

U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?
If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach.
Dudley ended the op-ed by abandoning the normal apolitical stance of a (former) Fed official and picking sides [emphasis added]:

I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that