Thursday , November 15 2018
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Cam Hui

Cam Hui

Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

Articles by Cam Hui

Tricks or treats for equities?

15 days ago

Mid-week market update: Will investors get tricks or treats this Halloween?

Here is the good news. The sentiment backdrop was sufficiently washed-out for a reflex rally to occur. For some perspective, I refer readers to Helene Meisler’s recent Real Money article:
Long time readers know I am not known for my sunny disposition when it comes to markets. I am a contrarian; when we’re going up, I look for what can take us down and when we’re going down I look for what can reverse us back up.
But it struck me when I took the mute off the television on Monday how really bearish everyone was. All of a sudden no one is interested in buying the dip. No one is even interesting in “picking.” All of a sudden everyone is talking about at least a revisit of the February lows or more.
Remember when

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Contrarian ideas for a relief rally

17 days ago

There are good reasons to believe the market is poised for an oversold rally. As I pointed out in my last post (see How this Bear could be wrong: Exploring the bull case), the SPX is testing a key uptrend line that began in the market bottom of 2009. Initial trend line tests rarely fail, which is supportive of the bounce scenario. In addition, the market is exhibiting oversold conditions on both the 5-week RSI (top panel), and the NYSE McClellan Summation Index (NYSI, bottom panel). Such conditions have resolved themselves with relief rallies, outside of major bear legs. Even the initial downlegs of the 2007-08 bear market saw oversold rallies after the market reached such oversold conditions.

Here are a few contrarian suggestions of beaten up investment themes for an oversold

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How this Bear could be wrong: Exploring the bull case

18 days ago

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 the trading component of the Trend Model to look for changes in the

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How short-sellers can get hurt in a bear market

21 days ago

This is a cautionary tale about the importance of return objectives and risk control. Regular readers know that while my trading model has not be perfect, it has been quite good for swing trading purposes.   So far in the month of October, my main trading account is up 7.1%, while the SPY is -7.1%. […]

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Defensive and Value leadership = Bear market?

23 days ago

Mid-week market update: I am publishing my mid-week market update early in light of the recent market volatility.
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.
RRG analysis through a style, or

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The brewing storm in Asia

25 days ago

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 the trading component of the Trend Model to look for changes in the

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Is there any more pop after the drop?

29 days ago

Mid-week market update: Is there any more “pop” after last week’s drop? The market certainly had a big rally yesterday, and it is not unusual to see a pause the day after a big move. 

Here are the bull and bear cases. 

Bull case
Option based sentiment is supportive of further advances. The history of the normalized equity-only put call ratio is high enough to see stock prices advance when sentiment has been this bearish in the past. That said, oversold markets can become more oversold and we haven’t seen this indicator reverse downwards, which would indicate a shift in momentum. Such an event would be a better trigger for a buy signal. 

The put/call ratio remains elevated today and stands at 1.16, which is also short-term contrarian bullish. 

Even Chinese stocks seem to

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Tops are processes: Here is why

October 15, 2018

I received a ton of comments after yesterday’s post (see A correction, or the start of a bear market?), probably because of the tumultuous nature of last week’s market action. Readers pointed out a number of buy and sell signals that I had missed in yesterday’s post and asked me to comment on them. (Rather than email me directly, I encourage everyone to put their comments in the comments section rather so that the rest of the community can see them.)
The bullish and bearish signals are not necessarily contradictory, as they operate in different time frames. I believe that they reinforce my conviction that the market is undergoing a long-term top. Tops are processes. Stock prices don`t go straight down when the market tops out. The most recent break was just a warning.
Even if you are

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A correction, or the start of a bear market?

October 14, 2018

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 the trading component of the Trend Model to look for changes in the

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The things you don’t see at market bottoms: Booming confidence edition

October 11, 2018

The last time I published a post in a series of “things you don’t see at market bottoms” based on US based investor enthusiasm was in June. Sufficient signs have emerged again for another edition.
As a reminder, it is said that while bottoms are events, but tops are processes. Translated, markets bottom out when panic sets in, and therefore they can be more easily identifiable. By contrast, market tops form when a series of conditions come together, but not necessarily all at the same time. My experience has shown that overly bullish sentiment should be viewed as a condition indicator, and not a market timing tool.

Past editions of this series include:
I reiterate my belief that excessively bullish sentiment may not signal the top of the equity market, but investors should be aware of

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Has the correction bottomed? What’s next?

October 10, 2018

Mid-week market update: Is the correction over? At least my inner trader had been positioned for market weakness. Subscribers who had been following my inner trader, you know that we issued real-time alerts to buy the market on September 12, 2018 and flipped short on September 21, 2018. (You can subscribe here if you haven’t done so). 

Where’s the bottom? 

The bull case
Here is the bull case. If this is a typical shallow pullback similar to the weak periods the US market has experienced since the February correction, then the bottom is near. The VIX Index spike above its upper Bollinger Band (BB) last week, which is a sign of an oversold market. Similar episodes during the post-February period has seen low downside after such signals. As well, both the 5 and 14 day RSI are more

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More cracks appear in the Fragile Five

October 8, 2018

Recessions serve to unwind the excesses of the past expansion cycle. While the immediate odds of a US recession is still relatively low right now (see A recession in 2020?), and there are few excesses in the economy, the problems are found outside US borders. This time, most of the excessive private debt accumulation has occurred in China, and Canada. 

I wrote about the New Fragile Five last March. Loomis Sayles made the case for these countries to be the New Fragile Five, which includes Canada, based on unsustainable real estate bubbles:

Cracks are starting to appear in five highly leveraged economies: Canada, Australia, Norway, Sweden and New Zealand. For several years following the global financial crisis, these five countries all shared a common theme—a multi-year housing

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A recession in 2020?

October 7, 2018

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 the trading component of the Trend Model to look for changes in the

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Style and factor analysis reveals the challenge for bulls and bears

October 3, 2018

Mid-week market update: The Dow has made another record high. Most technical analysts would interpret such a development bullishly as there is nothing more bullish than a stock or index making a new all-time high. However, there is the nagging problem of poor breadth.
In the past few weeks, I have been warning about the precarious technical condition of the stock market. On Monday, I wrote about the narrowing Bollinger Band of the VIX Index, which is a sign of complacency, and the pattern of declining new highs on both NYSE and NASDAQ stocks even as the market advanced to all-time highs (see The calm before the storm?). The negative breadth divergence has gotten so that that it has prompted analysts like SentimenTrader to point out the ominous historical parallels with the Tech Bubble

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The calm before the storm?

October 1, 2018

Notwithstanding today’s NAFTA USMCA driven reflex rally today, one puzzle to this market is the remarkable level of complacency in the face of potential market moving events, such as a trade war.
From a technical perspective, complacency can be seen through the historically low level of weekly Bollinger Band on the VIX Index, which has foreshadowed volatility spikes (h/t Andrew Thrasher). The chart below depicts the 10-year history of this indicator. While the sample size is small (N=5), four of the five past instances have seen market corrections (red vertical lines). The only exception occurred when the stock market had already weakened. When combined with episodes of low levels of NYSE and NASDAQ new highs, which is the case today, the outlook is particularly worrisome. 

Another

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Quantifying the fallout from a full-scale trade war

September 30, 2018

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 the trading component of the Trend Model to look for changes in the

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Everyone expects Mr. Bond to die

September 26, 2018

Mid-week market update: For a change, I thought it was more appropriate to write about bond yields instead of the usual tactical trading commentary about stock prices on this FOMC day.
Increasingly, there has been more and more bearish calls for bond prices (and bullish calls for bond yields) as the Fed continues its rate normalization program. Some analysts have pointed out a nascent inverse head and shoulders formation on the 30-year yield (TYX). With the caveat that head and shoulders formations are never complete until the neckline is broken, a decisive upside breakout in TYX would be bad news for long Treasury prices. 

I would argue against an overly bearish view for bonds. At a minimum, bond yields are unlikely to rise as much as expected, and they may actually decline

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When should you buy gold?

September 24, 2018

Goldbugs got excited recently when the gold stock to gold ratio turned up sharply after the gold price consolidated sideways subsequent to breaking up from a downtrend. Past episodes have been bullish signals for bullion prices. 

On the other hand, the front page of Barron’s may also be a contrarian magazine cover bearish signal. 

What should you do? 

Investor or trader?
When analyzing the price of gold, it is important to distinguish between traders and investors as they have different time horizons. From a trading perspective, a long-term track record of some key indicators shows a constructive outlook.
As the chart below shows, the % bullish stocks in GDX is just below 17% (bottom panel), and past readings indicate low downside risk for the price of gold. In addition, a

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FOMC preview: Prepare for the hawkish surprise

September 23, 2018

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 the trading component of the Trend Model to look for changes in the

Read More »

Surprising conclusions from advanced rotation analysis

September 19, 2018

Mid-week market update: I have been asked to periodically update my sector leadership analysis as a guide to spot up and coming sector strength. The standard approach is to apply the Relative Rotation Graph (RRG) to the market.
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 sector RRG chart shows that Healthcare

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How to watch for signs of another Lehman Crisis

September 17, 2018

It has been 10 years since the Lehman bankruptcy, which became the trigger for the Great Financial Crisis (GFC). The financial press has been full of retrospective stories of what happened, and discussions from key players.
The GFC was an enormous shock to investor confidence. Ever since that event, many investors have been living with the fear that another tail-risk shock to their portfolios, and they have searched for warning signs that another financial crisis is around the corner.
One of the commonly used indicators to measure financial tail-risk are the financial stress risk indicators produced by the Chicago Fed and St. Louis Fed. Right now, readings are relatively benign, as low and negative numbers indicate low levels of financial stress.

New Deal democrat also monitors the

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Is China ready for the next downturn?

September 16, 2018

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 the trading component of the Trend Model to look for changes in the

Read More »

Short-term bullish, long-term cautious

September 12, 2018

Mid-week market update: There are a number of signs that the pullback that began in late August has run its course. These conditions makes me short-term bullish, but I remain longer term cautious on equities.
The market’s recent action of a correction to test its breakout level turned support is constructive. The index pulled back to form a bull flag, which is a bullish continuation pattern. It staged an upside breakout out of the flag this week, which suggests that the index may be poised for a test of its previous highs. 

Imperfect buy signals
The market also flashed a number of imperfect buy signals, where various indicators neared buy signal levels, but never quite got there. As an example, the VIX Index breached its upper Bollinger Band on an intra-day basis, which would be an

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Tech as the canary in the coalmine

September 11, 2018

Technology stocks have been on a tear in the last couple of years. Indeed, both the Tech sector and the Tech heavy NASDAQ 100 has been market leaders. 

Tech earnings have surged in this cycle. By contrast, non-Tech earnings appear to be at or near a cyclical peak. 

Can it continue? 

Morgan Stanley’s warning
Business Insider recently highlighted a Morgan Stanley warning on the Tech sector.

All good things must come to an end.
It’s an age-old proverb — and one Morgan Stanley says applies to the tech sector.
This is an alarming prognostication when you consider that tech stocks have been indispensable in pushing indexes to record highs. But Morgan Stanley is adamant that tech is due for a reckoning, and it boils down to two major reasons.
First, the firm says weakness in the

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Red sky in the morning

September 9, 2018

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 the trading component of the Trend Model to look for changes in the

Read More »

The Dollar tail wagging the market dog

September 5, 2018

Mid-week market update: Here at Humble Student of the Markets, we believe that investors can gain great insight through the use of inter-market, or cross asset market, analysis. During this period of heightened trade tensions and emerging market stress, it is the US Dollar that is driving risk appetite, and the direction of stock prices.
Indeed, the stock market has weakened whenever the year/year increase in the USD Index has reached 5% or more. If the index were to rally up to about the 96 area this week from Wednesday`s closing level of 95.06, the 5% tripwire will be triggered.

Here are the bull and bear cases.

USD bull case
Currency strategist Marc Chandler summarized the case for rising trade tensions on the weekend:
Trade tensions are set to rise. The public comment period

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American confidence with Chinese characteristics?

September 4, 2018

Ed Yardeni recently highlighted the surge in small business confidence, earnings and employment plans as part of a scenario of what could go right.

Beneath the surface, there were a number of contradictions that were evocative of official Chinese economic statistics.

A confidence bifurcation
The first problem is how consumer and business confidence is measured. Jim O’Sullivan observed a significant partisan divide in the Bloomberg consumer comfort figures.

There was a similar partisan divide in University of Michigan consumer expectations.

Opinions vs. hard data
The NFIB small business population sample is skewed heavily small-c conservative and Republican. It is therefore no surprise that small business confidence and investment plans are surging. But how reflective is

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The macro risks that keep me awake at night

September 2, 2018

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 the trading component of the Trend Model to look for changes in the

Read More »

The risks to Trump’s NAFTA gambit

August 30, 2018

There has been a lot of excitement over a possible breakthrough on NAFTA based on a handshake agreement between the United States and Mexico. The White House has also positioned the deal as a take-it-or-leave-it offer to Canada to join the agreement by Friday, which has also raised the anticipation level on the prospect that trade tensions are going to ease.
However, I would characterize the US-Mexico deal as a useful step towards a comprehensive NAFTA agreement, but the characterization that a deal as imminent is a high risk strategy for Trump that may backfire on him.

Here are the main risks to a comprehensive agreement.

Trump does not have the authority to negotiate a bilateral deal with Mexico, and therefore he cannot just unilaterally cut Canada out of a revised NAFTA deal.

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On the verge of a “good overbought” rally, or market stall?

August 29, 2018

Mid-week market update: As the market broke out through the round number 2900 level, I am indebted to Urban Carmel and others for pointing out that the index is testing a key uptrend line. 

There are a number of common elements of the current market conditions to past tests of the uptrend:
By definition, all episodes either tested or approached trend line resistance.
Most were at or above their upper Bollinger Bands (BB). Each upper BB ride lasted between 1 and 4 days. Today is day 3 of the upper BB ride.
All were overbought on RSI-5, with readings of 80 or more.
The key difference between the rallies in 2018, and the melt-up advances that began in late 2017 is the degree of positive breadth participation. The 2017 episodes were marked by strong breadth and momentum that exhibited

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