The Buttonwood column in The Economist had this to say about the recovery in metal prices (before the most recent risk-off episode):

A pattern in markets is that a lot happens by rote. China’s response to a weak economy is to build; investors’ response to the Fed’s easing is to buy stocks; the algorithms’ response to a weaker dollar is to buy commodities. Higher prices beget higher prices. The sceptics, the too-sooners, note that this also works in reverse. Quite so. But the momentum is now with the believers.
Even as the copper/gold ratio recovers, there are reasons to be skeptical. As a reminder, this ratio is a useful indicator of global cyclicality. Both copper and gold are commodities, and respond to hard asset inflationary pressures. Copper has more industrial uses, and therefore

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

This is a market that defines professional career and business risk. Should investors adopt a momentum approach, or maintain caution in the face of valuation and macro risk?
The stock market has recovered from the COVID-19 crash. The NASDAQ has made a fresh all-time high, and the SPX was briefly positive for 2020. Price momentum has been strong, and broad. Analysis from Topdown Charts shows that 74% of countries are now in bull markets. 

On the other hand, the macro outlook and valuations are stretched. The market is trading at a forward P/E ratio of over 21. Even with headline CPI at -0.1%, the Rule of 20 is flashing a warning for the stock market. 

The current market environment raises the level of career and business risk for investment managers. Traditional investing

Mid-week market update: Experienced investors know the story about the difference between trading sardines and eating sardines. Here is how Seth Klarman recounted the story:

There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”‘
Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste

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

Joe Biden has officially clinched the Democratic nomination for president, and his odds of winning the Presidency in November have been steadily rising, and he is now at 54% on PredictIt. For the uninitiated, the contract pays off at $1.00 if a candidate wins, so buying the Biden contract at $0.54 implies a 54% of a Biden victory. 

The consensus view has the Democrats retaining control of the House. The PredictIt odds of the Democrats gaining control of the Senate has been steadily improving over the past few months, and now shows a slight edge for the Democrats. In the case of a 50-50 divided Senate, the vice-president casts the tie-breaker and the winner of the White House has control. 

While this is not meant to be an endorsement of any candidate or political party, it is

I don’t usually offer instant reactions to economic news, but the May Jobs Report was a shocker. Non-Farm Payroll gained 2.5 million jobs, compared to an expected loss of -8 million. The Diffusion Index bounced back strongly, indicating breadth in job gains. 

This was a positive and highly constructive report for the economy. Before everyone gets overly giddy, the report also highlighted some key risks to the outlook. 

Where the jobs came from
Nearly all of the 2.5 million in job gains came from the “private services providing” sector. Half of that was attributable to “leisure and hospitality”, with additional major gains from “retail trade” and “health care and social assistance”. Equally constructive was the 39.1K increase in temporary employment, which is a leading indicator of

Mid-week market update: As regular readers are aware, I have been increasingly cautious about the equity outlook for the past few weeks as the market advanced. This has become the Energizer Bunny rally that keeps going beyond expectations.
Where will it stop? One of the indicators that I have been keeping an eye on is the NYSE McClellan Summation Index (NYSI). In the past, whenever the NYSI has fallen to an oversold extreme of -1000 or less, the indicator has rebounded so that the weekly stochastic bounced from an oversold to an overbought level. We are now overbought on the weekly stochastic. 

To be sure, past rebounds have seen the weekly stochastic become even more overbought. These conditions suggests that there may be one or two weeks of more upside on NYSI, this relief rally

As we progressed through the pandemic induced recession, there have been much discussion about a second wave. Second waves appear in many forms, and they can threaten the current consensus expectation of a V-shaped rebound. 

Here are some of the second wave risks the market faces.
A second wave of COVID-19 infections
A second wave of layoffs and wave cuts
A second wave of bankruptcies
Finally, investors have to face the risk of permanent economic scarring that impair long-term growth potential. Under that scenario, slower growth rates will persist even after any recovery, and affect asset prices in ways that the market hasn’t fully discounted. 

A second wave of infections
In all likelihood, there will be a second wave of COVID-19 infections. The Center for Infectious Disease

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

There has been a recent continuing controversy about the usefulness of forward P/E as a valuation tool in the current recessionary environment. On one hand, past bear markets have typically bottomed out at a forward P/E ratio of 10, with a low of 7 (1982) and a high of 14 (2002). FactSet‘s reported market rating of 21.5 forward earnings is very stretched by historical standards. 

On the other hand, Liz Ann Sonders at Charles Schwab observed that stock prices and earnings estimates have shown a correlation of over 0.90 in the last 20 years and the recent correlation is a mirror image -0.90 as stock prices rose and earnings estimates fell. She then qualified that analysis by allowing the same negative correlation occurred during the GFC. 

Do forward P/E ratios matter at this

Mid-week market update: For the last two days, the SPX tested the 3000 level and its 200 day moving average levels and finally broke up today. However, market breadth presents a mixed picture. Fresh 52-week highs have been understandably strong for NASDAQ stocks, as they have been the recent leadership. However, new highs for both large and small caps are less than impressive, which calls into question the sustainability of this rally. 

Who wins the knife fight at the 3000 and 200 dma? Here are bull and bear cases.

The bull case: The rally broadens
The main bull case rests on the constructive nature of the changing market leadership. The old price momentum leaders of US over global, growth over value, and large caps over small caps have faltered. In the place, leadership is

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

How badly has the pandemic affected the global economy? The United Nations Development Programme (UNDP) has some answers in a recent report. It expects global human development to decline for the first time this year, and EM economies will bear the brunt of the impact. The International Labour Organization (ILO) estimates that up to half of global workers could lose their jobs.

New UNDP estimates Global human development – as a combined measure of the world’s education, health and living standards – is on course to decline this year for the first time since the concept was developed in 1990. The decline is expected across the majority of countries – rich and poor – in every region.
Global per capita income is expected to fall four percent. The World Bank has warned that the virus could

Mid-week market update: Is the market exhibiting signs of froth, or is the economy healing? There are signs of both. As Fed chair Powell indicated, the economy has encountered a health related shock, and the Fed can only do so much to stabilize markets. It cannot provide a cure.
Some of the market based indicators of covid related anxiety are showing signs of healing. 

Indeed reported that job postings are stabilizing and starting to improve from their worst levels. 

As the northern hemisphere enters spring and approaches summer, a  non-peer reviewed Harvard study found a weak effect of temperature and humidity on virus transmission.

We show that the delay between exposure and detection of infection complicates the estimation of weather impact on COVID-19 transmission,

We are continuing our coverage of earnings season during these turbulent times. With 90% of the index having reported, this will be the final earnings monitor of the Q1 earnings season. This week, we are seeing greater additional signs of stabilization, but companies are digging for the long haul.
Let’s begin with the big picture. FactSet reported that the bottom-up consensus forward 12-month estimate fell -0.64% last week (vs. -1.4% the previous week), and -20.0% since downgrades began nine weeks ago. The EPS and sales beat rates were both below their 5-year historical averages. 

Good news and bad news
There was more good news, and bad news the FactSet summary of Q1 earnings reports. Let’s start with the good news. The speed of earnings downgrades is decelerating. Forward 12-month

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

During past major market bottoms, the outperformance of small cap stocks has coincided with economic rebounds. The relative returns of small and microcaps appear to be trying to bottom. It is time to check in on how these stocks are doing. 

One way to monitor the progress of these stocks is to check in on the health of small businesses. Small businesses are the backbone of the economy. According to the Small Business Administration, US small businesses provide 47% of private sector employment. Equally important to the check-up is the poor bargaining power of small firms, as they act as a sensitive barometer of economic health. 

Good news and bad news
The National Federation of Independent Business (NFIB) April survey had both good news and bad news for investors. Not surprisingly,

Mid-week market update: Is this market starting a new bear leg? There are numerous signs that may be happening. The SPX violated the trend line of a rising channel while the stochastic recycled from an overbought reading, which is a sell signal. The chart of the equal weighted index, which filters out the effects of heavyweight leadership, looks worse as that index tests a key support level. 

The market’s narrow leadership is evidenced by the concentration of the current leadership of technology, healthcare, and communication services, which is nearing the highs set during the Tech Bubble. 

Narrow leadership and high concentration are high risk “this will not end well conditions”. Could the latest pullback be the bearish trigger? 
Sentiment signals
It may be turning out that way.

Remember the Great Financial Crisis (GFC)? As the GFC engulfed the global economy, China stepped up with a shock-and-awe campaign of fiscal and monetary stimulus that stabilized not only the Chinese economy, but global growth. Can China save global growth again?
China recently reported surprisingly strong export growth for April, but the closely watched early May trade figures from South Korea badly missed expectations. Exports plunged -46.3% YoY. Exports to China fell -29.4%, which is hardly the picture of a robust economic revival. 

Since China was the first major economy to enter the pandemic crisis, what does that mean for the world, based on a first-in-first-out principle? 
What stimulus?
As the extent of the COVID-19 outbreak became apparent, Beijing made the deliberate policy

We are continuing our coverage of earnings season during these turbulent times. Last week, we highlighted the disconnect between earnings expectations and valuation (see Earnings Monitor: Reality bites). This week, we are seeing greater signs of stabilization, and hope for the future.
Let’s begin with the big picture. FactSet reported that the bottom-up consensus forward 12-month estimate fell -1.4% last week (vs. -1.9% the previous week), and -19.5% since downgrades began eight weeks ago. The EPS and sales beat rates were both below their 5-year historical averages.

Signs of stabilization
For the bottom-up view of operating conditions, here is the latest from The Transcript, which monitors and summarizes earnings calls.
Succinct Summary: Companies are reporting signs of improvement in

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

This crisis has so far gone through two phases of market psychology. The first phase was panic, as it became apparent that COVID-19 had become a global pandemic, and economies around the world were shutting down. Stock prices rebounded during the hope phase, supported by a flood of fiscal and monetary stimulus, and the hope that reopening the economy might bring some semblance of normalcy. 

What’s the next phase of the market’s narrative, and how should investor position themselves? Here are a few ideas:
Will the economy be able to reopen successfully?
Will the trade war return, and what are its implications of the fight against COVID-19?
The risks of a wave of bankruptcies, or worse, an Apocalypse of zombie companies.
More European theatre: The German constitutional court

Mid-week market update: What should one make of sentiment readings? Credit Suisse reported that long/short hedge funds are now in a crowded long position:

One result of April’s latter month short covering is an all-time high net long exposure among equity long/short managers globally, albeit on a historically low gross exposure.

That’s contrarian bearish, right? Yes, but that snapshot isn’t the whole story. 

Sentiment is very diverse, and different market participants have different views of the market. Bloomberg also reported on the Credit Suisse findings of long/short fund positioning, but also highlighted a very different position taken by global macro hedge funds and commodity trading advisors:

As for macro managers and commodity trading advisors, which mostly speculate with

Now that we are slightly over halfway through Q1 earnings season, it would be useful to see what we have learned, and how market expectations have developed through this pandemic period.
Let’s begin with the big picture. FactSet reported that the bottom-up consensus forward 12-month estimate fell -1.9% last week, and -18.3% since downgrades began seven weeks ago. I have been monitoring the evolution of forward 12-month EPS for several years, and this level of revision is extraordinarily high. In the past, the magnitude of weekly revisions was usually about 0.1%, and swings of 0.2% would be considered high. Now, revisions are an order of magnitude higher at 1% or more. In addition, estimates have been falling while stock prices have been rising. 

Companies gave little in the way 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

The San Francisco Fed recently created a Daily News Sentiment Index, which is derived from 16 major newspapers. In the space of a few weeks, market psychology has turned from “the market is going to retest the March lows” to “the Fed is supporting prices, valuation doesn’t matter, the economy is recovering, – Buy”.

Regular readers are well aware of my increasing cautiousness about taking equity risk (see The 4 reasons why the market hasn’t seen its final lows and The bull case and its risks). While the economic recovery thesis is emphatically not my base case scenario, its’ time to conduct a review for investors and traders who would like to take that walk on the Dark side. How should investors position for an environment driven by Fed liquidity, and improving COVID-19 news. Even if

Mid-week market update: It is always to discern short-term market direction on the day of an FOMC meeting, but a number of trends have developed that can support a short-term risk-on tone.
The most notable is the possible change in leadership. For quite some time, the trends of US over global stocks, growth over value, and large caps over small caps have been the leadership in the past bull market. I am starting to see signs of possible reversals. 

In the past, changes in market leadership have marked market bottoms, and the emergence of new bull markets. This interpretation comes with the important caveat that leadership changes are usually necessary, but not sufficient conditions for major bullish reversals. 

Better sentiment
The tone of sentiment surveys are also improving. II

FactSet reported last week that bottom-up aggregated earnings estimates have been skidding rapidly for both 2020 and 2021. 

Forward 12-month EPS estimates are falling even as stock prices rose. 

Do earnings matter anymore? 

Flying blind
What is the market discounting? At this point, any estimates that analysts make are only wild guesses. No one can tell you the future (sorry, my time machine is still in the shop). We are all flying blind.
Those of us who are old enough may remember the 1996 plane crash of Clinton era Commerce Secretary Ron Brown on a hillside just outside Dubrovnik (see Politico story). The weather was bad, and the aircrew was unfamiliar with the navigation aids in the area.
Yes, today’s market conditions are like that. The WSJ reported that even Charlie

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