By

Troy

February 23, 2021

Foreign investment
The past 12 months saw record inflows into U.S. equities from foreign investors. It’s also interesting to note that foreign investment was consistently low until the mid-1990s when globalization really picked up steam.

Looking at nominal numbers doesn’t really make sense since fiat currencies are constantly being inflated. To make this indicator more range-bound, we can look at foreign investment in terms of inflation-adjusted dollars:

The chart above demonstrates that foreigners have rushed into U.S. stocks at the fastest pace ever (in real dollars), exceeding prior peaks in early-2001 and 2007.
I would consider this to be a long term warning

The market’s strong uptrend remains intact despite some lingering concerns about high valuations, extreme sentiment, and other overbought signals. Investors continue to pour into all markets (stocks, commodities, crypto etc.) with ever increasing liquidity.

Now let’s look at some bullish and bearish factors to get a balanced view of the markets.

Table of Contents

Average momentum
The non-stop rally across almost all markets has pushed many indicators to extreme levels. Taking a 9 week RSI of a combination of stocks, commodities and treasury yields quickly shows that we are at one of the most overbought levels in history.

When this happened in the past, it was not a good sign for stocks or the 10-year treasury yield over the next year on most time frames.

However, this was

This bull market is unique because unlike past bull markets, this one began with extreme speculation. Historically, extreme speculation occurred at the end of multi-year bull markets. This is why the markets are currently exhibiting extremely bullish signs (e.g. breadth today is similar to what you see at the start of multi-year bull markets) and extremely bearish signs (e.g. speculation today is similar to what you see at the end of multi-year bull markets). How do we reconcile these two opposites?
Let’s take a look at some bullish & bearish factors:

Table of Contents

Subsiding volatility
VIX closed below 20 for the first time in almost a year. The past year was a nervous one for markets: stocks rallied, but investors and traders were consistently on edge.

Historical cases of

By

Troy

February 11, 2021

Small caps’ strong momentum
The Russell 2000’s massive rally has caused it to reach an all-time high on more than half of all days in the past 3 months.

Historically, similar or higher streaks were only seen 7 other times. This was a more bearish than random signal for the Russell 2000 over the next 3 months.

Oil/Gold RSI
Oil’s recent rally pushed the oil/gold ratio higher, causing its RSI to hit levels only matched by 4 other times in the past. This is a sign that the global economy is improving.

This always drove oil’s price higher over the next 1-3 months:

And this was a bearish sign for the S&P 500 over the next 6 months:

TLT fund flows
As noted by many, the

Now that vaccines are being distributed, Biden is president, and the global economy recovers, the U.S. Economic Policy Uncertainty Index is falling after a historic surge last March.

The Uncertainty Index has dropped below 100 for the first time in almost a year. Historically, long periods of high (but easing) uncertainty led to more gains for stocks:

VIX
Speaking of prolonged periods of uncertainty, VIX’s streak above 20 is its second longest in history:

Given the way markets are rallying nonstop, this could lead to a melt-up before a melt-down. That’s what stocks did in 1999:

Overseas breadth
Breadth is extremely strong overseas. 93% of Japanese equities are above their 200 day moving average:

Even in Japan, this usually led to more gains for equities over the next 6

Last week’s market volatility was followed by a sharp reversal higher. While various speculative concerns remain (record valuations, frothy sentiment etc), the stock market’s uptrend remains intact for now.

Table of Contents

Momentum
The stock market remains firmly in an uptrend. Momentum clearly favors bulls with the Russell 2000 having rallied more than 7.7% this week:

Historically, such large gains for small caps consistently led to more gains over the next 9 months. The one exception was in June 2000 as the dot-com bubble ended:

Momentum + breadth
Breadth and momentum are often linked (strong momentum = decent breadth). A consistently high % of S&P 500 stocks remain above their 200 day moving average:

Historically, such long streaks of solid breadth led to more gains

I use a few trading strategies at the same time to smooth out my portfolio’s returns. One such quantitative trading strategy is my Insider Trading Model.
What is the Insider Trading Model
As you may know, the stocks that corporate insiders (e.g. CEOs, CFOs) buy outperform the broad stock market. This is because no one understands their companies’ prospects better than corporate insiders, which enables insiders to profit from this information advantage. This is especially true during times of market turmoil when most traders react emotionally while insiders logically evaluate the facts.
This is what would happen if, every single month, you bought the S&P 500 stocks that corporate insiders bought last month:

Let’s call this the “Basic Insider Trading Strategy”. From May 2003 –

By

Troy

February 4, 2021

VIX plunge
Last week I looked at the possibility of a VIX spike. VIX is now falling quickly after a sharp spike:

When VIX fell more than -30% over a 3 day historical period, the S&P 500 was almost always higher 6-12 months later, although this could first lead to more short term volatility in the stock market:

Options
Last week’s volatility wrung a little bit of the speculative juices out of the market. A 1 month average of IWM (Russell 2000 ETF) calls – puts volume has fallen to the lowest level in a decade: even lower than during the March 2020 stock market crash.

Over the past 10 years this was a bullish factor for the Russell 2000 over the next 3 months:

And it

By

Troy

February 3, 2021

Breadth
The U.S. stock market rebounded sharply after a quick pullback. The NASDAQ Composite’s Up Issues ratio (% of stocks that went up on that day) exceeded 74% for 2 days in a row.

Historically, these breadth thrusts could lead to choppy short term trading. But after that, it almost always led to more gains over the next 3-12 months. More importantly, in the past few years this marked some major medium term bottoms:

One important thing to note here is that almost all the historical cases occurred within a bull market. So take this bullish stat with a grain of salt.
Energy sentiment
Energy prices have rallied after a horrendous collapse last March. The ongoing rally

By

Troy

February 2, 2021

Weaker breadth
The stock market’s breadth has weakened a little, which is no surprise given the stock market’s recent pullback. The % of NYSE Composite members at a 52 week high dipped below 1.5% for the first time in over 2 months:

The recent historical cases of a pullback after strong breadth (Feb 2018, October 2018, Feb 2020) saw stocks fall further in the weeks ahead:

This is a minor bearish concern.
Small caps outperformance
Small caps outperformed large caps for 5 months in a row:

Historically, this often led to more small caps outperformance over the next 6 months:

Inflationary pressures
The ISM manufacturing business prices index reached a multi-year high,

What a week. Reddit & retail traders caught the world’s attention, stocks fell, hedge funds blew up, etc. Here’s what matters underneath an ocean of noise.

Table of Contents

Weakening breadth
Breadth was incredibly strong for several months but is now weakening. The % of Russell 2000 stocks above their 10 day moving average has fallen below 35% for the first time in a long time.

Historically, such a weakening in breadth led to more short term losses for the stock market. The Russell 2000, one of the strongest indices since October, may be about to take a meaningful breather:

Meanwhile, large speculator positioning towards the Russell has turned negative for the first time in half a year. The only other time speculator positioning was positive for so long ended with the Q4

By

Troy

January 27, 2021

Froth tech sentiment
Sentiment in the technology sector is frothy and there’s still some ways to go before such excessive optimism is reversed. The NASDAQ Composite’s Daily Sentiment Index is extremely elevated. Over the past few years, this was a decent sell signal for tech stocks (although the most recent signal in July 2020 was 1.5 months early).

Looking at all the historical data from 2000-present, this was a minor short term bearish sign for the NASDAQ:

Reversal day
What a wild day. The S&P 500 fell sharply from an all-time high while some stocks were wildly short squeezed. These sudden stock market reversals usually led to choppy trading over the next 2 weeks:

Traders can’t get enough of IPOs, SPACs, and other speculative vehicles these days. So while demand for these assets surges…

Corporate America and Wall Street bankers continue ramping up the supply of these “investments”. As a fee-driven industry, Wall Street will always sell as much as possible of whatever Main Street demands, regardless of the consequences.
Bloomberg’s data demonstrates that the value of U.S. IPO issuance in the past year exploded higher:

The previous 2 peaks were in 2000 and 2007, with a slightly lower peak in 2004. But more telling is the explosion in IPO’s issued by companies that generated losses (i.e. unprofitable companies). After all, everyone loves a good story about how XYZ company with $100 million in losses will be the next Google:

The above chart

By

Troy

January 25, 2021

VIX sentiment
VIX remains compressed in the wake of the stock market’s rally since November. Its Daily Sentiment Index’s 3 month average fell to the lowest level since February 2020:

Historically, such extreme sentiment usually led to VIX spikes over the next 2-3 months. The one big failure was in 2017, when the stock market rallied relentlessly and volatility remained consistently low:

Here’s the same chart, displaying VIX’s Daily Sentiment Index (DSI) below the S&P 500.

This was a minor bearish factor for the S&P over the next 3 months:

Stock market sentiment
The S&P Daily Sentiment Index’s 50 day moving average is rising:

Historically, such optimism was a bearish

Investors are buying anything and everything in a manner that’s reminiscent of the 1990s. The best stocks to buy these days: money-losing tech companies. The more losses, the better because growth is the name of the game. In the 1990s, profits didn’t matter. All that mattered was “eyeballs” and user growth.

Summary
Here’s how I approach markets based on 3 different strategies & time frames.
Short term trend followers should continue to ride the rally because no one knows exactly when it will end. If you are a short term trend follower, you must use stops.
Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
Long term investors should be highly

Fund flow
The big 4 U.S. equity ETFs (SPY, QQQ, IWM, and DIA) saw major inflows in November and December. The following chart illustrates a rolling 2 month sum of fund flows into these 4 ETFs:

Historically, this was a bearish reading for stocks over the next 2 months:

But now that January is almost over and stocks rallied since December, does this mean that the bearish signal is invalidated? Not quite:

Investor positioning is still stretched, and this remains a warning sign for global equity markets.
Sentiment surveys
Regardless of which survey you look at, sentiment is extremely high. The National Association of Active Investment Managers’ Exposure Index is at its highest level since December 2017:

Back then, the U.S. stock market rallied for another 1 month (blow-off top)

By

Troy

January 20, 2021

The stock market’s relentless push higher has been supported by strong breadth & momentum. These are the 2 primary bullish factors for stocks right now.
A 50 day moving average of the NASDAQ Composite’s new high/low ratio is at its highest level in over 15 years:

Such strong breadth was only matched 3 other times over the last 40 years. Each of those 3 cases saw further stock market gains over the next 6 months, although those gains could vanish after that:

Nowhere is momentum more evident than in emerging markets right now. The MSCI Emerging Markets Index’s 20 dma increased 77 days in a row as the index broke through to an all-time high:

Such strong momentum almost

By

Troy

January 19, 2021

More institutional selling
While retail investors and traders plow into risk assets, there has been a sharp ramp higher in the # of institutional sellers. The # of institutional sellers in QQQ (NASDAQ ETF) jumped more than 30% in the past 4 months:

When this happened in the past, traders needed to be vigilant for the next few weeks and months. There was always an opportunity for sellers to buy back their stocks at a lower price:
September 2012: this occurred at the start of a -11.9% correction
June 2014: the NASDAQ rallied another +6.9% before it fell -8.4%
July 2015: the NASDAQ fell -13.9% correction immediately
June 2016: this occurred at the start of a -7.5% decline

Small speculative markets continue to explode higher while large cap markets rally less.
Summary
Here’s how I approach markets based on 3 different strategies & time frames.
Short term trend followers should continue to ride the rally because no one knows exactly when it will end. If you are a short term trend follower, you must use stops.
Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
Bottomline: trend is up, but beware of mounting risks.

More speculative signs
Speculative signs keep piling up. Contrarian investors and traders have focused on surging penny stocks and micro-cap stocks in recent days. The smallest of small cap stocks are now more than 40% above their 200 day moving average! The last time this happened was in February – March 2000, near the peak of the dot-com bubble.
*This is the Dow Jones Micro-Cap Index, which is the smallest 50% of the Wilshire 5000 index:

It’s important to note that this also happened during the first year of the 2003-2007 (September 2003) and 2009-2020 (September 2009) bull markets. In those 2 historical cases, the stock market rallied another 4-6 months before major corrections began. This is a bearish sign for spring & summer 2021.
Energy rebound
Energy stocks are rebounding.

Stock market surge everywhere
Stock markets around the world – particularly in Asia – continue to surge. The average country’s stock index is 18% above its 200 dma! This is the highest reading in over a decade:
*I calculated this average using the following countries’ indices: U.S., Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, HK, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, UK, Brazil, China, India, South Korea, Mexico, Taiwan, Russia.

When so many stock markets around the world surged in the past, the S&P 500 (which accounts for approximately half of global market cap) usually rallied a little more over the next 3 months, followed by a sharp pullback.

High volatility is to be

There are 2 general ways to outperform buy and hold in the stock market:
Time the broad “stock market” (e.g. be fairly accurate at predicting corrections and bear markets)
Buy stocks that are better than the broad stock market
Today I will show you how insider trading data can help you improve your trading performance by buying stocks that are better than the broad stock market (S&P 500). Corporate insiders (e.g. CEOs, CFOs) are smart money. No one understands their company’s prospects better than corporate insiders.
How useful is insider trading data?
Factually speaking, just how useful is insider trading data? How much alpha can insider trading data add to your trading performance?
The following chart illustrates how much corporate insiders beat the S&P 500:

We took all insider

The greatest pain trade in today’s highly speculative environment is if financial markets “melt-up before they melt-down” (to borrow Julien Bittel‘s phrase). Bears feel intense FOMO as markets rally despite numerous overbought readings, and bulls face losses if they overextend their stay when the market eventually falls. This is a thought shared by legendary investor Jeremy Grantham who published an excellent piece worth reading.
Summary
Here’s how I approach markets based on 3 different strategies & time frames. I diversify my portfolio into 3 strategies:
Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
Medium term traders

Jump in SKEW
A wall of money continues to flow from market to market based on the popular narrative at the time. 6 months ago it was “tech does well under corona”, so everyone rushed headlong into tech stocks. Now it’s “vaccines are good for the economy”, so everyone is rushing into small caps. Result: small caps jumped higher today while the NASDAQ fell.
In the meantime, SKEW‘s 3 week average continues to rise. SKEW measures the risk of a black swan event, so traders usually interpret high SKEW readings = bearish.

In the past, such high readings were something to be concerned about, but didn’t always result in an immediate correction.
October 2017: stocks rallied for another 3 months before VIX spiked and stocks fell.
July 2018: stocks rallied for another 2 months before stocks

By

Troy

January 6, 2021

Investors and traders should always be open to new ideas and different opinions. Previously I said that “medium term traders should remain defensive in Q1 2021“. Legendary investor Jeremy Grantham published his latest market outlook. I highly recommend you read it. Jeremy Grantham’s main points:
This is a bubble.
Predicting the exact top of a bubble is impossible.
“I know that this market can soar upwards for a few more weeks or even months – it feels like we could be anywhere between July 1999 and February 2000. My best guess as to the longest this bubble might survive is late spring or early summer, coinciding with the broad rollout of the COVID vaccine. At that moment,

Let’s take a quick look at the bull case for commodities and ex-U.S. stocks in 2021, particularly in the 2nd half of 2021 (we may get a correction first!).
ex-U.S. stocks just broke out above its January 2018 high while its 14 week RSI crossed above 70:

Historical cases of strong momentum almost always led to more gains for ex-U.S. equities over the next year, although a short term pullback was possible.

While the media was busy talking about Bitcoin, IPOs, and other speculative instruments, the commodities rally in December received much less attention. Commodities – and agriculture in particular – are on fire.

“Re-flation” is a big theme this year. The following chart illustrates the 52 week correlation between ex-U.S. stocks and agriculture. As you can see, both global

In the coming weeks I will show you how to use corporate insider trading data to improve your trading performance. In the meantime, here are 4 stocks that CEO’s heavily bought last week. All purchases exceeded $100k.
Insiders sell for many reasons (gift, divorce, diversification), but they buy for only one reason. They buy when they believe that the stock price will go up.
Steel Partners (SPLP)
Steel Partners engages in banking, manufacturing, restaurants, defense, and finance. It saw significant insider buying last week from its CEO (Warren Lichtenstein), President (Jack Howard), and Director (Eric Karros).
A bullish sign: none of these purchases were pre-planned trades. Pre-planned trades are less important because they don’t demonstrate a discretionary decision to buy.
A bullish

I wish you a happy and prosperous New Year. May 2021 bring you and your family good health and success. If you’re interested, we launched a new website that provides dozens of useful indicators for free.
Looking back, 2020 was a year that few will forget. From a markets point of view, it was a year in which “dumb money” (traders who chase trends) was the smart money. Global central bank intervention caused a “wall of money” to flow from one asset to another, resulting in a year when “everything went up”.

Market participants can notice a dangerous trend over the past 2 months. The riskier an asset is and the less intrinsic value it has, the better the asset has performed since November. Moreover, this “wall of money” is not infinite, and is flowing into assets with smaller market

By

Troy

December 30, 2020

The U.S. economic recovery is K-shaped: most people are suffering while some are doing well. The stock market is rallying while Consumer Confidence has not recovered at all:

This may seem like a bearish sign for stocks, but it isn’t. The stock market is forward looking, and it’s normal for post-recession bull markets to have weak consumer confidence:

As has been the case for most of the past decade, U.S. stocks have outperformed ex-U.S. stocks. That is starting to change as ex-U.S. stocks challenge their January 2018 highs:

Contrary to standard technical analysis, breakouts aren’t always bullish. Breakouts are more bullish in the U.S. than outside the U.S., mostly

Small caps overbought
The Russell 2000’s nonstop rally has kept a meaningful % of its stocks in overbought territory for a long time:

Historical cases in which more than 5% of small caps were overbought for 36 consecutive days led to more-bearish-than-random returns over the next 2-3 months:

This is a bearish factor, particularly when the Russell breaks its upwards-sloping trendline.
Momentum
Momentum remains a bullish factor for stocks, and thusfar momentum indicators have beaten contrarian indicators. The Russell 2000’s momentum is very strong: it’s 3 day RSI has been consistently elevated.

When 3 day RSI’s 2 month average was this high in the past, small caps usually pushed higher over the next 2 months:

This is a bullish factor, and directly contradicts the previous bearish