Sunday , July 12 2020
Home / Humble student of the markets / Waiting for the inflection point

Waiting for the inflection point

Summary:
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

Topics:
Cam Hui considers the following as important: , , , ,

This could be interesting, too:

Lance Roberts writes This Is Nuts…Again. Reducing Risk As Tech Goes 1999 07-11-20

Lance Roberts writes The Bullish Test Comes As Earnings Season Begins 07-03-20

Lance Roberts writes Market Corrects As COVID Cases Surge 06-26-20

Lance Roberts writes Market Holds 200-DMA, Bulls Remain In Control…For Now 06-19-20

Preface: Explaining our market timing models
We 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 Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.
 

Waiting for the inflection point

The latest signals of each model are as follows:

  • Ultimate market timing model: Sell equities
  • Trend Model signal: Neutral
  • Trading model: Bearish

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
 

Don’t count on the Fed

There is a belief among the bullish contingent that Fed intervention can solve everything that’s wrong with the stock market. While liquidity injection can boost equity prices, they do not represent a permanent solution. Otherwise, the Japanese and European markets would have been the clear leaders in the past decade.
 

Waiting for the inflection point

Instead, the recent surge in stock prices has created a mini-bubble which is at risk of bursting.
 

Warnings of froth

I have written about the sudden surge in small investor trading that has been supporting this advance. Linette Lopez at Business Insider called a “perfect storm of stupid”.

  • Close to 800,000 people have created new brokerage accounts on three of America’s top brokerage platforms since the coronavirus pandemic hit the US.
  • That means tons of new people are playing the markets at a time when things are so uncertain that hundreds of companies canceled their 2020 earnings guidance. There is no model that can predict what’s about to happen to the economy or the market.
  • That means tons of new people desperate for a coronavirus vaccine are now betting on potential treatments and cures. Just this week the market handed billions to two companies that made headlines without showing any real data.
  • This is very stupid, and people are going to get played.

A much shared chart shows that the trading activity at discount broker Robinhood has rocketed upwards.
 

Waiting for the inflection point

CNBC reported that consumers used much of their stimulus payments to trade the stock market.

Securities trading was among the most common uses for the government stimulus checks in nearly every income bracket, according to software and data aggregation company Envestnet Yodlee. For many consumers, trading was the second or third most common use for the funds, behind only increasing savings and cash withdrawals, the data showed.

Yodlee tracked spending habits of Americans starting in early March and found that behaviors diverged around mid-April — when the checks were sent — between those that received the stimulus and those that didn’t. Individuals that received a check increased spending by 81% from the week prior, and data show some of the spending went to buying stocks.

People earning between $35,000 and $75,000 annually increased stock trading by 90% more than the prior week after receiving their stimulus check, data show. Americans earning $100,000 to $150,000 annually increased trading 82% and those earnings more than $150,000 traded about 50% more often. “Securities trading” encompasses the buying and sells of stocks, ETFs or moving a 401k.

Waiting for the inflection point

SentimenTrader extremes

Jason Goepfert at SentimenTrader recently issued his own warnings of sentiment extremes. First, the stampede into growth and technology is as overbought as 1980, 1999, and 2015. All of these episodes ended badly soon afterwards.
 

Waiting for the inflection point

That warning was addressed not only at the small investors dabbling in the FANG+ names, but institutional investors too. The latest BAML Global Fund Manager Survey revealed that global institutions were underweight stocks, but they compensated by overweight high beta sectors like technology and communication services (GOOGL, NFLX).
 

Waiting for the inflection point

From a tactical perspective, Goepfert also observed that the stock market is likely to staging a volatility breakout. Past breakouts have tended to resolve themselves in a bearish manner.

The S&P 500 has been stuck in a range for a month, above its medium-term 50-day moving average but below its long-term 200-day average. Based on other long streaks of being stuck between time frames, there has been a higher likelihood it will break the streak by falling below its 50-day average. But future returns were weak, no matter which way it broke.

He also issued a warning based on volume behavior.
 

Waiting for the inflection point

How much gas is there left in the tank?

How much gas is there left in the bulls’ tank? Traditional sentiment models are unhelpful. AAII weekly sentiment has is retreated to neutral from a crowded short condition.
 

Waiting for the inflection point

Same with the NAAIM Exposure Index, which measures the sentiment of RIAs.
 

Waiting for the inflection point

Investors Intelligence sentiment has also returned to neutral territory.
 

Waiting for the inflection point

However, two major investment firms’ sentiment indicators are unusually giving off wildly contradictory readings. The BAML Bull-Bear Indicator is flashing an off-the-charts buy signal.
 

Waiting for the inflection point

On the other hand, the Citi Panic-Euphoria Model pushed further into euphoric territory this week.
 

Waiting for the inflection point

Someone is going to be wildly incorrect and have egg on his face.
 

The week ahead

Looking to the week ahead, the market still appears to be range-bound. The possibility exists that the S&P 500 could strengthen further to test its 200 dma at about 3000, but that only represents an upside potential of 1.5%. Different versions of the advance-decline lines remain in uptrends. Until those trend lines are broken, the bears cannot be said to have seized control of the tape.
 

Waiting for the inflection point

The week starts with a slight bearish bias. Short-term breadth is falling, and momentum is negative, but readings are neutral and the market could turn up from here.
 

Waiting for the inflection point

Longer term breadth is recycling off an overbought condition.
 

Waiting for the inflection point

My inner trader remains short the market. For the purposes of risk control, his line in the sand is 2970 on a closing basis.

Disclosure: Long SPXU, TZA
 

About 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.

Leave a Reply

Your email address will not be published. Required fields are marked *