Tuesday , September 29 2020
Home / Humble student of the markets / A global and cross-asset market review

A global and cross-asset market review

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:

Andriy Moraru writes Commodities Technical Analysis, September 28th — October 2nd

Lance Roberts writes The Sell-Off Is Overdone. The Correction May Not Be. 09-25-20

Andriy Moraru writes Commodities Technical Analysis, September 21st — September 25th

Lance Roberts writes The Pre-Election Correction Continues, Is It Over? 09-18-20

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.
 

A global and cross-asset market review

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.

Subscribers can access the latest signal in real-time here.
 

An uneasy feeling

I wrote a week ago that I had an uneasy feeling about the stock market’s intermediate term outlook. This was owing to a combination of global market weakness, and cross-asset warning signals. Last week, US equities continued to grind upwards. Let’s review how those signals evolved.

Starting with the US, the SPX broke up through a rising trend line to a new recovery high. Internals were mixed. While Advance-Decline Lines staged upside breakouts to all-time highs, the ratio of high beta to low volatility stocks, which is a risk appetite indicator was range-bound and did not confirm the market’s strength. Neither the the NYSE Advance-Decline Volume (bottom panel).
 

A global and cross-asset market review

The NASDAQ 100, which had been the market leaders, broke out through resistance to a new all-time high, and the breakout held despite a pullback late in the week.
 

A global and cross-asset market review

It is unclear how much good news and bad news is in the market. President Trump’s announcement on Saturday that he would sign an Executive Order and several Memorandums to extend supplemental unemployment insurance payments at the rate of $400 per week, down from $600 per week, suspend the collection of payroll taxes, defer student loan payments, and extend the federal moratorium on evictions. CFD futures, which is admittedly thin and prices are only indicative, did not react to the news.
 

Overseas weakness

The action in overseas markets was not as bullish. European markets (all indices are measured in local currency) pulled back and were unable to recover above their 50 day moving averages (dma). All were below their 200 dma.
 

A global and cross-asset market review

Turning to Asia, Japan’s Nikkei Index was also unable to rally much, and ended the week below its 50 and 200 dma.
 

A global and cross-asset market review

The technical condition of the Chinese market and the markets of China’s major Asian trading partners were mixed. Shanghai was never able to recover and break out above resistance after an initial surge and pullback. The Hong Kong market weakened below its 50 dma. Taiwan and South Korea were strong, but that’s mainly attributable to the leadership of semiconductor stocks. Singapore and Australia remain regional laggards.
 

A global and cross-asset market review

A commodity price checkup

What about commodity prices? They are important barometers of the global cycle, and Chinese demand as China has been an voracious consumer of commodities. The CRB Index has been rising steadily, but it remains caught between its 50 and 200 dma despite the recent stellar performance of precious metals.
 

A global and cross-asset market review

Some words of caution are in order for commodity and gold prices. First, the USD has shown an inverse relationship to both commodity and gold prices, and Macro Charts pointed out that the USD Index (DXY) DSI is wildly oversold. He went on to say, “Since 2011 this was a near-perfect bottoming signal.”
 

A global and cross-asset market review

I previously identified a USD reversal as one of my equity bearish tripwires. Not only is a rising dollar bearish for commodity prices, it’s also puts pressure on vulnerable EM economies that are dependent on USD financing. There are two worrisome signs from a technical perspective. The USD may be in the process of tracing out a double bottom. A greater concern are EM currencies, which are weakening even as the USD fell. This is a negative divergence that investors should keep an eye on.
 

A global and cross-asset market review

As well, gold is poised for a correction. Alex Barrow observed that gold prices are 4 standard deviations above its 200 dma. He added, “This has only happened two other times in the last 30-years, in Jan 03′ and May 06′.  Both prior instances led to sharp pullbacks of 18% and 25%, respectively. ”
 

A global and cross-asset market review

Lastly, silver has soared against gold prices. Nautilus Research found that past similar episodes have been bearish for silver prices.
 

A global and cross-asset market review

These conditions are setting for a disorderly sell-off in precious metals. One possible catalyst is the CARES Act 2.0 impasse in Washington. Arguably, gold and silver prices have been rising because of the reflationary effects of a combination of easy fiscal and monetary policy. As the agreement for fiscal support has stalled, the Fed may be left pushing on a string. These conditions are potentially bearish for gold and silver prices. As I wrote before, a correction in silver after a parabolic rally is another one of my bearish triggers for equities. Watch gold and silver prices carefully for signs of a downside break.
 

A global and cross-asset market review

Bond rally = Rising risk aversion

The third, and final bearish tripwire that I identified in the past is a rally in the Treasury bond market. The long Treasury bond ETF (TLT) staged an upside breakout out of an inverse head and shoulders pattern last week, and that breakout has held. Similarly, the 10-year Treasury yield broke down through a head and shoulders pattern, and that breakdown has also held.
 

A global and cross-asset market review

This is the most concrete equity bearish signal to be concerned about.
 

The week ahead

The market broke up out of a short-term wedge, as measured by the percentage of stocks above their 5 dma, which is short-term bullish. Readings are not overbought, which is an indication that there may be further upside potential.
 

A global and cross-asset market review

Looking a little longer term, the percentage of stocks above their 10 dma is neutral and rising. Readings are also not overbought, which is also an indicator of possible upside potential.
 

A global and cross-asset market review

In conclusion, the intermediate term concerns that I raised a week ago remain in place. Global stock prices are not confirming the strength in US equities. Commodity prices are at risk of falling because of an oversold USD, and excessively bullish sentiment in precious metals. The Treasury market is already sounding a warning. The next 10% move in US stocks is likely to be down rather than up.

In the short run, however, price momentum is positive and the market can go higher. However, there is considerable event risk from growing US-China trade frictions, and constitutional uncertainty over Trump’s Executive Order and Memorandums.

Disclosure: Long SPXU

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 *