What an actual bond market catastrophe looks like

Mid-week market update: Is the bond market tantrum over?

Here is the good news. In the wake of tame PPI and CPI reports this week, the 30-year Treasury yield retreated while in a resistance zone (top panel). In addition, there is nothing worse than a failed breakout. The second panel shows the inflation factor trade, consisting of long TIPS and short long-dated zero coupon Treasuries, which staged an upside breakout and reversed itself.

 

The worse of the yield spike fears may have passed. But that was nothing. As a lesson. Here is an actual case of what a potential bond market catastrophe from uncontrolled debt growth looks like.

The full post can be found here.

Thinking the unthinkable: Israel-Iran War

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 that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

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 email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

   

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Neutral (Last changed from “bullish” on 26-Jul-2024)*
• Trading model: Neutral (Last changed from “bearish” on 19-Sep-2024)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

 

The drumbeats of war

Oil prices have risen in response to rising tensions in the Middle East, but the year-over-year change is still negative. While war isn’t in our base-case scenario, investing is about pricing risk. I argue that the market is underpricing the risk of a conflict.

 The full post can be found here.

A powerful buy signal, with caveats

There is an adage on Wall Street that investors shouldn’t fight the Fed (or central banks in general), but the devil is in the details. 

Callum Thomas of Topdown Charts that global central banks are engaged in a broad-based easing campaign. The limited sample of the history of such episodes (annotations are mine) show stocks rose on two of the four occasions (blue lines) and fell in the other two (grey lines). This begs the question of whether pivots to widespread rate cuts are equity bullish.

 

My analysis of the latest circumstances is a qualified “yes”, but investors should be aware of the risks.
 

The full post can be found here.

Five bullish reversals you may have missed

The S&P 500 exhibited a surprise price reversal on the weekly chart. After violating an uptrend line that stretches back to the COVID Crash bottom which scared the living daylights out of a lot of investors, the index staged an upside reversal while the weekly stochastic recycled from oversold to neutral, which has been a useful buy signal in the past.

 
In addition to this obvious bullish price reversal on the weekly chart, here are five other risk reversal factors that you may have missed.
 

The full post can be found here.

Why you should fade the war hysteria

Oil prices have jumped over $6 a barrel since the Hamas attack on Israel as a geopolitical risk premium became embedded in the oil price. The surprise attack brought up memories of the Yom Kippur War 50 years ago, in which the armies of Egypt and Syria launched a simultaneous surprise attack on Yom Kippur in 1973 that left Israel fighting for its existence. In the wake of that war, the Arab-producing states launched an oil embargo on the West which devastated growth. It’s no wonder oil prices popped this time.

 
I think investors should fade market’s war fears. Here’s why.

The full post can be found here.

A geopolitical stress test?

Mid-week market update: Geopolitical risks are rising and it remains to be seen how the market reacts to geopolitical stress. On the weekend, I made the following tweet.

Those fears are becoming more real.

The full post can be found here.

How the G7 meeting exposes the risks for 2024

Two weeks ago I highlighted how history shows that the stock market only bottomed after recessions have begun (see How to spot the stock market bottom) and a recession is likely on the way in H2 2023. If that is the case, U.S. equities should bottom at some point this year and a recovery should be in full swing by 2024. 

However, the agenda of G7 Summit in Hiroshima highlights the geopolitical risks to the 2024 recovery and the threat to global growth in 2024 and beyond.
 

 

The full post can be found here.

Why you should financial model the Yom Kippur War

The recent OPEC+ decision to cut oil output by 2 million barrels per day is giving me a case of PTSD from a Yom Kippur long ago. In October 1973, the stock market was just getting over a case of Nifty Fifty growth stock mania. Arab armies, led by Egypt and Syria, made a surprise attack on Israel on Yom Kippur and overwhelmed the surprised defenders. The Israelis eventually prevailed in the conflict with US help. Arab oil-exporting countries responded with an oil embargo that spiked energy prices and caused a deep recession. The stock market fell roughly -50% on a peak-to-trough basis before recovering.

Fast forward to 2022. Instead of the Nifty Fifty, we have the FANG+ mania, which may be show signs of fading. Instead of a Middle East war, we have the Russo-Ukraine war. Instead of an Arab Oil Embargo, Russia has weaponized energy, mostly against the EU. Despite much lobbying by Washington, this year's Yom Kippur brought an OPEC+ surprise. The organization made a decision to cut oil output by 2 mbpd. While the cut isn't as bad as it sounds because a number of OPEC members aren't producing at capacity, the decision nevertheless shows that the US and Europe have no allies within OPEC. As a consequence, Street analysts are scrambling to raise their oil price forecasts, and higher energy prices are likely to put pressure on the Fed to stay hawkish.

Will investors see a repeat of the 1973-1974 bear market in 2022-2023?

The full post can be found here.

Higher for longer

Mid-week market update: The Fed has spoken. As expected, it hike interest rates 75 bps. In its Summary of Economy Projections (SEP), it sharply lowered GDP growth for this year and it raised the Fed Funds projection to 4.4% for this year and 4.6% next year, which are both ahead of market expectations. In other words, higher for longer (though it did signal rate cuts in 2024).

Fed Funds futures reacted by extending the already elevated Funds Funds rates for next year, but it did show some skepticism of the Fed's SEP by expecting rate cuts by September 2023.

The full post can be found here.

What's "Black Swan" in Chinese?

Mid-week market update: Here we go again. Just when you thought world events were under control, House Speaker Nancy Pelosi's visit to Taiwan raised the geopolitical risk premium.

And just as I predicted on the weekend (see In what world is fighting the Fed a good idea?), we've had a cacophony of Fed officials pushing back on market expectations of an imminent pause in rate hikes. Bond yields spiked in response.

Here is what I am watching.

The full post can be found here.

How a war of conquest has become a contest of pain

I received feedback from a number of readers in response to my publication, Bearishness, begone!. They expressed concern over the terrifying spike in European natural gas prices. In response to the EU's support for Ukraine, Russia has weaponized its energy exports. Gazprom has already reduced Nord Stream 1 gas flows to 20% of capacity. What happens this winter? What are the consequences for the region's economy? How will the ECB cope in light of inflationary pressures from rising energy prices?

The root of the surge in energy prices is the Russia-Ukraine war. In response to the aforementioned questions, I discuss:

• The state of the battlefield and its outlook;
• The hybrid war beyond the battlefield; and
• The contest of pain between Russia and the West.

The full post can be found here.

Bearishness, begone!

The returns of my Trend Asset Allocation Model have been strong. Based on an "out of sample" record of signals from 2013 and a simulated portfolio that varies up to +/- 20% from a 60/40 benchmark, the model portfolio has managed to achieve equity-like returns with 60/40-like risk. Performance has also been consistently positive in the shorter time frames (to July 26, 2022).

• 1 year: Model portfolio -8.1% vs. 60/40 -9.8%
• 2 years: Model portfolio 7.1% vs. 60/40 4.2%
• 3 years: Model portfolio 10.2% vs. 60/40 7.1%
• 5 years: Model portfolio 10.9% vs. 60/40 7.8%

   

The Trend Model turned neutral from bullish in January 2022 and turned bearish in March. Amidst all the gloom about a global recession, it's time to become more constructive on equities. The signal has been upgraded to neutral from bearish.

Here's why.

The full post can be found here.

An FOMC market nosedive ahead?

Mid-week market update: I recently identified a 2022 market formation where the S&P 500 declines into an FOMC meeting and rallies afterward. The key question for investors is whether the same pattern will repeat itself for the July meeting. If so, the market should top out about now.

Here are the bull and bear cases.

The full post can be found here.

The commodity canary in the coalmine is falling over

One of the main elements of my Trend Asset Allocation Model is commodity prices as a real-time indicator of global growth. As well, John Authers recently wrote, "The commodity market is a real-time attempt to assimilate geopolitical developments, growth fears, and shocks to supply and demand, so it’s an important place to look for the next few weeks." So far, commodities have been elevated even as the global economy showed signs of slowing. The divergence is attributable to supply shocks.

We all know the recent story of supply shocks. The COVID-19 pandemic disrupted global supply chains and caused both a supply shock. As the virus first emerged in China, Beijing responded by shutting down the economy and its industrial capacity came to a virtual halt. Just as the world began to recover from the COVID Crash, the Russia-Ukraine war sparked another supply shock, this time in energy and agricultural products. 

Despite the supply pressures, commodity prices have finally started to fall. In particular, the cyclically sensitive industrial metals have rolled over.

Here is what it all means.

The full post can be found here.

Sale in May

We would also like to announce our "Sale in May" event. Get 50% off a monthly subscription for the first month. Click here to subscribe.

A sentiment preview of FOMC week

Since the publication of my weekend trading update (see Will the Fed rally or tank markets?), a number of additional sentiment readings have come to light that may be relevant to traders and investors. The historic almost off-the-chart levels of bearishness of the AAII weekly sentiment survey has been known for several days, but there's more.

The full post can be found here.

Sale in May

We would also like to announce our "Sale in May" event. Get 50% off a monthly subscription for the first month. Click here to subscribe.

What matters more, the war or the Fed?

An unusual divergence has appeared between the VIX Index and MOVE, which measures the implied volatility of the bond market. While MOVE has spiked, VIX has fallen. 

The difference in the two indicators can be explained by two forces that affect markets today, namely geopolitical risk and macro risk as defined by the Fed cycle. The decline in the VIX and equity rally reflects a compression in geopolitical risk premium in light of constructive Russia-Ukraine discussions, while the elevated nature of the MOVE Index reflects the market's concerns about the Fed's tightening cycle.

I pointed out a month ago that Wars are equity bullish, but there's a catch. History shows that stock markets have recovered from sudden geopolitical shocks, with the exception that the war or insurrection results in a permanent loss of capital. It is therefore no surprise that stock prices advanced as the Russia-Ukraine risk premium faded. 

Here is a framework to consider. In the short-term, geopolitical risk will continue to dominate market volatility. Longer-term, it is the Fed cycle that matters to stock prices.

The full post can be found here.

Sell to the sound of trumpets?

Mid-week market update: Before the war began, I wrote that investors should Buy to the sound of cannons. Historically, investors have been rewarded by buying sudden geopolitically related downdrafts. The corollary is "sell to the sound of trumpets", or news of peace.

US equity indices across all market cap bands staged upside breakouts through resistance yesterday and they pulled back today to test the breakout levels.

Is peace at hand? Are the trumpets sounding?

The full post can be found here.

Great (bearish) expectations

Mid-week market update: The bears have exhibited great expectations for risk assets. Ed Clissold of Ned Davis Research observed that the NDR Crowd Sentiment has been at a sub-30 reading, which is historically bullish. However, he pointed out that momentum is negative and hedged with "sentiment is extremes differ cycle to cycle, so it's best to wait for sentiment to begin to reverse".

The full post can be found here.

A double bottom?

Mid-week market update: The S&P 500 put in a potential double bottom when it tested its recent lows while exhibiting a positive RSI divergence. Stock prices rallied on the news of a ceasefire in order to allow civilians to evacuate.

Is this a durable bottom?

The full post can be found here.

Wars are equity bullish, but there's a catch...

Four weeks ago, I suggested that investors buy to the sound of cannons. Now that the cannons have sounded, is that still a good idea?

Yes, but there's a catch. A detailed list of past crises from Ed Clissold of Ned Davis Research reveals that stock prices usually rebound strongly after sudden shocks such as war. On average, the DJIA is up 4.2% after a month and 15.3% a year later.

Here's the catch...

The full post can be found here.