Bottomed, but wait for re-test of lows

Model signal summary
Ultimate market timing model: Buy equities
Trend Model signal: Risk-off
Trading model: Bullish

The "Ultimate Market Timing Model" is a long-term market timing model based on research outlined in our post Building the ultimate market timing model.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.

Update schedule: I generally update model readings on my blog on weekends and tweet any changes during the week at @humblestudent.

Confirmation of limited tail-risk
Whew! Q4 GDP came in at 0.7%, which was below expectations of 0.8%, but growth was still positive and well above some of the Apocalyptic calls for a negative print. This week, we saw further confirmation that macro tail-risk is limited. The US economy is not headed for a recession and the downside risk from China has also been contained.

The full post is at our new site here.

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‚Freedom: Three Varieties and a Caveat‘

Highlighting something from yesterday's links:

Freedom: Three Varieties and a Caveat, by Peter Dorman, Econospeak: What follows is a very brief summary of an appendix in my micro textbook that addresses the libertarian case for free markets. It was triggered by the comment of Tyler Cowen that the left needs more Mill.
There are three kinds of freedom, each valid. The first is negative freedom, “freedom from”, which means simply freedom from external coercion.  This is what underlies the libertarian attachment to free markets.  The second is positive freedom, “freedom to”, which seeks to provide people the means to realize their (feasible) objectives. Traditionally the left has seized on this notion to justify redistributive institutions and policies. The third is “inner freedom”, freedom from habit, custom, and unreflected assumptions, which was the core message of German idealism, English and French Romanticism and American Transcendentalism (and, at its best, rock and roll).
In a perfect world we would bask in all three of them. Unfortunately, each makes demands on the others, and there is no universal criterion for striking a balance. The first step toward a reasonable politics of freedom, however, is to simply recognize that no one conception is sufficient by itself.
Finally, it’s important to recognize that freedom, according to any interpretation, is always limited by obligation. In particular, we have obligations toward children, the very old or disabled and others who depend on us for the necessities of life. One way collective action can widen the domain of freedom is by helping us to meet these responsibilities more efficiently. Consider, for instance, how public education and pension systems (like Social Security) widen the scope for parents and children of their elderly parents to be freer in other aspects of their lives.


Economists in Fantasyland: Economists See 20% Chance of Recession That’s at Least 20% Likely Already Here

Economists have a perfect track record of 100% failure in ability to predict a recession. In a recession that's at least 20% likely to have already started, Economists See 20% Chance of US Recession this Year.
A Financial Times survey of 51 economists, conducted in the days after the Fed’s January meeting, underscores the impact of the past month’s severe market turbulence and a string of lacklustre economic reports out of the US and China.

The fear that the world’s largest economy — considered the lone engine of global growth — is on the verge of recession has intensified. In the FT’s December survey economists had put the odds of a US recession at 15 per cent during the next two years. Now, they see a one-in-five chance of recession in the next 12 months.

Economists surveyed by the FT emphasised that while the odds of a recession had climbed, a large majority still expected the US to escape one. Several who have fielded increased investor calls on the subject said that the conversation had been skewed because of the near obsession with the price of oil — a point that they argued had more to do with supply than global demand.

Mr Gapen, who put the odds of a recession between 10 and 15 per cent, said that he still thought strong consumption trends would keep the US economy from contraction.

Rate Hikes Odds

Less than 5% of economists see a greater than 50% chance of recession.

Hikes Foreseen in December Survey

In December not a single economist thought the Fed would hike zero times in 2016.

Hikes Foreseen in January Survey

CME Fedwatch Odds

The Fed Fund futures show a nearly 50% chance of no hikes this year.

Fantasyland Material

In contrast to Fed Fund futures, the latest Financial Times survey shows economists still expect two or three hikes this year. Over 10% of the economists foresee four hikes.

This is truly Fantasyland material.

Mike "Mish" Shedlock

Nate Silver’s Continual Underestimation of Donald Trump’s Chances

On January 18, I sent the article below (starting with the title Nate Silver Off the Mark on Donald Trump Nomination Odds)  to the New York Times as an Op-Ed.

They did not publish it.

It’s hard enough  getting something timely to major news organizations, and when you do, you have to sit and wait days for no response. The New York times has the best turnaround of the bunch, three days so I could have used this earlier.

This would have been more timely on the 18th and even more timely when I first started writing, but here it is now. What I have to say is still relevant.

Nate Silver Off the Mark on Donald Trump Nomination Odds

I am a big fan of Nate Silver. His calling of the last two elections was nothing short of brilliant. However, I just cannot accept Silver’s current assessment of Trump’s chances of winning the Republican nomination.

In footnotes to his January 8 article Three Theories Of Donald Trump’s Rise Silver expressed belief that “Trump’s chances are about half of what betting markets say they are. I think they’re about half that – 12 or 13 percent.”

Trump Odds According to Nate Silver
Trump Odds1

Historical Precedents

Given Trump’s commanding lead in the polls, one might instinctively think Silver is crazy. But Silver cites historical precedents:

  1. Polls before the first primary are not that useful
  2. Political outsiders do not win elections
  3. Establishment candidates do win elections

To that Silver adds “Trump could lose New Hampshire either to a surging Cruz or if one of the several establishment candidates — Marco Rubio, Chris Christie, Jeb Bush, John Kasich — can consolidate the support of more moderate/establishment Republican voters.

In defense of Silver, I would personally add there are 12 Republican candidates and anything could happen, in theory. One chance in 12 would be just over an 8 percent chance.

Bit of Realism

Chances are not all equal. So let’s place some odds on some additional candidates.

What are the realistic odds that Ben Carson, Chris Christie, Carly Fiorina, Jim Gilmore, Mike Huckabee, John Kasich, Rand Paul, or Rick Santorum will win the nomination?

As long as we are taking history into consideration, Ben Carson has flamed out. Has a flame-out ever recovered? Does Rand Paul (my preference) have more than a 0.1% chance?

Does anyone in the above group of eight have more than a 0.5% chance? If so, who and why?

Even if you gave them all a 1% chance, which seems generous, the total combined odds would be 8%. Nonetheless, let’s make that assumption and place it in a new chart.

Interpretation of Nate Silver Odds

Trump Odds2

Does the combination of Bush, Rubio, and Cruz really have a 79% of winning the nomination?

I think not.

Double the combined odds of Ben Carson, Chris Christie, Carly Fiorina, Jim Gilmore, Mike Huckabee, John Kasich, Rand Paul, and Rick Santorum to an amazing 16% and the Bush, Cruz, Rubio odds would still be 71%.

Triple the odds of the “group of eight” winning the nomination to a preposterous 24% and the “group of three” would still have a 63% chance of winning.

Mathematical Bias

By focusing solely on the odds of Trump winning, while placing no odds on the others, Silver introduces a mathematical bias far beyond what history can reasonably suggest.

Let’s put a spotlight on Bush. Jeb Bush is polling 4.8% nationally.

Silver discounts national polls. I sympathize. But how far does one want to take that idea given that primaries start less than two weeks away?

Do candidates polling less than 5% at this stage often win nominations?

If one generously gives a Bush 5-15% chance of winning the momination, the combined Cruz Rubio odds would be something in the 65-75% range, assuming the group of eight has an 8% chance and Trump a 13% chance.

It all has to add up to 100%.

Arguably, the best chance for Bush and the ABT (Anybody But Trump) crowd has is if the Republican convention is deadlocked.

Until we see the results from Super-Tuesday and the polls of the states that follow, a deadlocked convention is a distinct possibility, but not one I have seen Silver depend on.

Other Flaws in Silver’s Odds Estimates

We are dealing with humans, in real time, not history.

History suggests fringe candidates don’t usually win elections, but they can. Jimmy Carter was  unknown, but he won. Obama was not supposed to beat Hillary, but he did.

Yet, flame-outs are more likely. Carson did just that. So have many others.

Trump hasn’t yet.

Rather than insisting a historical flame-out is still likely, Silver just might wish to consider reasons Trump will not flame out.

For example, a Gallup Poll headline from January 18 plays straight into Donald Trump’s hands: Majority in U.S. Now Dissatisfied With Security From Terrorism.

security satisfaction

Does Unpopularity Matter? When?

Silver notes Donald Trump Is Really Unpopular With General Election Voters.

Does unpopularity mean “People won’t vote for the guy?”

I don’t particularly like Trump. But I would vote for him over Clinton or Sanders.

What did Carson have before he flamed out other than he was “likable”? Amusingly, he’s still the most likable Republican.

Carson comes across as sincere, and he is likable. But I would not vote for Carson under any circumstances. I would instead “waste my vote” and write in Rand Paul or vote for the Libertarian candidate.

Trump draws amazing crowds. Silver dismisses that. Yet, the last time someone generated this much crowd energy was Ronald Reagan.

This is not a basketball game. Nor is this a one-on-one play with polls all breaking one way at the last minute. Those are areas in which Silver excels.

This is a one-on-many play, where voter attitudes have consistently sided with Trump, no matter who he offends. It’s a mistake to discount such sentiment.

Like him or not, Trump is clever. For Republicans, he is on the right side of security, guns, abortion, and China. That’s quite a bit.

And he’s also a genuine outsider at a time nearly every other Republican is pretending to be one.

Is there any reason to suspect voter attitudes on terrorism, on Trump, or on Washington insiders will change in the next few weeks?

Odds of Winning it All

I suggest Trump’s odds of winning the nomination are far more than what odds makers presume.  And if Trump wins the nomination, I suspect his odds of him winning it all would be about 50%.

My rationale is that Hillary may not win the nomination. There is some chance of a criminal indictment related to emails. Sanders could pull out an upset. Odds of one of those have to be higher than the alleged 13% chance Silver assigns to Trump.

AWM (Angry White Men) will be a factor, perhaps totally negating any personal dislike of Trump.

Most importantly, I think the US is approaching, if not already in a recession. Eight years ago, Obama blew dissatisfied Republicans out of the water on the heels of a big recession that had just started.

Why can’t that happen again? If anything, history suggests it will.

Mike “Mish” Shedlock

Hotel Occupancy: Solid Start for 2016

Here is an update on hotel occupancy from STR: US results for week ending 23 January
The U.S. hotel industry reported mixed results in the three key performance measurements during the week of 17-23 January 2016, according to data from STR, Inc.

In year-over-year measurements, the industry’s occupancy decreased 1.9% to 56.2%. Average daily rate for the week rose 2.5% to US$116.51, and revenue per available room increased 0.5% to US$65.51.
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.  Hotels are currently in the weakest part of the year; December and January.

Hotel Occupancy RateThe red line is for 2016, dashed orange is 2015, blue is the median, and black is for 2009 - the worst year since the Great Depression for hotels.

2015 was the best year on record for hotels.

So far 2016 is tracking close to 2015. A solid start to the year.

Data Source: Smith Travel Research, Courtesy of

Mental and Emotional Preparation for Trading

An important implication of the recent post on how to avoid bad trading decisions is that it is not enough to plan trades, write in a journal, or review performance.  If we make decisions in cognitive, emotional, and physical states that are different from the ones we occupied during our preparation, we're likely to find that the decisions we plan won't always be the ones we act upon.

Experienced traders don't just create a plan for a trade; they often plan a variety of possible scenarios for their positions based upon how markets behave, news that comes out, central bank decisions, etc. By anticipating a variety of events, these traders enable themselves to respond quickly in the face of surprise.

This mental preparation is most effective if it is also emotional preparation.  In other words, we want to not only anticipate a scenario, but also the thoughts, feelings, and physical states likely to accompany that scenario.  If a market is topping, for instance, and my short position starts to go my way, I know that I may feel uncomfortable on a bounce, and I know I'll have thoughts about stopping out of the trade.  I also know, however, that if it's a weaker bounce consistent with the broader topping action, it could be an attractive level for adding to my position.  If I plan the trade mentally but not emotionally, I increase the likelihood that I could act on the feelings and impulses of the moment and scratch out of a trade just when I really should be adding to my risk.

When we anticipate the thoughts and feelings that can nudge us from our best intentions, we make ourselves more resilient.  We're more likely to respond to stress with "been there, done that."  The idea is to make our planning as broad as possible so that we're anticipating a wide range of scenarios--and responses to those scenarios.  If there's one thing we want to minimize in trading, it's surprise.  Surprise--whether positive or negative--will shift our states and nudge us from trading plans.  When we prepare for a wide range of scenarios in which positions go our way or against us, we take the surprise out of market events and keep our responses more stable.

We cannot--and should not--eliminate emotion from trading, but that is also not necessary.  Preparation puts emotion into perspective; we gain control, not by staying Zen, but by anticipating situations that are likely to take us out of calm focus and preparing our responses to those.

Further Reading:  How to Trade Your Plans Once You've Planned Your Trades

Fickle February (3 of 4)

Preface to All Weekend Chart Posts: Greetings from Slope Chart Central, where I have composed 38 of my favorite short positions in the form of charts. It’s the usual drill (Slope Plus gets exclusive access to a little more than half the charts; all Slopers get the remainder), except that I’ve decided to present these in static […]
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