Get ready for the melt-up

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 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 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 the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.


The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Risk-on*
  • Trading model: Bullish*
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 and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.


A brighter tomorrow
No, the "brighter tomorrow" of the title does not refer to the better future promised by American politicians during this election season, but the brighter future for equity prices over the next 6-12 months. It appears that the market bubble scenario that I outlined a few weeks ago is well on its way to becoming a reality (see How to get in on the ground floor of a market bubble). The following factors are combining to create an environment that could see the market melt-up:
  • Positioning: Investors have been caught leaning the wrong way. They are just starting to play catch-up, but sentiment remains overly skeptical.
  • Growth surprise: A US recovery has caught most people off-guard (though I in the minority when I was bullish during the market panic in January, see Buy! Blood is in the streets!).
  • Central bank accommodation: The Federal Reserve has been ultra-cautious in its policy of interest rate normalization, which is an enabling factor for equity price gains.
While I am starting to have concerns about equities on valuation grounds, the market is likely undergoing a blow-off phase where if participants hold their noses and buy, they could enjoy some truly bubbly profits.

The full post can be found here.

About That Optimism Thing …

Watching the Democrats’ smoothly staged, potently scripted convention last week, voters could easily think that Hillary Clinton has this election in the bag. The critiques of Donald Trump made devastatingly clear that he’s a preposterous, dangerous candidate for the presidency. The case for Clinton was compelling, and almost every party leader who mattered showed up […]

Short Interest on Leading Stocks At Multi-year Lows

Short sellers are often vilified by the mainstream media, CEO’s of publicly traded companies & many institutional money managers which are forced, by prospectus or other security selection parameters, to maintain only long-side exposure to the market. I won’t go into all the benefits that short sellers provide, such as liquidity and sniffing out corporate […]

bradford-delong.com: Grasping Reality with the Invisible Hand… 2016-07-31 18:21:30

Must-Read: A piece from Paul Krugman three years ago that I put aside to think about because I didn't really understand what argument he was trying to make. I am pulling it out again because I was reading Adair Turner.

Adair, seeking supporters for his advocacy of helicopter money, recruits as authority number one Ben Bernanke. That's great!

He then recruits as authority number two... me. That's not so great. There ought to be somebody of more weight and reputation--and intelligence--on the pro-helicopter money side. I wish I could do something to boost my reputation overnight (my weight is already more than high enough, thank you very much). But I can't. So all I can do is to try to become more intelligent, and think smarter thoughts about helicopter money. So the first question is: what argument am I (and Ben, and Adair) making?

Paul Krugman (2013): Helicopters Don't Help:

David Beckworth has a good piece on... the irrelevance of the decision to finance budget deficits by printing money as opposed to selling bonds...

In case 1, the government runs a budget deficit, which it finances by selling bonds.... At the same time, the central bank... buy[s] bonds from banks with newly created monetary base. I think we’re all agreed that the second part of this story isn’t very effective in a liquidity trap; the limitations of QE are why we’re even talking about helicopter money.

But now consider case 2, in which the government pays for deficits simply by “printing money”, that is, adding to the monetary base. How do these cases differ?... You may say that... you wanted an increase in government spending financed by the printing press. But why couldn’t you do that same increase in spending financed by bonds that the central bank promptly buys back?...

It’s the spending increase, not the printing press, that does it. As Voltaire said, you can kill sheep with witchcraft if you also feed them arsenic....

What you need to get monetary traction, as I pointed out long ago (and for the record, I do think I was the first to make this point) is to convince everyone that the monetary base will stay larger — to credibly promise to be irresponsible. The only way I can make sense of the call for helicopter money is to argue that for some reason the institutional setup — having the central bank finance the government directly — makes it less likely that the central bank will snatch away the punchbowl later. But that’s a very different argument from the one the helicopter advocates seem to be making.

bradford-delong.com: Grasping Reality with the Invisible Hand… 2016-07-31 18:16:25

Live from the Republicans Self-Made Gehenna: Dr.Cleveland: Decompensation:

One of the most useful psychiatric terms I've picked up in my travels is the word "decompensation"...

Decompensation is, just like it sounds, the opposite of "compensation." It is when a patient responds to stress or setbacks by getting sicker. The going gets tough, and the patient's symptoms get worse.

That doesn't fix whatever's causing the stress; it just deepens it. An alcoholic gets fired and goes on a four-day bender.  A bipolar patient who's having trouble finding work becomes too depressed to even leave the house. Just when the patient needs to step up and cope with a challenge, they become even worse at coping. Bad, bad times.

It's been no secret on this blog that I consider Donald Trump to have at least one fairly serious psychiatric condition. He is, to put it politely, a profoundly disordered personality. And under the stress of the campaign, he is going to decompensate badly.

Running for President of the United States is incredibly challenging and stressful, even for strong, sane people who have already run many successful campaigns. Donald Trump is neither strong nor sane, and he has never been elected to any public office in his life. Not dog-catcher, not zoning board, not public water commission. He is not going to be able to take this. He is going to crack.

In fact, he has already started.

Over the last few days, as the general election gets underway, he has done a huge number of maladaptive things: expressed his desire to punch various speakers from the Democratic convention, decided to rant on Twitter about how Mike Bloomberg was mean to him, and mostly damningly urged the Russian government to spy on his election opponent. None of that is rationally calculated to help him. None if it is something you would do to help yourself. And I don't think he planned to plea to Putin at all; it was just another troubled impulse he could not control. Lack of impulse control is one of his symptoms.

You can look at his behavior as demonstrating his lack of fitness for office, and you should. He is appallingly unfit for that office. But you can also understand what Trump is doing as the expression of psychiatric symptoms getting worse under pressure. Maybe that moves you to some compassion for him, and maybe it doesn't; Trump's condition prevents him from feeling compassion for anyone else, and in his current position he is extremely dangerous to our country. But we shouldn't necessarily lose our compassion because he has. We're bigger than he is.

Those symptoms are only going to get worse, because the pressure of the campaign is only going to get worse. I mean, the general election hasn't even really gotten started yet. Donald Trump is going to crack under that pressure, and he is going to do it in front of the entire world. I am not looking forward to watching that. But anything is better than watching him crack in the Oval Office.

bradford-delong.com: Grasping Reality with the Invisible Hand… 2016-07-31 18:13:56

Live from the Republican Self-Made Gehenna: Ilya Somins makes some typos. Shame on the Washington Post for not correcting them! I have cleaned his piece up:

Ilya Somin: How Trump Strengthens the Forces of Political Correctness:

Political correctness feeds on the perception reality that many right of center political views are really just a cover for racism, ethnic bias, religious bigotry, and sexism...

If Because many conservatives and libertarians are really just promoters of white supremacy and male dominance, there is no reason to take them seriously, and little will be lost if their views are suppressed they incur social obliquy marked by speech codes, “safe zones,” and the like.

That perception is massively reinforced and made undeniable when Trump does things like call Hispanic immigrants “killers” and “rapists,” claim that a Mexican-American judge’s ethnicity should disqualify him from hearing a case involving Trump University, call for a ban on Muslims entering the United States, advocate the massacre of innocent relatives of suspected Muslim terrorists, and generally indulge in rhetoric that differs little from that of David Duke and still maintains the active and enthusiastic support of large majorities of those in America who call themselves "conservatives" and "libertarians".

If Since the alternative to political correctness is Trumpism, then most all people not of actively bad of good will are likely to pick the former--not just minorities, but also many all whites with the moral conscience of even a gnat who thus oppose bigotry.

By winning the GOP nomination and becoming the leader of the main right of center party, Trump has already dealt a blow to the struggle against PC by making modern American "conservatism" and "libertarianism's" underlying nature undeniable**. To the extent Since the overwhelming bulk of so-called conservatives have embraced him, they enthusiastically and stridently validate the PC left’s claim that they are at best worse than indifferent to bigotry , rather committed and at worst active supporters of it....

Some conservatives and libertarians may think that there is no need to abjure Trumpist nastiness, because PC leftists will hate us regardless of what we do. From the standpoint of hard-core advocates of political correctness, there is little or no real difference between Trump and those who sit on their hands and do not oppose him like, say, Mitt Romney or John Kasich...

Beating Trump

MAKE NEWS

Trump owns the news cycle, he’s the headline every damn day, whereas Hillary’s nowhere to be found. Taylor Swift did not become the biggest star in America by laying back and resting on the laurels of “1989.” She had listening parties, of both professionals and fans. She delivered Christmas gifts and filmed the ensuing hysteria. And despite experiencing a backlash, she could still sell out stadiums all across this great nation of ours. You see the fans don’t care about the haters. Don’t piss in the wind complaining, best your enemies by playing their own game, but better.

SPEAK TO HIS CONSTITUENTS

Want to replace Taylor Swift, do her act better than she does. Or come up with something transcendent that eclipses her. This election is about persuading the undecided. You’ve got to speak to their issues and convince them. The anybody but Trump faction is never gonna vote for him, don’t bother preaching to the converted, if anything it alienates the middle. The middle is worried about jobs and their future. And you appeal to these people emotionally, you feel their pain, something Bill Clinton was so good at. Stop railing against the Donald and go after his fans.

INNOVATE

Kanye is the master here, he held rallies to roll out his fashion line and his video, and charged for the privilege of attending. Kanye thought outside the box, he realized it wasn’t about unit sales, but mindshare.

ENGAGE

The person with the best message wins online. If Hillary were smart, she’d get into a flame war with Trump, engage him on his own terms online, spontaneously, on Twitter. The eyeballs and the news would be overwhelming. Trump’s a man of no substance, Hillary’s a wonk. She’d win any battle if she only played. Furthermore, it would set up the debates, it would defuse Trump’s firepower and put him on his heels. And Hillary could reference the online shenanigans during the ultimate televised encounters. Once again, Trump wins by being outrageous, that’s why people tune in, to see what he says next, it worked for him in the Republican primaries. Hillary’s got to go for the jugular, she’s got to be tough, we know she’s got it in her, she’s got to stop playing soft grandma and become bad ass grandma, which will further demonstrate her ability to lead, it’s a win win. Hillary’s not touchy-feely and that’s okay with the women on the work front lines, who have to deal with a man’s world every day and know how to play rough. 1992 was a generation ago, those ladies pissed off that Hillary didn’t want to stay home and bake cookies are in retirement homes wondering how they’re going to pay the next bill, if they’re not still working. People want a fighter and a winner, and that’s Hillary, not Donald, and if she’d just take off the gloves, stop smiling and start sneering…she’d issue the knockout punch.

ISSUES NOT PENUMBRA

Don’t take the bait! Don’t react to Putinism or the Muslim inanities, this election is about economic security, plain and simple. Once Donald gets you off point, you’ve lost. If someone was gonna be turned off by Donald’s wild statements and flip-flopping they’d have already abandoned him. You think the press is doing your job, by hammering Trump every damn day, but when it comes to entertainment there’s no such thing as bad publicity. And Trump has made this election about entertainment. You can’t win on that level, he’s better at that than you are, but if you illustrate his inadequacies by challenging him, you’ll succeed. Trump is thin-skinned and cannot let a comment slide, he’s always got to react. Go on Twitter and ask him how he’s gonna balance the budget with his tax plan, ask him how he’s gonna repair our nation’s infrastructure, ask him how he’s gonna keep black people and Latinos safe. Own the issues, play offense, not defense, that’s when Trump looks worst, when he’s force to respond to specific questions far from his wheelhouse, the ones important to undecided voters.

It’s a game folks. And Trump has revealed it to be a completely different one from what has come before. And all the established players have been caught flat-footed. The Republican party, the media and now Hillary Clinton. Past is prologue. Don’t be one of the seven dwarf Republicans playing your own aged game as Trump clears the board. Bush had a plan, no one cared, they want action and emotion. Rubio had no substance. And Carson was a dodo and Christie was tainted. And while they were jockeying for position, Trump redefined the race and then won it, to everybody’s amazement.

He’s gonna go low. He’s gonna say things that are gonna make many wince. But his words won’t be so different from those used in bars and households all over America today. Decorum is out the window, everybody uses the F-word, life is a rap battle, and the person who believes they’re above this is seen as out of touch and ends up being squeezed out.

Beyonce tested limits and got even bigger. Standing up for something instead of just smiling and playing nice.

And the “Voice” contestants play by the rules and then never succeed in the marketplace.

And Drake releases new music constantly, he’s always in the news.

And Bieber is the biggest and baddest, and he’s left a trail of missteps in his wake, but no one who listens to his music cares, they just love the songs.

Sing your song Hillary. Say what you’re gonna do instead of claiming America is already great. Be a leader, something Obama has faltered at. Challenge Congress. Push back. Organize. Have us follow in your wake instead of you following in ours.

As for Goldman Sachs and the speech money…do your Checkers mea culpa, say you needed the money and you kept making the money because money is power and you needed to accumulate so much to take on the corporations. Make your supposed flaws your assets.

Today’s musicians may not be cutting edge musically, but no one has done a better job of harnessing the new communication tools to reach the populace. It’s musicians who dominate social media, it’s musicians who are now unfiltered and in the marketplace every damn day. Better to consult with Taylor and Kanye than Robby Mook. And Bill’s aged and out of touch and Obama is so busy playing nice that he might have beaten Romney but would be challenged in today’s world.

The battle will be won by making your own news, by controlling your own narrative, not by being interviewed on Fox News, but by being all over Facebook, Twitter and Snapchat. Never forget, the mainstream media is last, stories are built online. You can create your own narrative, musicians do it every damn day, Kim Kardashian is the master of this. Hell, she’s a good example. People hate her for having no talent. But you know what talent she does have? Making money. By staying in the news and appealing to those open to her message.

And many more people would be open to your message Hillary if you just got into the pit and fought it out.

You can do this, I know you can.

Don’t be afraid of mistakes, they’re quickly forgotten, step up to the plate and take some whacks, it’s the home runs we remember.

P.S. Own the criticism. Just like African-Americans took back the N-word and Obama called the Affordable Care Act “Obamacare,” tweet Trump and tell him it’s CROOKED HILLARY! And that you’d be tweeting from Benghazi, but you couldn’t get a plane there fast enough, just like you couldn’t get troops in to save…

P.P.S. Ask any golfer, you play to win or you don’t. Sure, Hillary might eke out a victory with her present strategy, but who’s she gonna kick if she fails but herself. No one is better informed on the issues than Hillary, no one knows better how to shepherd change through our system, she’s got to stop having her seconds telling everybody this and DEMONSTRATE IT!

~~~


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