Headlines
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Macro model flips to cash:
The Macro Index Model is now reflecting some of the horrid economic data released over the past two months. As a result, it has dropped to the lowest level in a decade, and moves to cash. This has happened before the last 3 recessions, and returns tend to be poor with such a low reading. The only potential saving grace is the positive momentum that had built up.
The bond market calms down:
Volatility in the bond market spiked in March, like most other assets. It has since calmed down and the MOVE Index has dropped to its lowest level in a year. Other times it cycled from a multi-year high to a one-year low, it often perked up again, but that was an inconsistent influence on bonds, stocks, and gold.
A bit weak: Despite a late-day rally pushing the S&P 500 up more than 0.4%, the Up Issues Ratio, Up Volume Ratio, and New High / New Low Ratio were all below 0.5, meaning more selling than buying interest. Of the 21 times that's triggered since 1965, the S&P added to its gains over the next month only 7 times, with a median return of -3.7%. A single day isn't enough to break a trend, but bulls should look for better participation in the coming days.
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Smart / Dumb Money Confidence
Smart Money Confidence: 69%
Dumb Money Confidence: 49%
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Risk Levels
Stocks Short-Term
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Stocks Medium-Term
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Bonds
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Crude Oil
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Gold
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Agriculture
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Research
BOTTOM LINE
The Macro Index Model is now reflecting some of the horrid economic data released over the past two months. As a result, it has dropped to the lowest level in a decade, and moves to cash. This has happened before the last 3 recessions, and returns tend to be poor with such a low reading. The only potential saving grace is the positive momentum that had built up.
FORECAST / TIMEFRAME
None
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One of our main Buy/Sell Signals has flipped to a sell. The Macro Index Model, reflecting mostly monthly economic data, has deteriorated the most since the last recession.
As Troy noted when he first created the signal, macro deteriorates from time to time, which is normal during the ebb and flow of an economic expansion. To differentiate temporary slowdowns from real problems, the model looks for significant macro deterioration. It combines 11 diverse economic indicators to determine the state of the U.S. economy:
- New Home Sales
- Housing Starts
- Building Permits
- Initial Claims
- Continued Claims
- Heavy Truck Sales
- 10 year – 3 month Treasury yield curve
- S&P 500 vs. its 10-month moving average
- ISM manufacturing PMI
- Margin debt
- Year-over-year headline inflation
The model leans towards housing & the labor market. Housing indicators are extremely useful as leading economic indicators, and there are plenty of academic papers that explain why. Labor market indicators are very timely for calling recessions, with few false signals. Stock market investors should be bullish when the Macro Index is above 0.7, and bearish when the Macro Index is below or equal to 0.7.
Not only has it dropped below 0.7, it has gone further than any point over the past decade, and receded below 0.6. According to the Backtest Engine, future returns in the S&P 500 have been relatively subdued after such low readings.
We can ask the Engine to ignore multiple readings in a row and exclude any of them that triggered within 12 months of another signal.
Returns degraded after these, in large part because it triggered early in the very long-term topping process before the last two recessions.
If we only held the S&P 500 following months when the signal was above 0.6, it would have showed a better risk/reward profile then simple buy-and-hold, even with getting caught during the severe March drawdown.
This signal may be different in that it just ended a record run in positive territory. We've seen time and time again over the years that long streaks of positive momentum which ended suddenly usually had more positive returns than those following shorter bouts of positive momentum.
If we only look at times when the signal fell below 0.6 for the first time in at least two years, then the S&P's future returns were better. Three suffered major losses, and three escaped mostly unharmed.
The biggest risk from here is persistency. If the signal continues to hover below 0.7 in the months ahead, like it did during the last two bear markets and recessions, then it significantly raises the risk that we're in a tough, long slog and not a rapid rebound. The most positive signals in the table above saw the model avoid much more deterioration, and typically rebounded within two months.
The point of using a mechanical system is it that takes emotion and judgment out of the equation. That's a good thing for many, maybe even most, of us. For those who use some discretion, when we see conditions deteriorate like this, combined with a rebound in sentiment, it makes sense to be cautious. The biggest caveat against the model's warning is the speed of the decline and recovery, as well as fiscal and monetary response, which is all of which are beyond what any of the other signals witnessed.
BOTTOM LINE
Volatility in the bond market spiked in March, like most other assets. It has since calmed down and the MOVE Index has dropped to its lowest level in a year. Other times it cycled from a multi-year high to a one-year low, it often perked up again, but that was an inconsistent influence on bonds, stocks, and gold.
FORECAST / TIMEFRAME
None
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The bond market is calming down. That market's equivalent of the VIX "fear gauge" has now dropped below its levels from early this year, before the pandemic.
The bond market is about 25% larger than the stock market, and its moves can drive massive flows between assets. Theoretically, a drop in volatility in this massive market should calm investors across all assets.
For the MOVE Index itself, when it cycles from a multi-year high to a one-year low, it has tended to perk up again at some point during the next 1-2 months.
Unlike the stock market, where there is a more consistent inverse relationship between stock prices and volatility, there isn't such a close relationship in other assets like bonds. Even though the MOVE Index tended to rebound after a cycle like this, it didn't necessarily mean losses on bonds.
For the stock market, a calmer bond market was mostly a good thing, but not a panacea. It would have given us a false and awful sense of confidence in 2000 and the summer of 2008.
We might reasonably assume that if the bond market is calming down, then investors may not see much of a demand for safe havens like gold. That assumption did not prove to be effective.
While the metal did lose some luster after a couple of the signals, it mostly rose in the months ahead.
Lower volatility is, almost by definition, a good thing. That's almost always true in the stock market. In other assets, it's not quite as clear but still generally holds true. In the case of bonds, when we see a spike and then calmer conditions, it's still mostly a good sign, we just shouldn't make too many assumptions about how good it is, and how much it translates to other assets like stocks.
Active Studies
Time Frame | Bullish | Bearish | Short-Term | 0 | 6 | Medium-Term | 12 | 0 | Long-Term | 37 | 3 |
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Indicators at Extremes
Portfolio
Position | Weight % | Added / Reduced | Date | Stocks | 49.9 | Reduced 10.3% | 2020-04-23 | Bonds | 0.0 | Reduced 6.7% | 2020-02-28 | Commodities | 5.1 | Added 2.4%
| 2020-02-28 | Precious Metals | 0.0 | Reduced 3.6% | 2020-02-28 | Special Situations | 0.0 | Reduced 31.9% | 2020-03-17 | Cash | 45.0 | | |
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Updates (Changes made today are underlined)
In the first months of the year, we saw manic trading activity. From big jumps in specific stocks to historic highs in retail trading activity to record highs in household confidence to almost unbelievable confidence among options traders. All of that came amid a market where the average stock couldn't keep up with their indexes. There were signs of waning momentum in stocks underlying the major averages, which started triggering technical warning signs in late January. The kinds of extremes we saw in December and January typically take months to wear away, but the type of selling in March went a long way toward getting there. When we place the kind of moves we saw into March 23 into the context of coming off an all-time high, there has been a high probability of a multi-month rebound. After stocks bottomed on the 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. While other signs are mixed that panic is subsiding, those thrusts are the most encouraging sign we've seen in years. Shorter-term, there have been some warning signs popping up and our studies have stopped showing as positively skewed returns. I reduced my exposure some on Monday and a little more on Thursday and will consider further reducing it if we drop below last week's lows on SPY. Long-term suggestions from the studies remain robust, but shorter-term ones are significantly less so, and stocks still have to prove that we're in something other than a protracted, recessionary bear market.
RETURN YTD: -9.8% 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
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Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
Sector ETF's - 10-Day Moving Average
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Country ETF's - 10-Day Moving Average
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Bond ETF's - 10-Day Moving Average
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Currency ETF's - 5-Day Moving Average
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Commodity ETF's - 5-Day Moving Average
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