Sunday, October 11, 2015

A "What's-the-credit-limit-on-my-VISA-card" buy signal

Great headline, long post at Humble Student of the Markets:
Trend Model signal summary
Trend Model signal: Neutral (upgrade)
Trading model: Bullish

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 Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.

A washed-out market
Back in the day when I was a long-only equity portfolio manager, the market would occasionally get hit with emerging market crises. On one occasion, I can remember being in investment meetings discussing how to tweak our stock picking quant models in light of such an event. A manager on the emerging market team made the astute comment that you couldn't possibly model the stocks in a country undergoing a crisis based on anything but technical analysis. At inflection points, it is the technical factors start working first, followed by fast moving fundamental models like estimate revision, then fundamental factors like growth and value.

I remember that insight well and it was based on those comments that after 9/11, I moved my quantitative equity market-neutral portfolio to an all-cash position. I recognized that no quant model was going to work very well in that situation. The fundamental ratios would be all outdated and no sane person would trade off them, but no one quite knew what earnings estimates were until the dust had settled.

I believe that we are at a similar kind of turning point in the market, but on the upside. Market psychology can be revealing, especially when it rallies in the face of bad news. We saw that when the stocks rose on the news of a highly negative Employment Report. We saw a similar reaction last Wednesday, when German trade figures came in below expectations but the DAX Index ended the day in the green....MUCH MORE