Global Growth Scare = Trend Model Downgrade
Cam Hui | Jul 28, 2014 01:04AM ET
Weekly Trend Model signal
Trend Model signal: Risk-on
Direction of last change: Negative (Trading Downgrade)
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A downgrade in Trend Model signal strength
Late Friday, CNBC reported that Goldman Sachs downgraded equities to "neutral" over fears of a possible sell-off in the bond market:
Goldman Sachs downgraded equities to "neutral" over the next three months on Friday afternoon, citing the risk of a temporary sell-off in stocks following a sell-off in bonds.
The firm said the near-term risk/reward profile for stocks was less attractive, even as it reiterated a "strong conviction" that stocks were the best-positioned class over the next year.
My Trend Model also detected a number of signals of global weakness, though the reasoning behind my downgrade were different from Goldman's. Even though the absolute level of the signal remains "risk-on", the weaknesses led to a directional change which amounted to a trading downgrade. As the chart below of real-time (not back-tested) past trading upgrades and downgrades show, they have had a reasonable track of signaling short-term stock market movements.
When I put it all together, risks are rising and a Trend Model downgrade is warranted. Nevertheless, the intermediate term trend for US stocks is still up so it's not time to panic. If recent history is any guide, any pullback is likely to be less than 5%.
My inner investor therefore remains overweight US equities. He is not taking any action but he is keeping an eye on how the situation is developing as he doesn't want to react to every little twist and turn of the market. My inner trader, on the other hand, has sold out of his long equity position and he has taken short positions in stocks.
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Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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