Cam Hui | May 18, 2015 02:22AM ET
Trend Model signal summary
Trend Model signal: Neutral
Trading model: Bearish
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 which seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual (not backtested) signals of the trading model are shown by the arrows in the chart below. In addition, I have a trading account which uses the signals of the Trend Model. The last report card of that account can be found here.
Update schedule: I generally update Trend Model readings on )? That what the stock market felt like last week.
The SPX and OEX reached all-time highs, but market internals were unenthusiastic with exhibitions of positive momentum. As the chart below shows, RSI(14) remained in a tight range and behaved much like it had in the past few weeks when the market oscillated in a tight band. The % bullish metric flashed a negative divergence and % above the 50 day moving average was also range-bound.
Other US stock market indices were not confirming the new highs either. The NASDAQ Composite, Russell 2000, the DJIA and DJTA were all below their highs, though the Dow was very close (see my post How worried should you be about the weak DJ Transports?). Moreover, all of the averages shown in the chart below are exhibiting a disturbing sign of having breached an uptrend, indicating a loss of momentum. I was informed by another technical analyst that I had turned bearish too early, as such formations often resolve themselves with a sideways consolidation and sometimes a rally to a marginal new high before rolling over.
Looking abroad, SPX strength hasn't been confirmed by the European averages either (via the FTSE 100 and Euro Stoxx 50). Both European averages also display the same characteristic breach of uptrend lines seen in the US averages.
To be sure, not all inter-market analysis is painting a bearish picture. Despite the weakness in Europe, the technical conditions of the Greater China stock markets (the Shanghai Composite, Hang Seng, Taiwan Weighted, KOSPI and ASX All Ordinaries) are mostly healthy. But then if US equities have to depend on Chinese stimulus as a source of global growth, we would indeed be scraping the bottom of the barrel.
Score breadth, momentum and inter-market analysis as bearish.
I saw a number of bulls get very excited when the Bespoke ).
There is no doubt that the NAAIM exposure index is a bullish sign, but the AAII results have to seen in context, as the high level of neutral opinions pushed the AAII bull-to-bear spread to an overall neutral reading. While I am not a big fan of opinion surveys, as opinions can move on a dime, surveys where people put real money on the line are better indications of investor opinion. My own interpretation of the AAII sample and Rydex data are pointing to neutral sentiment readings.
Other indirect indicators of sentiment, from option data, indicate that the market is complacent and showing no fear. The chart below of the term structure of the VIX, the equity-only put-call ratio and the VIX Index itself, where high readings indicate fear and low readings indicate greed, are all showing complacent readings.
Moreover, the all three versions of the ISE call-put ratio (total, equity-only and index and ETF) moved above the 200% level on Thursday, which is a rare occurrence. Though the sample size is small and there was one important exception at the 2009 market low, such occasions have not been bullish signs in the past.
Dana Lyons looked at the ISE index and ETF data and came to a similar conclusion:
Score sentiment models as mixed to slightly bearish.
h3 The growth scare continues/h3The US macro outlook is shaping up to be the "mild industrial recession" postulated by Gavekal has suggested that global sales growth may have peaked for this cycle.
To be sure, not all indicators are pointing down. Here are a number of signs that can be interpreted bullishly:
This review is much too long and it`s time to wrap up. In summary, the new high shown by the SPX last week is unconvincing. Market action continues to be suggestive of a wimpy bull-wimpy bear, range-bound market. Short-term indicators like this one from IndexIndicators.com show that readings are nearing levels where the market has sputtered in the past few weeks. Indeed, this chart of net 20-day highs - lows rolled over on Friday, even as the index made a marginal high.
My inner investor remains cautious, but not overly panicked. My inner trader remains short. Should a decline materialize this coming week, my inner trader will be watching for signs of negative momentum on prolonged oversold conditions. Otherwise, his base case is a brief market swoon, to be followed by the usual short rally - until the real bear episode begins.
Disclosure: Long ARCA:SPXU, NASDAQ:SQQQ
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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