The stealth decoupling sneaking up on portfolios

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 the 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 Asset Allocation 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 a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Bearish*
• Trading model: Bearish*

* 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 mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

A stealth decoupling
As the Sino-American trade war has progressed into Cold War 2.0, a consensus is emerging among analysts that the Chinese economy is starting to decouple from the rest of the world. However, in the short run, there is a stealth and surprising decoupling in performance occurring in global equity markets. It’s the US market from the rest of the world.

This development is important because US equities amount to roughly half of global equity market capitalization. The chart below of major markets relative to MSCI All-Country World Index (ACWI) tells the story. US relative strength peaked out in late August and began to roll over in September. At the same time, Japan has been climbing steadily, Europe has broken out of a bottoming process, and EM equities appear to be making a relative strength bottom.

We consider the implications of this emerging trend, and what it means for equity investors.

The full post can be found here.

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