Category Archives: Model Prediction

1998, Weekly wrap, 9/10-16/2017

Macro and Markets

What difference a week makes! The S&P finally made it over 2500 on Friday, brushing aside yet another NK missile test. While Amazon and Alphabet are still wallowing, the semiconductor index conclusively broke out of its triangle. Risk-off assets were sold: gold finally and bonds right after the yields were at resistance the previous week.

My first prediction for a final bubble phase of this market appeared in November 2016. In March 2017, I added that S&P will end the year with a “27 handle”. The words “post August moon-shot” appeared in the very first weekly wrap, where the target was set at “the S&P to 3300-3500 and the NDX to 10K in 12-18 months”, which, to be honest, were meant to be on the safe side. I didn’t really have to write all the preceding words to state my position since there is one number that that succinctly captures them all: 1998, as in the year 1998 in relation to the first tech bubble. E’nuf said.


Overnight BTC dipped below $3000, ETH to $200 and LTC was in the low $30’s. The sentiment was such that I’m willing to go out on a limb and call a bottom to this correction — or shall I say the conclusion to this particular bubble. I’m beginning to regard bitcoin as a series of bubbles each with a fresh group of hopefuls. Please note that I’m not a crypto trader and don’t take this as trading advice. Do check out the two bitcoin links below especially Charlie Bilello’s.


The Apple ($AAPL) puts were closed on Monday with a 50% gain. They would have expired today had I held but couldn’t take the chance over the iPhone X launch. I added to PM miner hedges on Monday such that I’m only 30% long. On Wednesday I sold puts on Activision Blizzard ($ATVI) as an attempt to acquire the stock cheaper. In addition, I swapped Qualcomm ($QCOM) for more Visa ($V) but regretted it almost instantly. I still have semi exposure elsewhere though.

Good Reads

None of the above is investment advice, the standard disclaimer applies.

On Bubbles

Charlie Bilello from Pension Partners pointed out that the CAPE is now over 30. His piece is balanced and well written as always but it won’t prevent others from using the data to once again proclaim that the market is expensive and that we’re in a bubble, etc. So far so good and I might even agree. But if the implication is that there is impending doom then I have to beg to differ.

Many writers, the eminent Larry Swedroe among them, have argued that the historical context of the P/E ratio has evolved. I find no reason to doubt them, so let’s take the shorter term relative movement as an indication of multiple expansion or contraction. In 1921-29, the CAPE ratio went from 5 to 30, for a gain of 6X. In 1982-2000, the CAPE ratio went from about 7 to 44, another 6X. The CAPE low of 2009 was about 12.5. Now I’m not about to forecast a CAPE of 75 (although within the realm of possibility, cf. Japan 1990), but surely an increase of mere 2.5X can’t be the end of this bubble if it can be called such? If this is indeed the coming-home-to-roost of all the QE by all the central banks since the great financial crisis then we will have much, much further to go. To say otherwise is to say “this time is different”.

I have been saying on this blog since last November that we’re entering a generational bull market. Currently the model is seeing a consolidation low in July, flat in August, but a truly maniacal phase for 12-18 months thereafter.

Speaking of bubbles, the Collaborative Fund recently published The Reasonable Formation of Unreasonable Things. Here are a couple of gems:

The majority of your lifetime investment returns will be determined by decisions that take place during a small minority of the time.

Bubbles are not anomalies or mistakes. They are an unavoidable feature of markets where investors with different goals compete on the same field. they would occur even if everyone was a financial saint.

It’s a hallmark of thought-provocativeness that the readers may draw different conclusions from the ones the author intended. It reads to me that one of the article’s main purpose was to warn long-term investors of the dangers of irrational pricing during bubbles. Pointing out the difference in goals and time frames was a beautiful rebuttal to EMH which sometimes is used to justify “buy at any price”. But to me the greater take away was the importance of the bubbles — rational, inevitable, and the driver of long term returns that those smooth, monotonically uptrending curves from a fantasy land called Excel would have you overlook.

Two recent articles by Jason Zweig (here and here), speaks to the difficulty of riding a bubble: specifically, a money manager Samuel Lee and his experience with Ethereum. Except in this case, the final chapter, or more than likely the second act, has not yet been written. Jason Zweig is too good a writer and has too much understanding to express an opinion other than saying it’s really hard. So here I would like to give myself some pointers that I hope to follow:

  • Participate — showing up is half the battle, especially when others are calling it a bubble.
  • Don’t be greedy. Position size control is paramount. Set a volatility limit as well as a position limit.
  • Do not envy those in earlier with a lower cost basis, nor those in later with a larger position.
  • Take profits, often. It’s impossible to catch the exact bottom or top. Play with the house’s money.
  • Do not take positions to justify a point.
  • The majority of the portfolio should be in an allocation that one would have in the absence of bubbles.

The last point is an import one for me. My speculative positions are benchmarked against cash, not the 60/40 much less 100% stocks. Why would it be otherwise if the bubble is expected to be short lived? Taking profits, even partially, forces one to re-evaluate the whole position.

We live in interesting times. I see three bubbles in progress or developing that require very different treatments. In cryptocurrencies, I have taken a position and am simply content to sell a little bit as prices rise. In PMs I have a 15% baseline allocation but trade around the cycles. Exposure can be increased by being in silver, miners, 3x ETFs and options while maintaining the same nominal allocation. In stocks and Nadaq in particular, I’m willing to increase the overall allocation along with highly leveraged option positions. These are in contrast to their neutral allocations of 0%, 15% and 45% (for all equities), respectively.

The next year or two should be very interesting.

A Correction May Be Upon Us

The long waited correction may be finally upon us. The 1%+ drop in the S&P on Mar 21st was the first in over 100 days. The bounce on the 22nd was anemic and accompanied by low volume. Most of today (23rd) was spent in positive territory but sellers took over in the last two hours — a very tell-tale sign. As in the chart below, we have broken below the trend line from the November election. Given this evidence, I’m of the opinion that an intermediate correction of months in duration has started.

I’ll go out on a limb again in trying to forecast a duration and depth of this correction. My model is signaling a bounce in April and a resumption of decline in May with a hard drop and bottom into July. I have little confidence in the exact path but a correction of 4+ months in duration will match that of the rise, a symmetry that would be appealing. The Fibonacci levels for this “Trump rally” aligns nicely with regions of minor support/resistance. I don’t trade at those time intervals but it’s interesting nonetheless. Given the nature of the in-flows of this rally, and that the market is never kind to Johnny-came-latelies, there is a high probability we’ll retrace all the way to the November bottom and more. I would go so far as saying that the “Brexit” bottom of 1991.68 is also in play.

Why do I bother with this kind of predictions and what do I plan to do with that information anyway? First and foremost it’s to develop a feel for the market and secondly to build confidence in the model. I’ve been clear on my approach to market-timing. My main goal is to be able to avoid the “big one” and ensure that my family is provided for. The skills that I’m honing are essential in deciphering the macro trends.

Since the inception of this blog, my most significant market timing move, in terms of duration and amount of capital, was the avoidance of nominal bonds. 35-40% of my passive portfolio has been in stable value funds paying 2 or 3% per annum. It’s been a good move — AGG has lost 3% since Aug’16. Compared with that that my pruning of stocks is rather opportunistic. In full disclosure, my pace of selling picked up in Feb/Mar, but it was not due to my market view. The main reason was the rotation in my fixed income allocation precipitated a desire to limit dividend payouts. This morning I closed out the MCD/DIS option spreads mentioned in this post, along with a couple other positions to give me a 12.7% cash position in my active portfolio. I don’t have plans for more sales; instead there are 7-9 buy candidates. My longer term view remains that we are in a full-blown bull market; but first, we’ll have to wait out this correction.

Model Predictions, Mar 2017

I first spoke of the equity pricing model I follow in this post last November. Though I don’t plan on giving the details of the model, I do want to give updates as projections evolve. The model is but one input in formulating my market narrative, though an important one.

Last November, the model was signaling a dramatic final bull phase for this market, to the extent that I was willing to put a price target AND a time, which I’ll no doubt live to regret, namely S&P of 3400 in Q4’18. Updating with more recent data and some fine tweaking later, the model is still forecasting a sharp upward trajectory but also a little more volatility in 2018. The predicted peak is still a very respectable 3000+ in the S&P and the timing has been extended into 2019. There wasn’t much change in 2017 where I still expect the S&P to end the year with a 27 handle.

There is negligible impact on actual investment decisions — being directionally correct is can be asked for anyway. I have already carried out the slight increase in equity allocation in my passive portfolio, discussed here and here. I’m in the middle of a more dramatic over-haul of my active portfolio that I’ll go into in a future post. There is a final batch of stocks to buy and sell; the greater quandary, as always, is the timing. The market has been running hotter than the model predictions — a small correction from April to July has been anticipated, besides there are other voices calling a correction in May.

The most sensible course of action seems keep writing near term puts on the stocks I’ve picked out and let the market come to me.

Bull Bear Markets and P/E Ratios

I haven’t shown any charts in my writing so far on this site even though I use them regularly to get a feel for the overall market and for entry/exit points. To me technical analysis is just another arrow in the quiver. I’m not terribly interested in philosophical debates on why or how it works; it works for me, that is sufficient. Anyway, in today’s post, I want to share a few charts with you.

The first is the daily on the S&P showing the narrow trading range it has been in since December. This, rather than the “round number effect”, is why decisive breaks of DOW 20K and S&P 2300 are significant. In this struggle, bulls are having a slight upper hand but recent volume is not confirming. Overall, I think there is equal probability to breaking out and sideways, and a lot less to breaking down. A chartist will tell you that such a consolidation pattern will more likely than not resolve in the same direction as prior to the consolidation.

The next chart is from an excellent piece from Doug Short on Bull and Bear markets. It’s well worth a read. I agree with the bull/bear classification he used. The trend lines are mine. Note the red, power-up lines. The bull markets from the 1877 and 1949 lows started with those power moves and then slowed down. The bull markets from the 1921 and 1982 bottoms ended with them. The current bull market has a section, 2011-13, that seemed to follow the same slope. It remains to be seen how it will play out. I drew the last line — obviously one or many different ways it can be drawn — to coincide with my S&P target of 3400 in Q4’18 that I first laid out here.

The discussion on P/E ratios was fascinating. The referenced piece from Ed Easterling is also well worth a read even though I don’t agree with its conclusion. P/E ratios are important, but they are a derived metric, while price should always be the primary signal. The key chart from that work is below. Bull and Bear markets are indicated with green and red bars with historic P/E ratios underneath.

Again the difference in opinion lies in the classification from 2009 onwards. To me the disagreement is profound. If my model is correct, the P/E ratio will continue to expand and will likely approach 40, a territory only before seen during the dot-com bubble. The model also predicts a drastic but not cataclysmic decline that will likely bottom at a historically-still-elevated P/E in 2020. If that turns out to be the case, anyone insisting on a single-digit P/E stands to miss the boat. Profound indeed.