Pre-FED Market Update

This is an out-of-cycle update, but given the situation it is warranted. Today the FED will announce their plans for interest rate changes. Our models are showing an elevated risk of downside moves. As reported on Bloomberg this morning, the market is pricing in a 50% chance of a 50 basis point reduction. This gives us concern, because if they deliver a 25 basis point reduction (which is widely believed to be the practical solution) there could be a negative market reaction. Therefore, we have removed our leveraged positions. Our non-leveraged index positions are still in-place.

Market update 9.14.24

This week’s market movements were unusually fast compared to our traditional entry cycles. In last week's post, we anticipated sideways or choppy trading as the market prepared for the next bullish wave, which we expected to coincide with the FOMC rate cut next week. However, the market swiftly moved through the consolidation phase, with SPY up 4% week-over-week and QQQ nearly 6%.

Our model's signals triggered an entry window on Thursday, which closed quickly by Friday—an uncommon occurrence. This rapid shift raises concerns that an underlying factor could trigger a quick sell-off.

As of Friday's close, our model indicates a moderate pace of bullish movement in the coming week. We will monitor the situation closely and set tight stops on our leveraged positions.

Market update 9.7.24

This week’s market activity trended notably downward, as we anticipated in last week’s update. Price movements for SPY and DIA aligned with our model’s projected one standard deviation variance. While QQQ slightly exceeded this range, it’s not entirely unexpected, as a one standard deviation move is expected around 68% of the time in a normal distribution. Many television commentators seemed puzzled by the Tuesday sell-off, citing a lack of clear catalysts. However, having tracked our indicators for over a decade, we know that this kind of movement often occurs without an obvious trigger. That’s the advantage of our model—we frequently spot potential market shifts that others miss. While no forecast is flawless, our predictions are typically quite close.

Interestingly, the market has quickly recalibrated after this recent downturn. Our indicators are nearing signals of a bullish turn, although they haven’t fully aligned just yet. We anticipate a significant bullish move, likely to coincide with the upcoming September FED meeting. Whether the rate cut is 25 or 50 basis points, it seems poised to be met with strong enthusiasm. We will continue to monitor our indicators closely to see if this scenario continues to unfold as expected.

As we look ahead to next week, we expect further downside pressure or potentially choppy trading as the market works through the final stages of this pullback.

In the table above, our model's predicted change indicates a slightly negative bias for all three indexes over the next seven days.

The whisker plot above shows an improving trend as we look out 14 days or more into the future.

The bar chart above shows a significant improvement in the probability of positive return after the 14-day mark. We think this is aligned with the FOMC rate cut decision planned for mid-September.

Market Update 8.30.24

Once again, our 7-day predictions were remarkably accurate, staying within a quarter of a standard deviation across all three major indices we track. As anticipated, the markets remained generally flat over this period.

Looking ahead to next week, we foresee a similar trend. While there may be a slight upward bias, the probability of a significant upward move is low. Additionally, there is considerable downside risk if traders react negatively to unfavorable news. Although this outlook aligns with the recent medium-term market rally, it reinforces our view that portfolio managers should consider maintaining neutral risk positions in the coming week.

Our model's outputs closely mirror last week's results, driven by the consistent market conditions that serve as our inputs. The price targets have been updated to reflect the latest closing prices as of August 30, 2024.

The whisker chart above highlights significant standard deviations, reflecting a considerable level of historical market indecision under similar conditions dating back to 2012.

The bar chart above illustrates the probability of positive returns over time. The model's nominal probability of positive return is 63%, so when observed probabilities fall below this threshold, it signals historically significant downside risk in the market.

Market Update 8.24.24

This week’s market performance closely mirrored our projections from last weekend. The predicted end-of-week prices for the DIA, SPY, and QQQ were remarkably accurate, reflecting the precision of our forecasting models.

As we look ahead, the market appears to be approaching a medium-term exhaustion point. Our model indicates a significant decline in the probability of positive returns, now falling below our nominal threshold of 63%. For the DIA, the probability of a positive return is a mere 45%, accompanied by 7-day predicted changes that come with wide standard deviations, extending into negative territory. Investors holding leveraged bullish positions should proceed with caution, as the market’s current dynamics suggest increased risk.

Model outputs as of market close on 8.23.24.

The chart above displays the predicted changes in selected market indexes, with whiskers representing one standard deviation. Notably, the 7-day standard deviations extend significantly into negative territory, suggesting that any "bad news" could trigger substantial market pullbacks next week. On the other hand, there's also a considerable potential for gains, as the upper whiskers indicate possible extensions into positive territory. As a result, our outlook on the market is neutral at this point—neither bullish nor bearish.

The bar chart above illustrates the probability of positive returns across different time horizons. Our model sets the nominal probability of positive returns at 63%. The probabilities shown in the chart fall significantly below this average, signaling an exhausted medium-term bullish market.