Weekly roundup #20

Forward Return Analysis & macro data roundup

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This is a new weekly series where you will get a number of indices and ETFs analyzed using the "Recognizing Market Chaos" framework. I will highlight the best opportunities based on the overviews and include the image in the blog post. This is the first post for the new theme, so I need a little more time to adjust the content and find the right way to deliver the most value.

For an introduction, see the posts on recognizing chaos in the market.

I made some other changes and improvements to the model. I added a likely estimate of upside momentum in forward returns (gray line). This is another layer to assess whether the forward returns structure is supported by all possible estimates. Then I added a volatility analysis to the model, shown in another image. This feature added another 3-8% of validity to the model (depending on the asset). Also the overview now contains a signal strength column, which shows the relationship of the bullish probability and quantile prints ranging from 0 to 4, where 4 is the highest signal strength.

Another update to the model, resulting in another 5% improvement in the prediction of the return. I also split the momentum indicator into two parts, a trading part that optimizes between 5 and 30 days, and a trend part that optimizes between 63 and 126 days. The first subplot now shows the momentum indicator as a color code for the price index. Green is bullish and red is bearish.

Another addition is the forward return model for two more time frames, the 5-day forward return and the 10-day forward return. In the upper left corner you can see the r-square for the validity of the model.

Index overview

Most indices are still in an uptrend and are therefore - with a few exceptions - in an bullish regime. But we are now seeing some changes in the regime, especially for the economic sensitive / high beta index like BTC and ETH, which are now bearish.

In the USA, the S&P500, the Dow Jones, the NASDAQ and the Russell 2000 are all in an uptrend. This result continues to support the strong price appreciation regime in the stock market. "However, the term return structure determined using the quantiles shows a weak to moderate return structure (slightly negative to neutral 15-day term returns), especially for the major indexes such as GSPC, DJI, NASDAQ and Russell." This structure has not changed from last week's report. The futures indicators have also shifted slightly lower and are trending more down than up.

For the VIX, the signal has changed to a bullish structure and now shows supportive forward yields. After today's decline in the index, we still see a lot of upside potential and a very strong index. The recent forward yields are all in quantile 5 where the median is very positive. The bull probability is also very high at 71% right now.

On the short side, the NZ50 performs the worst with one print in quantile 1 and four prints in quantile 2. The index has changed its bearish bias, and the upside probability and strength index does not suggest that this will change in the next 5 to 15 days.

LONG:

New: 3 different time frames for the forward return model

SHORTS:

Last weeks return (5 days:)

Long:

1. VIX -8,24%

Short:

1. XAX -0,03%

ETF implied macro forecasts

This is a new model designed to simply focus on the price movement of the various ETFs compared to the macro signal model. As I have stated several times in recent weekly roundups, focusing solely on price movement and momentum is what makes us money. So why don't we also use the information stored in various ETFs that are mainly judged by momentum (bullish/bearish) and extract the given information for GDP, leading indicators or capacity utilization. The next images show the results of the model. The full set is behind the paywall.

GDP implied by ETF price action

The above inputs now form the core structure to explain the current GDP dynamics (3-month difference in GDP growth). In general, we want to see rising GDP momentum in conjunction with rising stock price momentum. By backtesting it becomes clear, that rising GDP momentum is associated with an increased likelihood of positive returns.

This is not the only factor to be evaluated, but as a general basis it is an important component. At this point, the information implied by the exchange-traded funds becomes more volatile, as we see some positive crossovers of the mean values within the model.

As a result, the projected probability of rising GDP momentum stays currently at around 20%. Looking at the 5-day moving average, we see a less volatile picture of probabilities, still below 50%, suggesting a declining GDP momentum. For further information, the same result is currently proposed by using the OECD leading indicator for the U.S. in the same analytical framework.

Impact scores on the Model

Below you can see the model impact scores, based on the shapley values. AGG has the highest impact, whereas GLD and UNG have the lowest impact.

Yearly coupon:

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