Weekly roundup #26

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

A look at the summary table shows that many bearish signals are lighting up as the short-term momentum signal is less strong and in most cases below the medium-term trend signal. The European indices are still in a downtrend as some of the macro data is still at very low levels. The S&P500, Dow Jones and NASDAQ are also now in a downtrend. This is putting strong downward pressure on the markets as a whole. Based on the quantile structure, we can see some quantile 4 expressions which indicate a somewhat oversold level and could signal a small upward correction of the recent decline.

From a trend perspective, nothing really looks promising for long exposure as we see increased risk at the moment. As mentioned above, there is a relatively high probability of a near-term reversal at price levels on the NASDAQ, which has some quantile 5 and quantile 4 expressions.

On the short-term side, the NZ50 looks the most promising, with decent quantile-1 and quantile-2 prints. The index has a low probability of upside and a low strength measure. The NZ50 is likely to continue its downtrend.

LONG: NASDAQ for a mean reversion trade, short term

SHORTS:

Last weeks return (5 days:)

Long:

Short:

1. FTSE -0,78%

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.

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.

As a result, the projected probability of rising GDP momentum stays currently at around and slightly below 10%. The fact, that the indicator is still at very low levels and not improving further sustains the indicative problems of lower future returns. Looking at the 5-day moving average, we see a less volatile picture of probabilities and is currently also at and mostly below 10%, suggesting a declining GDP momentum.

Nothing has changed from last week with this indicator, we are still in an unfavorable regime for stock market returns. As the chart indicates, a lower probability predicts higher volatility and lower returns. This is a risk signal for current and possible future returns. A lower probability outcome is associated with a lower potential return and likely negative. 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.