The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or an All-in-One subscription.
Included in this report:
- Year-to-date performance
- Weekly summary.
- Update on market positioning.
- Stock market forecast.
- Capital markets update.
1. Year-to-date performance
We use two long-only cross-sectional momentum strategies to generate signals for capital markets and factor ETFs. See Section 3 below for open positions and signal updates.
Year-to-date, the weekly report strategies are up 26.1% (equal allocation, no leverage) versus a gain of 23.1% for the SPY ETF. Gold (GLD) is up 28% year-to-date. Tech stocks (QQQ) have gained 21%. The US dollar index (UUP) is up 6.4%, and long-duration bonds (TLT) are down 2.4%.
Despite the strong correlation between the ensemble (WeeklyReport) of the two momentum strategies and the stock market (SPY), a brief period of outperformance in early April of this year accounts for the higher return. Note that the strategy’s beta over the last 10 years is about 0.45.
2. Weekly Summary (October 7–October 11, 2024)
- Stocks ended the week with gains despite a worse-than-expected inflation report and escalating geopolitical tension.
- Large-cap stocks (SPY) gained 1.2% to end the week at new, all-time highs.
- Long-duration bonds (TLT) fell 1.9% due to worries that the uptick in inflation will delay interest rate cuts.
- Commodities (DBC) were little changed. See Section 5 for more details.
- The US dollar index (UUP) ended the week higher as the probability of another 50 basis point cut fell to 0%.
- Since January 3, 2022, bonds (TLT) have been down 31%, while gold and large-caps (SPY) have gained 43.6% and 27.1%, respectively.
- For the week, the equally weighted magnificent seven stocks index fell 1%. TSLA plunged 12.9%, but NVDA gained 7.9% for the week.
- The tech sector (XLK) gained the most this week, by 2.5%. The utilities sector (XLU) fell the most, by 2.5%.
Bandwagon Effect
The bandwagon effect is a psychological phenomenon where people do something because others are doing it. It’s a cognitive bias that can be caused by a variety of factors, including social factors: People may want to be part of a group that seems likely to win.
The bandwagon effect is self-reinforcing, meaning that it becomes stronger as more people join. It can be observed in many areas, including financial markets: People may invest in a particular asset because it seems to be popular.
Source: Google Generative AI
Social media has exacerbated the bandwagon effect due to the dominance of permabull accounts that promise a sustained stock market uptrend. However, the majority of these accounts, along with their followers, lack a strategy to handle market shocks caused by exogenous events.
In the 1990s, people referred to the bandwagon effect as “irrational exuberance” and “reflexivity.” The uptrend ended with a 3-year bear market shock, during which many investors lost most of their money. Then, the real estate bubble in 2007 caused another shock, resulting in the loss of fortunes for many more investors, including the new investors who had replaced the old ones during the dot-com bust. The central bank took on the role of a market maker to guarantee a resumption of the uptrend. This slowly resurrected the bandwagon effect until the pandemic shock, when again losses for investors mounted. The government printed money to support the market, and they succeeded, but inflation spiraled out of control. The bandwagon effect of cognitive bias peaked in late 2021, and then one of the worst shocks occurred with both stocks and bonds falling. The government responded to these new shocks by implementing massive deficit spending. However, we are currently experiencing a new phase of the bandwagon effect, where many analysts, either unaware of these dynamics or unwilling to do so for personal reasons, are promising sustained market growth.
The market will continue to rise until the next shock, and no one knows when it will arrive. The shocks are sudden and leave little room for rational thinking, while they exacerbate panic behavior. Anyone who does not offer a method to minimize losses during a shock is not a serious analyst, but rather a participant in a common cognitive bias. There are a few alternatives to dealing with shocks after they occur, some simple but with larger eventual losses, and some more sophisticated, with smaller losses and even possible profits. However, anyone who promises higher prices in the future is probably a charlatan, because prices always go up in the long term. The problem is how to deal with exogenous shocks. Not only do these charlatans never discuss solutions, but some are even unaware of the damage these shocks can inflict on investors.
In these reports we use strategies and we hope they will minimize losses in case of a shock. Strategies can fail, and there is no guarantee. However, promising higher prices without some sort of strategy to deal with shocks is charlatanism.
3. Update on market positioning
We use two cross-sectional momentum long-only strategies that generate signals for capital markets and factor ETFs.
The most recent update occurred on Friday, October 11, 2024, following the close of the market. The year-to-date, equally weighted performance is 26.1%. Below are the open positions and new signals.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: The Weekly Market Reports are provided for informational purposes only and do not constitute investment advice or actionable content. We do not warrant the accuracy, completeness, fitness, or timeliness for any particular purposes of the Weekly Market Reports. Under no circumstances should the Weekly Market Reports be treated as financial advice. The author of this website is not a registered financial adviser. Before subscribing, please read our Disclaimer and Terms and Conditions.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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