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 27.6% (equal allocation, no leverage) versus a gain of 24.2% for the SPY ETF. Gold (GLD) is up 31.4% year-to-date. Tech stocks (QQQ) have gained 21.3%. The US dollar index (UUP) is up 7.2%, and long-duration bonds (TLT) are down 2.2%.
Note that, despite the high correlation between the ensemble (weekly report) 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 0.46.
2. Weekly Summary (October 14–October 18, 2024)
- Stocks ended the week with gains after more data confirmed the economy is strong and a recession is nowhere in sight.
- Large-cap stocks (SPY) gained 0.9% to end the week at new, all-time highs.
- Gold (GLD) gained 2.4% and closed at new, all-time highs.
- Long-duration bonds (TLT) were up slightly but were unable to stage a strong rebound due to worries that a strong economy will delay interest rate cuts.
- Commodities (DBC) fell as crude oil plunged 8.1%. See Section 5 for more details.
- Forecasts of slower rate cuts helped the US dollar index (UUP) end the week higher.
- Since January 3, 2022, bonds (TLT) have been down 30.9%, while gold and large-caps (SPY) have gained 47% and 28.2%, respectively.
- For the week, the equally weighted magnificent seven stocks index rose 0.8%. AAPL gained 3.3%, but META fell 2.3% for the week.
- The utilities sector (XLU) gained the most this week, by 3.4%. The energy sector (XLE) fell the most, by 2.7%.
- Year-to-date, utilities (XLU) are up the most, by 32.4%, while energy (XLE) has risen the least, by 10.4%.
- Gold (GLD) and the US Dollar Index (UUP) are in overbought territory.
Fooled by Macro
The relevance of fundamentals has significantly diminished in recent times. For example, while some strategies have profited from the gold breakout since March this year, or even earlier, macro experts have only recently begun to recognize this movement. The weekly chart for the GLD ETF below displays the breakout.
Since the week ending December 22, 2023, one of the two strategies used in these reports generated a long signal for the GLD ETF, and the position is up 34% year-to-date. While macro analysis creates a lot of noise and there’s a lot of rivalry to see who’s right, strategies operate silently in the background. Macro analysis has a poor track record owing to biases and large lags. Fundamentals have lost most of their predictive power due to interventions in the markets in the form of quantitative easing and deficit spending.
Due to its inherent complexity, the market defies linear analysis. Even the most basic strategies display some non-linear behavior, which, given the right market circumstances, can become quasi-adaptive. Due to prevalent biases, like confirmation bias and wishful thinking, macro analysis usually fails to adapt. Biases also impact strategies, but they do so during development rather than implementation. What this means is that strategies with strong economic value and minimal bias during development have a better probability of succeeding.
One problem with macro analysis is the irrational escalation, or escalation of commitment, bias.
Escalation of commitment is a human behavior pattern in which an individual or group facing increasingly negative outcomes from a decision, action, or investment nevertheless continue the behavior instead of altering course. The actor maintains behaviors that are irrational, but align with previous decisions and actions. _Wikipedia.
One of the reasons macro analysis has survived in an increasingly complex market environment is the availability heuristic bias: simple explanations to complex problems are popular within a network of people because other people have accepted them. However, it is increasingly becoming evident that this type of analysis does not only lead to missed opportunities, as is the case with the gold move this year, but that it is also probably false when applied to complex non-linear stochastic systems. There are exceptions to all rules, and some macro analysts may have developed unique processes and methods to allow them to be successful, but on the aggregate, especially after quantitative easing, the effectiveness has diminished.
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 18, 2024, following the close of the market. The year-to-date, equally weighted performance is 27.6%. 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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