It appears we had another good day with our CQNS model.
Last night when it ran, the aggressive RISK-OFF stance of the weekend moderated. Number of stocks dropped to 20, and the stocks were more back to normal with some technology and higher BETA names.
The market did trade a bit erratic today, but it ended flat. The model picks were slightly red, but so was the S&P 500, so the hedge would have paid for some of the CQNS long declines.
Net-net, the model suggested a less aggressive stance, and the market was pretty subdued. Makes us feel good about the predictive power.
We are starting off 'on the wrong foot' tomorrow.
1. The 13-week US Treasury yield is up to 4.25%. This requires us to adjust a key parameter in our model, the risk-free rate. It is only 5 basis points, but we like to stay a little ahead so may raise it 10 basis points. This will reduce the edge of stocks, and create a new RISK-OFF cycle. The question will be whether other rates rise in the short term, and whether risk-free hits 4.5% (which will be material for our model).
2. Stocks we follow have lower volumes being traded. This can reinforce trends and allow for over-sized movements in stocks which do have volume. The lack of volume can also be a good thing, and dampen down volatility, if the market is not also seeing low liquidity. A lack of both liquidity and volume could mean trouble, like a small helicopter flying too high and running out of oxygen (which causes a lack of lift and power).
3. There is a speech by Chairman Powell on Wednesday. Those can be material to risk if he has a message to send.
4. We started to read the FED FOMC memo from early November. We read portions and they were dire. Lower market liquidity. Higher market volatility. Tightening Main Street Conditions.
5. Headline readings on US Real Estate were poor.
On the other hand, Santa may be coming to town. You know that old chestnut, the Santa Clause rally that lifts stocks in December as loss harvesting is completed and people reload positions.
Stock Market BLOG
President and Investment Advisor Representative