Futures Momentum Model Signals – Net-Buy Bond Signals Reverse

• Bond signals return to net-sell as US long bond and JGB signals return net-sell.
• All equity models continue to signal buy for the fifth week.
• Over the past three months, the best performing bond model has been the one-month lookback for gilts (3.5%), for equities the twelve-month lookback model for the Nikkei returns as the best performer (8.4%).

Canada’s inflation rate rose to 4.7% YoY in October, a print last seen in March 2003, and markets are now pricing at least one hike by March, earlier than the ‘middle quarters of 2022’ guidance given by the Bank of Canada. Elsewhere, after the jump in US inflation the latest Bank of America survey found 61% of investors expect inflation to be transitory versus 58% the month prior. The gain in commodity prices may start to subside with China planning a release of strategic oil reserves after the US invited it to participate in a joint sale. Oil has dropped from recent highs to below $80/b. On this backdrop, we saw bond models return to net-sell, all equity model signals remain ‘buy’.

Latest Signals

Bond models return to net-sell after JGB bond signals flipped net-buy two weeks prior (Chart 1). This week, two changes as the three-month lookback model for the US long bond and the twelve-month lookback model for the JGB flip from ‘sell’ to ‘buy’ (Table 1).

Signals across all equity models remain ‘buy’ and have been net-buy for the past five weeks (Chart 1, Table 1).

Best Performing Models

Looking at the performance of the best models over the past three months, we find the following:

• Bonds: The best-performing bond model is the one-month lookback for gilts. It has delivered 3.5% returns and is currently signalling a ‘buy’ signal (Table 1, Chart 2)
• Equities: S&P500 equity models last just one week as the best-performing equity model as the twelve-month lookback model for the Nikkei delivers 8.4% over the past three months. It currently signals ‘buy (Table 1, Chart 3).

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 months, you buy, otherwise you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)