Net Long Equities and Net Short Bonds

• The Nikkei models continue to signal ‘buy’.
• Eight bond signal changes leave the German bund 3-month lookback signal as the only ‘buy’.
• Over the past three months, the best performing bond model has been the 1-month lookback for German bunds (4%), for equities it has been the 1-month lookback for the Nikkei (11.9%).

Olaf Scholz proved victorious in the German elections, winning a minority 25.7% after the CDU-CSU slumped to its worst ever result. The debt ceiling remains an issue in the US, while energy is a focal point across Europe and China. On global growth, worry could further by this time next year as tightening may occur into slow growth and inflation. Lastly, hedge funds have flipped net short on both an absolute and relative basis on the CAD. With this backdrop, equities are net ‘buy’ and bonds are net ‘sell’.

Latest Signals

The only 3-month lookback model to remain ‘buy’ was the German bund, the rest flipped to ‘sell’; the remaining contracts across all lookback periods for each bond model are now ‘sell’, after eight changes (Table 1). No changes occurred in 1-month lookback models. Lastly, net signals across the bond models for each contract are ‘sell’ (Chart 1).

Only one change occurred in equities, the FTSE-100 1-month lookback flipped from ‘sell’ to ‘buy’. All lookback models for the Nikkei delivered positive returns WoW gaining 0.4%, the best WoW returns was in the DAX and S&P500 gaining 0.8% (Table 1). Net signals remain ‘buy’ across all equity models (Chart 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 3-month lookback for German bunds. It has delivered 4% returns and is currently signalling a ‘sell’ signal (Table 1, Chart 2).
• Equities: the best performing equity model has been the 1-month lookback for the Nikkei. It has delivered 11.9% returns and is currently giving ‘buy’ signals (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.

(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.)