Financial News

Will portfolio rebalancing sink equities?

Preface: Explaining our market timing models We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Asset Allocation Model is an asset allocation model that applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bullish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


Theme du jour: RebalancingI had a discussion last week with another investment professional about the possible short-term asset price effects of portfolio rebalancing. Equities had handily beaten fixed income investments during the quarter, and balanced fund managers will have to rebalance their portfolios by selling stocks and buying bonds.




How important is the rebalancing effect? It seems that all the trading desks are talking about it. To add to the confusion, JPMorgan's derivatives analyst Marko Kolanovic put out a research note stating that "there will be no monthly selling, and indeed there could be buying of equities into month-end. A lack of these flows, and broad anticipation of ‘month/quarter-end’ effect, could result in the market moving higher near term, all else equal."
What's the real story?
The full post can be found here.
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