With a Top-Down Approach, This Professional Explains the Key Drivers of Major Asset Classes

We had a professional macro researcher and analyst answer questions on what is driving the markets.

Michael Bozzello
The Stocktwits Blog

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Callum Thomas is the founder of Topdown Charts. His background is in multi-asset investment management in New Zealand and Australia, with a focus on investment strategy and economics. Callum joined AXA Global Investors in 2009 and was brought across to AMP Capital as an investment strategist role in 2014. Prior to that he worked in strategy at the New Zealand Stock Exchange. He left to start Topdown Charts because of his passion for research and desire to build a business. His aim is to provide a world class institutional research offering, with a distinctive chart-focus and top-down perspective on multi-asset investing. Callum has a passion for global economics and asset allocation strategy and has developed strong research and analytical expertise across economies and asset classes. Callum’s approach is to utilise a blend of factors to inform the macro view, spanning valuation, monetary conditions, cyclical indicators, sentiment and technicals. Callum believes innovation is vital in investment research and is on a constant mission to uncover and develop new datasets, indicators, and ways of looking at the world to drive sensible and profitable decision making by portfolio managers. Below is a re-cap of a live Q&A we had with the entire StockTwits community. For the full transcript please GO HERE.

@Callum_Thomas

Can you explain the top-down approach you take to the markets? Any insight into your process would be great! Also what is your favorite chart right now? — michaelbozzello

The top down approach really refers to the point that I’m more of an asset allocator at heart than a trader of individual names. This typically requires more of a top-down approach — tracking the key drivers of the major asset classes and at times going down into individual countries, sectors, commodities, and currencies. So, the top down aspect is partly a product of my overall focus when it comes to investing and also means a very data-driven approach with lots of charts and indicators to inform and confirm the decision/view point. My go-to favorite chart right now is global property prices:

@Callum_Thomas

How do you accurately model the sentiment surrounding a specific ticker? — jayhead13

Depends, but a selection: mutual fund flows, ETF flows, futures positioning, surveys, implied volatility, and price/technicals.

Do you use a weighting factor across the “blend” of factors in your investment decisions? — patrickrooney

I don’t have a pure quantitative process, but my view: different factors will take a different weight at different times. Example, valuation takes much greater weight when at extremes and is virtually irrelevant when not extreme/average. Likewise, cyclical economic indicators are more important at turning points.

On the global-macro level, what’s one chart we should all be paying close attention to right now? — lonesome

Good question — this chart served me very well last year in picking the upturn…

@Callum_Thomas

Here’s one for the US manufacturing PMI fans.

@Callum_Thomas

$VIX is kinda low vs a number of models I track. Still, needs a catalyst.

Callum_Thomas

In your opinion, what is the most computer efficient software/site for a lot of charts on one screen? — aesaito

Not sure, I use excel & Thomson Reuters Datastream for the bulk of my charts.

Do you see bitcoin as a (large enough, liquid enough, & uncorrelated) asset class for institutional investors yet? — cousinHub

No. I can just imagine the reaction I would get if I pitched bitcoin to an investment committee/board of trustees.

Probably one of the key short-comings is the lack of data — they have only been around a (relatively) short period of time. Most institutions are too risk averse. Still, good question, I might run a poll on Twitter and see the type of response. I can’t vouch for accuracy or sample size, but here you go:

Rule of thumb: linear for short time frame and limited range, log for long and growthy/bigly moving assets. I don’t like P&F for a number of reasons. Candlesticks for life! Volume — sometimes yes sometimes no. Favorite technical indicator? I quite like market breadth — I actually like to use it across asset classes e.g. Here is market breadth applied to commodities:

@Callum_Thomas

How do you set up a resistance chart? — Tufts633

You mean a resistance line? Judgement. It should be obvious though(and obvious to other market participants,) because half the point is that it’s a psychologically important level, so when it breaks people will pay attention.

What are you three favorite momentum or trend indicators? How do you use them to understand trend? — dennismccain

Call me old fashioned, but trend lines, 50dma, and 200 dma(slope and crossover) — keep it simple.

Do you place any end of day trades to sell in the morning, and if so which setups? — GoLong325

Not doing any trades myself at the moment: running independent research firm, trading would ruin my objectivity.

Your thoughts on $URA? — ArcticVapor

Honestly, have never looked at it, but I know China has big energy needs and is looking for “clean” energy. So, China will be a big source of future demand, they are building ~100 reactors (nuclear = no smog, so “clean”).

What’s your favorite sell signal? — bxvets

Overbought (momentum/techs), overhyped (sentiment), overvalued (valuation), out of time (cycle/fundamentals turning).

Why do people make different decisions on the same chart? Some say it’s extremely bullish and some say its bearish? — chocolat85

I try to keep things data driven, focus on indicators/signals…yet interpretation is in the eye of the beholder.

What are your preferred moving averages to use? — nirbush

50 and 200 for markets ….. and 3mma for smoothing economic series.

What is the best way to invest $1000 for a rookie investor? I started trading about a month ago. — cjh1997

No one true answer for this — depends on your risk tolerance, time you want to spend on it, goals, interests, etc

Give your definition of a “bear market” and your definition of a “bull market”. — extrodyne

Kind of meaningless terms in a way. 20% up/down is textbook, but I would prefer to know uptrend vs downtrend. Also, I would prefer to watch the charts/indicators — see what facts suggest, rather than apply a bias and label a market.

Can you walk through your process for getting clients? — BadaBingCapital

Great questions — truth is I am still figuring this out. I’m mostly targeting institutions, with some success. I’m planning to write a blog on reflections from the first 12 months in the business.

When does a market start to make you nervous (e.g., now?), and what are your preferred ways to guard your back? What’s your preferred time period for a trade to coalesce? What has to happen for you to decide to bail? — bearcharts

There’s background conditions like overvaluation and overleverage, but you still need other indicators to turn… i.e. overvaluation in and of itself is no reason to be bearish tactically (strategic/long-term maybe though).

What are your thoughts on short trading with volatility tracking indices like Barclay’s VXX? — haseebab

Be very careful and make sure you know what you’re doing — don’t fool yourself, do your homework. No free lunches.

How does something get on your radar?— michaelbozzello

Radar: big price move, big change in data, big relevance to other markets, big change in my own thinking/models

How do you prevent analysis paralysis when taking so many factors into consideration? Do you weight certain factors more ?— coverthecall

If you’re paralyzed by the analysis then there’s probably nothing there. Different factors become more important at different stages of the cycle, and overall more confirmation equals a higher conviction.

What is the most important factor you look at when investing (e.g, EPS, P/E, market share, price, etc.)? — springerj02

Depends! No one true answer, no magic bullets… important to do the work and build the case.

How fast do you trade? Are you mainly concerned with short term trades or thinking about a 6 month + time frame? — Buffet121

I advise institutions on asset allocation — mostly medium/longterm, but with some tactical trades/downside warnings.

What books would you recommend reading? — CwA

Ned Davis: being right or making money. CMT curriculum is good for learning disciplined technical analysis.

Pick the one economic indicator you use most when evaluating any one country. How do you use that indicator to find investment ideas? Any examples come to mind in the last few years? — scheplick

Manufacturing PMIs are pretty good for gauging the cycle, likewise OECD lead indicators, and property prices. Manufacturing PMI is best when you find a downtrodden market, with low valuations, and the manufacturing PMI starts turning up/bottoming. I’ve used this setup numerous times e.g. EM, Brazil, Russia, Nigeria(for country allocation… in equities ).

Favorite daily reads and tools you use ?— howardlindzon

Favorite tools equal MS Excel and Datastream and the ever growing jungle of models and indicators I’ve built.

Owning $INDY for a good while — just keeps chugging up. Likely to continue? — Alexsimonelis

Good question, India is increasingly overvalued, but a lot of good reform programs underway. See valuations chart

@Callum_Thomas

India has solid LT growth prospects + room for improvement (reforms)

@Callum_Thomas

We hope you enjoyed this Q&A! Press the 👏 below if you really liked it and feel free to highlight or comment on any part. We also have a newsletter for anyone interested in getting daily updates about the stock market.

I am the Community Manager for StockTwits. Follow me @michaelbozzello.

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Product Manager @StockTwits | Personal trader for 15+ years | It takes passion from great people to build great products