4 reasons to be bullish, 4 to be bearish

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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.



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 is 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: Neutral
  • Trading model: Bullish

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.


A dead cat bounce?

Now that the stock market has staged a relief rally, can it be characterized as just a dead cat bounce, or is it a more durable move? Arguably, the downdraft that began in January violated an uptrend. It would be difficult to believe that a market can recover to its previous highs that quickly after such technical damage.



Here are four reasons to be bullish and four to be bearish.



The bull case

Here are some reasons to be bullish. The S&P 500 intermediate-term breadth momentum oscillator just flashed a buy signal. Its RSI indicator just recycled from an oversold reading to neutral. These signals have shown a 72% success rate in the last five years.



Cyclical indicators like commodity prices and the base metals/gold ratio are strong, though the copper/gold ratio has been trading sideways. Commodity price strength isn’t attributable just to energy. The equal-weighted commodity index has made new recovery highs. This is an important cross-asset, or intermarket, relationship that should at least put a floor on stock prices.



Credit risk appetite has also been acting well. Both the junk bond and leveraged loan markets are showing few signs of stress.



Finally, sentiment readings are still depressed. Macro Charts pointed out that S&P 500 futures speculators cut their long exposure by the fastest rate in history. Even when normalized by market cap, the selling stampede is consistent with past short-term bottoms.



SentimenTrader also observed that leveraged Rydex bear assets skyrocketed to an off-the-charts reading last week. Major bear legs simply don’t start with sentiment readings at such extremes.




The bear case

Here is the bear case. Three of the four defensive sectors are in relative uptrends and the uptrends began before the market weakened. This is a signal that the bears still have control of the tape.



I had highlighted in the past the long-term sell signal from the negative RSI divergence of the monthly Wilshire 5000 chart. The most recent peak-to-trough drawdown was about -10%. Was that enough? If the Wilshire 5000 were to close at these levels today, MACD would turn negative (bottom panel). In the past, this has sometimes been a sign that the decline is nearly over or the start of a deeper drawdown. In all cases, it has not marked the market bottom.



How far can the market fall? This analysis of past strong advances yields some clues. The S&P 500 staged a massive rally from the March 2020 lows and the percentage of stocks above their 200 dma reached the 90% level, which represents a “good overbought” rally (shaded regions, top panel). Momentum then cooled and the percentage above their 200 dma recycled below the 90% level. There have been four other similar episodes other than the current one in the last 20 years. Two resolved in sideways markets, characterized by sideways movement in cyclical and risk appetite indicators, namely the copper/gold ratio and the equal-weighted consumer discretionary to staples ratio. And two resolved with deeper pullbacks when the cyclical and risk appetite indicators fell. 



The current episode presents a mixed picture. While the copper/gold ratio has traded sideways, indicating a benign environment with normal equity risk, the equal-weighted consumer discretionary to staples ratio has fallen, indicating plunging equity risk appetite. In all past cases, pullbacks ended when the percentage of stocks above their 50 dma fell to 20% or less, which hasn’t happened yet (bottom panel). Notwithstanding the debate over the magnitude of any potential stock market weakness, the bears phase isn’t over yet.


This chart also shows how momentum has turned. People usually analyze the equity put/call as a contrarian short-term indicator, but it can also be a long-term indicator of retail sentiment and the animal spirits of the market. During a durable advance, retail investors often pile into single-stock call options to speculate on the market. The top panel shows the 50 dma of the equity call/put ratio (red line) and the 200 dma (black line). In a strong uptrend, equity call/put ratios rise, indicating strong retail participation and momentum. The equity call/put ratio began topping out in mid-2021 and they are now rolled over. The animal spirits are gone, which removes a source of equity demand.



The retreat in animal spirits is particularly bearish for speculative growth stocks. ETFs such as Cathie Wood’s ARKK are likely to be vulnerable to setbacks. The market won’t bottom until the relative performance of ARKK bottoms.




Bull or bear?

So where does that leave us? Who is right, the bulls or bears?


Actually, they both are. Bullish factors tend to have shorter time horizons, which are weeks, compared to those of bearish factors, which are 3–6 months. I interpret these conditions as the market can tactically rally further, but the intermediate-term outlook is still bearish. The current rally is a bear market rally. Expect further choppiness and volatility for the next few months with little upward progress in the major equity averages. Depending on the evolution of technical, macro, and fundamental conditions, stock prices could see further downside and undercut the recent lows.


Investment-oriented accounts are advised to maintain a neutral position in line with the asset allocation targets specified by investment policy. Traders could try to capitalize on further potential gains, but purely from a tactical perspective. If the seasonal pattern is any guide, the S&P 500 should be choppy for another week and rally into a mid-month peak.



Earnings season reporting continues and the market will undoubtedly be volatile and respond to the headline reports of the day. In addition, the CPI report on Thursday will also be a source of uncertainty.




Disclosure: Long SPXL


33 thoughts on “4 reasons to be bullish, 4 to be bearish

  1. Cam, the statement that ‘The current rally is a bear market rally’ implies that we are in a bear market. Is that correct?

    1. We are in a bear market inasmuch as the bottom hasn’t been seen yet. Not sure what the downside is, it depends on whether the economy goes into recession – see yesterday’s publication.

  2. Eventually the bear will come, but it could take a surprisingly long time. Yesterday’s post had a chart showing how often futures rates were off. The same thing happens with earnings, so don’t be surprised if things change.
    Demographics says we don’t get much inflation, as does technology.
    I still think that this is telegraphed way too much to be a surprise. The US2year yield has been going up for over 6 months from below 0.2 to 1.31, so what’s the problem with raising rates?
    It’s just too obvious for my liking. When the market goes higher, and covid is over, and they are saying increased rates don’t matter because the economy is great and rates go up in a bull….that’s when you really need to worry…..I worry anyways, but not as much as when they are saying everything is super and sentiment is euphoric.

    1. Closing BABA for a very minor gain. Thanks, Sanjay – I had assumed the Softbank news might lead to a reflexive selloff and that buying the decline might pay off as the day wore on.

      No interest in anything else today.

  3. One thing that bothers me a lot is how the mega caps are carrying the market, it’s classic end of a bull market behavior, but a possible explanation is that the small caps were impacted more by covid, or perceived to be that way and so they have lagged.
    How does one trade the noise? Use a larger time frame?
    Someone posted a while back about buying crude futures in the 77 range when it had pulled back from around 83….of course oil tanked to the 60s, before zooming to the 90s…very noisy, and if one takes range extremes, prices can always break out of the range with you on the wrong side if you trade against the extremes.
    well, position size helps.

  4. Many of us were calling for an historic bear market decline as stimulus payments ended and rates began to rise.

    Stimulus payments ended some time ago, and rates increases are on the horizon. Why wouldn’t we see a decline?

    If the SPX declines an additional -20% from here, we’re simply back to November 2020 levels. IMO, that’s not unreasonable.

  5. Here’s an interesting take on screening for colon polyps by CHEK.

    ‘Clinical stage medical diagnostics company Check-Cap received approval from the FDA for its amended Investigational Device Exemption application for C-Scan, allowing for a U.S. pivotal study.

    ‘Check-Cap’s goal is to innovate colorectal cancer screening. The company’s preparation-free screening test, C-Scan, allows physicians to detect polyps before they become colorectal cancer, according to a Feb. 7 press release. C-Scan is noninvasive and doesn’t require sedation or bowel preparation. It uses an X-ray capsule with an ultra-low dose, along with integrated positioning. It has a control and recording system and proprietary software to generate a 3D map of the inner lining of the colon while it travels along the gastrointestinal tract.

    ‘Check-Cap CEO Alex Ovadia said: “Now that we have received approval from the FDA of our amended protocol, we are focused on final preparations to initiate the first part of the U.S. pivotal study, which we anticipate will begin in March-April 2022, followed by initiation of the second part of the study in Q4 2022. Initiation of the study signifies a major step in the clinical development of our device, which is designed to detect precancerous polyps.”‘

    1. Will C-Scan replace Exact Sciences’ Cologuard as a screening tool? Sounds like a more accurate option.

    2. I looked at this Company a few years ago. I guess I need to revisit this. Thanks for sharing.

      Do you know anything about Cologuard?

      There are doctors who just practice screening for colon. Check-Cap will get a lot of pushback from them.

  6. My wife opted for Cologuard a couple of years ago and thought it was a great invention!

    You’re probably right about pushback with Cologuard – but C-scan sounds like it will still require a trained physician to administer and interpret so the process may be welcomed by gastroenterologists-> identical compensation for a cleaner procedure!

    1. C-Scan may end up as a preferred procedure for an additional reason – it’s likely to catch polyps in areas that are otherwise inaccessible to a scope.

    2. I need to do a deeper dive on this name. Thanks for your input.

      In near-term, I’m concerned that the price is under $1. Unless it goes above $1 by June 22, 2022, the Company may need to do a reverse split which won’t be positive in this case.

      The product is not yet approved in the US. The studies will be conducted thru the end of 2022. And then the FDA approval.

      The product is approved in Europe but the Company has no intention to commercialize it over there. I don’t know why. One reason could be that colonoscopy is not as common over there as over here in the US. But still!

      1. All true. I think once the FDA starts down the approval path things get easier. They would not have approved an exemption application unless they were sufficiently impressed/ convinced that the device offers unique advantages to a procedure that many patients postpone or forego altogether due to the unpleasant nature of a colonoscopy.

      2. See #12 below….I looked at their website. They have been working on it for quite a while. The trials so far have been small, I can assure you that they will need to do much more to get approval to market in the US.
        What would be interesting is to see if there was synergism with Cologuard to reduce false negatives, which is the problem with any screening system.
        I have followed and lost money on another stock PLX, which has a product and the technology sounds great and better price than the competition. They recently had FDA problems because their site could not be inspected because of Covid. They make enzymes for these horrible conditions that are plant based, which are less expensive to make and have a longer half-life than animal based enzymes, but the market is small and making progress is tough. Comparing with FIT is misleading because FIT is not very good, and this would concern me because if you want to compare, compare to cologuard or colonoscopy. I don’t trust misleading.

  7. Closing remaining positions in BABA as well FB/ GOOG in the premarket session.

    Closing TLT in the premarket session.

  8. Looks like we may have a H&S consolidation over the last month, or if you prefer, cup and handle, either one targets a new all time high…we shall see
    EXAS has been around for a long time, it’s the same story as HPV testing which took a long time to go mainstream. There will be a lot of issues to work out false positives and negatives. The colorectal guys will get to screen all the questionable ones. But it takes a long time for this to work out. I had Digene back in 2002, they had approval for testing when a Pap test came back ASCUS, the test was fantastic, saved lives and easily checked with colposcopy. IT got wider approval and yet it still took years to become mainstream. I prefer Cologuard, I wonder about that little capsule getting stuck somehow, even if it is only one in 10,000.
    Finally CCJ might be getting a good boost, but it’s gonna be bumpy

  9. Tough to chase on a day like this, and of course one of my rules is never to chase. It’s more of a psychological challenge. My strategy? Suck it up. A pullback normally materializes in short order.

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