Fearful, but not panicked

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: Neutral

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.


The drumbeats of war

From a purely fundamental perspective, the US equity outlook is mildly bullish. However, rising geopolitical risk premium is unsettling risk appetite. Sentiment surveys such as AAII have fallen into the fear zone. In the past, such readings have resolved in relief rallies.



While fear levels are elevated, the market is neither panicked nor oversold, which is an indication that there may still be unfinished business to the downside once the market bounce is over.



Constructive fundamentals

Developments last week have been constructive for equity fundamentals. The release of the January FOMC minutes was a bit anti-climactic. The Fed indicated that it would raise interest rates and it would normalize the balance sheet, but there was no hawkish bombshell as advocated by hawks such as St. Louis Fed President James Bullard. In the wake of the publication of the minutes, Fed Funds futures walked back its expectations for a half-point rate hike at the March FOMC meeting, but it still expects six quarter-point rate hikes in 2022. 



The other bullish factor for stock prices is the evolution of earnings expectations. Q4 earnings season is nearly over. Both the EPS and sales beat rates are above average and forward EPS estimates are still rising. Fundamental momentum remains strong.




A looming conflict

However, the rising risk of a Russia-Ukraine conflict has left the market nervous. Brent crude prices are in severe backwardation, where the front month price is much higher than the futures price indicating short-term jitters. Readings exceed the levels seen at the first Gulf War, indicating fears of Russian energy supply disruptions.



Another factor that could keep geopolitical tensions elevated is falling EU electricity prices despite the strength in natural gas. The price decline is attributable to a strong wind season. Falling electricity prices reduces the short-term leverage that Russia has over the EU.



Historically, shocks involving limited war have had a minor impact on stock prices. Bloomberg identified 18 war-linked events since 1940. The S&P 500 fell -1.5% on the event date and the average total drawdown was -5.4%. If we exclude incidents during recessions, the averages were -1.3% and -4.3%.


NATO has asserted that it will not send troops into Ukraine. If a conflict were to break out, the equity market impact should be relatively modest based on this historical study. 




Where’s the panic?

Despite the jittery nature of market psychology, the market is neither panicked nor oversold, which is disconcerting. None of the four components of my Bottom Spotting Model have been triggered. The components consist of:
  • VIX Index: Watch for a spike above the upper Bollinger Band.
  • VIX term structure: Watch for inversion.
  • NYSE McClellan Oscillator: Watch for an oversold condition.
  • TRIN: Watch for a reading above 2, indicating involuntary “margin clerk” liquidation.



The best-case scenario will see a relief rally that tests 50 dma resistance once geopolitical tensions fade. The worst-case scenario is a break of neckline support at about 4300-4330 of a possible head and shoulders pattern, with a measured downside objective of about 3800.


Tactically, the market could rally early next week as it is mildly oversold. However, it may need another day of weakness to spark a washout low.


24 thoughts on “Fearful, but not panicked


    The history of the stock market is littered with “gurus” trying to call turns in the market. Joe Granville and Robert Prechter are two famous names that come to mind. The obsession to call the turns can be an exercise in frustration and emotional anguish. Not to mention loss of capital.

    If you have followed numerous examples of Ken’s momentum investing, it is far easier to hop on a moving train or like a surfer catch the next big wave.

    Here are the numbers year to date:

    SPY – 8.56% inverse etf available.
    qqq -14.16 % inverse etf available
    XME 10.32%
    XOP 13.12%
    GLD 3.60 %

    Having traded the markets for numerous years I have found that in bull markets, the market ignores bad news and in bear markets good news is ignored. Also, counter-trend rallies are short, fast and sharp.

    The question for each one of us is to resolve in our mind is: are we in a bull market or a bear market?

      1. Unfortunately, there is no easy answer. Part of it comes with experience. However, Ken is his book identified a way which makes sense. After a sentiment bottom look for a group (etf) that rises the most in terms of percentage and volume. In this case also I would use a moving average to initiate a long position. I.E. Not trying to catch the bottom. Just in case the bottom is tested again The best way I know is to add to the position as it goes up using a stop. Adding to a position should be in the form of a pyramid. So for example 50, 30 and 20.

    1. Well, I don’t know that historical analogies are that simple. Much of trading success (or failure) depends on an individual’s strengths/weaknesses, time frames, risk tolerance, life goals, and a myriad of other factors. And there are an infinite number of possible trading approaches when we consider that each individual applies a unique mindset to each trading decision.

      In the present scenario (ie, last week), I’m not so much trying to call an exact turn. It’s more a bet on pattern recognition – that the current negativity represents a decent buying opp.

      Hopping on a moving train is more difficult for me. One example would be the spring/summer of 2020. Far easier for me to buy in early, ahead of ‘confirmatory’ price movements. I sensed buying interest ahead of the crowd and booked good gains. On the other hand, I closed positions ahead of the crowd, and left money on the table.
      But that’s my style. Chasing after an upswing just doesn’t work for me.

      The bottom line is that there are no perfect systems. We each trade using an approach that works best for us – and the approach we use at any given moment in time is only a snapshot of a work-in-progress that never stops.

      1. I hope the readers understand that this is an intellectual discussion and in no way is to knock anybody or their style of investing or trading. We all are adults and are responsible for our trades and the results achieved.

        Having said I wanted to point out that even the best have great difficulty identifying a stock market bottom. The risk one runs when you average down is that prices can go down further then one wants. Hence the need for stops. I have been in situations where I puked at the exact bottom. This is how selling climaxes are made.

        Take for example Cam’s way to identify a bottom. It would have identified the Friday as a bottom before the Monday – the 1987 crash. That is one reason to use stops and also to add on the way up. But as I said earlier to each his own.

      2. Absolutely, and no offense taken at all. Simply pointing out that there two sides to every trade, and even more perspectives re every strategy.

        I’ve taken my own shots at John Hussman and Bill Miller over the years. What’s great about this game is that to a large extent it’s a level playing field (certain roadblocks have always been in place for individual investors, but they seem to be coming down one by one), and a lifetime pursuit that rewards cumulative time/effort – albeit also one that IMO no one masters.

  2. We are in Winter (bear market) Here are two solid proves. First BlackRock is failing and money managers like BlackRock ARE a leveraged play on the stock market. They go up more in the bull and down more in the bear. Their bottom line swings exponentially either way. It is now far below its 200 day moving average line. Here is the chart;


    Here is one of my momentum charts.


    The top of three show the relative performance over the last six months, the normal momentum strategy. BLK has underperformed by almost 20%. A bear market indicator.

    The second of three show the performance versus the market since the November 19, stock market peak – big underperformance.

    The third of three shows the performance since the January 27, recent low – another big fail.

    Three Xs = Bear Market.

    The other strong indicator was just announced. It is the level of margin loans. In a bull market, margin loans totals rise faster than the stock market. People get more confidently aggressive as they make money and borrow to buy more stocks. When the market peaks and starts a bear market, margin loans fall faster that markets. The January number was down a huge 8.8%. Here is a link to Jill Mislinski’s great work on this:


    James Stack of Investech came out with a good article with a warning about this too. His various other indicator set has turned negative also.

    I can hear the great, black hole sucking sound of margined day traders losing money and being force to sell and pay down margin. That is shifting to other investors who are now experiencing losses and are paying down margin. This is bear market activity and the confidence of a bull market doesn’t return quickly.

    The Winter started with the Robinhood/ Cathy Wood’s stocks crashing. It’s shifted to the FANNGs and then to growth stocks in general. If the pattern from the Dot.com crash holds up, we see Winter spread to the general market.

    A war with Russia is not my concern. The Central Bankers’ war on inflation is the key. It could be long and nasty. I read a book once that commented on every war starting with both sides thinking it would be over quickly. People underestimate. People haven’t been in an inflationary time for a very long time. Most of the younger investors, never. Inflation will be underestimated in its stickiness. guaranteed.

    The war will be over when high inflation is killed with an atom bomb or Central Bankers surrender and let it become a permanent fixture. Either way, the war won’t be over by the fourth quarter.

  3. Market has been in a bear market starting early last year, if you examine market internals, and many indicators are continuing to fall.

    It is stealthy and unusual compared to past instances, possibly distorted by the pandemic. Even the junk market is starting to show some stress. All in all this is a very peculiar situation. Just observe and adjust accordingly.

    1. Ingjiunn, here is my take; At the beginning of 2021, the extremely extended ‘Stay at Home ‘ stocks and the overpriced ‘Green’ stocks peaked and started to fall. Other growthy types have fallen in wave after wave since with the general market index held up by fewer and fewer big names and Value stocks. With higher rates forcing a recession, the economically sensitive Value stocks are next to fall.

    2. Ken, if the Fed only raises rates 2-3 times (25bps each) rather than 5-7 times as expected by the Sell-side, will you change your mind?

      Many folks even on Bloomberg are talking about a Fed policy error as they see economy slowing.

      The Fed may be more deliberative and patient in view of the prospects of a slowing economy.

  4. Putin is ready to recognize the two separatist regions as Russian puppies. Unless something positive comes up, Market will continue to drop. Looks like a recession is very likely given that market is economy.

    That’s for short term. And soon after this will start the re-militarization of Europe given Russia’s aggression, rekindling the1930s. Too bad history has to repeating itself. But this time is different, we don’t need a powerful military like Nazi’s to cripple Russia. Application of asymmetry, that is.

    1. One of Putin’s most powerful weapons is inflation. Not that I want to downplay the dangers of military confrontation, but the western realization that Putin is no longer an even remotely reliable partner. Even if the short term effects can be mitigated, longer term decoupling from Russia is inflationary.

      1. Many moving parts. But I think that first comes more inflation and then disinflation and then deflation. The world’s economy will slow down substantially in the future. Peace like we have seen post-WW2 is no longer easy to maintain.

        2022 might be historically prominent, if people looking back decades from now, in that it marks a significant shift in the world. At least one positive I can immediately identify is that all the bullshit cultural wars will quickly disappear, now people will face real wars and real hardship.

        Hard time produces tough people. Tough people produces good time. Good time produces weak people. Weak people produces hard time. Cycle repeat.

        1. The rebound in the German DAX has been weak so far because everyone agrees that energy prices in Germany are going to skyrocket. As of now the opposite is happening as outlined by Cam above.

  5. Cam,

    Any opinion on gold and silver? I wonder if the fear has peaked or will peak in near-term as the investors assess the damage done and move on (for a short while anyways).

  6. Max frustration is the market’s modus operandi.

    I was looking to add to positions in the hole – and an opportunity may arise later in the day – but SPY 425 unlikely to be revisited in the premarket session.

    1. Naz green.

      Bumped up exposure from 35% to 38% on the opening decline. Hoping to see an even better buying opp during the day.

    2. This is not a day trade for me. I’m scaling into a position that I hope to exit when Russia/ the first rate hike/ and anything else currently front and center starts to fade away.

  7. I think we finally saw a little panic today with VIX @ 32.

    The time to worry about SPY 425 was at the highs ~480. Now it’s time to start buying in for another run to 480.

    1. Are markets finally ready to rally? I have no idea, but the plan is to stick with the current 40% exposure should we continue to decline, and increase exposure if/when/as we begin to rally.

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