Panicked enough for a relief rally?

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.


Scared enough?

Are you scared enough? The market is extremely jittery. News last week of a Russian attack that started a fire at a Ukrainian power plant sparked a risk-off episode. Further sober analysis revealed that the incident was under control and there was no radiation leak. Worries about the incident sparking a second Chernobyl disaster are overblown.


Two weeks ago, the AAII weekly sentiment survey showed the bull-bear spread had fallen to -30, but it rebounded last week to -11. Readings of -30 are rare and they have only been lower during the bear markets of 1990 and 2008 (shown in pink). These levels weren’t even seen in the wake of the Crash of 1987. In all cases, they signaled short-term bottoms.



The key question for investors is whether current conditions represent a durable market bottom, or just a bear market rally.



Rising fear = Bullish confirmation

The AAII buy signal is confirmed by readings from other sentiment models. The NAAIM Exposure Index, which measures the sentiment of RIAs, fell below its 26-week Bollinger Band. In the history of the NAAIM data series, such extreme conditions have been useful signals that downside risk is limited short-term and risk/reward is tilted to the upside. These buy signals, however, are not indications of a durable intermediate-term bottom, as evidenced by their behavior during the GFC bear market.



I could write about the elevated level of the VIX Index as an indication of market anxiety. Instead, I would point out that the MOVE Index, which measures the implied volatility of the bond market, is also high. For some context, a reading of 120 on MOVE implies a daily change of 7.5 bps every day for the next 30 days.



As well, does this cover from the Economist represent the peak of war hysteria, which would be a contrarian magazine cover indicator? Asking for a friend (see Wars are equity bullish, but there’s a catch).



Lastly, Mark Hulbert recently published a Marketwatch article, “The end (of the stock market correction) may be near”.

The end of the stock market’s correction may be near.


That’s because I just received an email from a prominent money manager declaring that “buy and hold is dead.” Like the first robin of spring heralding warmer weather around the corner, emails such as this one are a contrarian signal that the tide is about to turn.


That’s because the relative popularities of market timing and buying-and-holding follow a fairly predictable cycle. Buying and holding will be at its most popular at market tops and least popular at bottoms. Just the reverse will be the case for market timing.



A bear market rally

Sentiment model readings aside, I would argue that the intermediate-term trend is still down, but the stock market is poised for a bear market rally. I had highlighted the sell signal flashed by the negative RSI divergence by the Wilshire 3000. Such signals have led to significant drawdowns in the past.



I also pointed out in the past the S&P 500 underwent a “good overbought” rally off the March 2020 bottom, as shown by the percentage of stocks above their 200 dma rising to 90% on a persistent basis (top panel). The momentum of that advance faded in mid-2021 when the indicator fell below 90%. There have been four similar episodes of “good overbought” rallies in the last 20 years. All of them did not end until the percentage of stocks above their 50 dma fell below 20% (bottom panel). That condition has not occurred yet.



Here’s another reason why I am bearish. The Russian ETF RSX is trading at $5.65. Notwithstanding the fact that the Ruble has crashed, the underlying stocks in Moscow are halted, though the ETF holds GDRs which do trade in London, the last reported NAV is $0.89! There’s still too much bullishness.




Poised for a rally

In the short run, the S&P 500 is poised for a counter-trend relief rally. The stock/bond ratio exhibited a series of positive RSI divergences, which is constructive.



Fundamental momentum is supportive of an advance and, at a minimum, should put a floor on stock prices. Forward 12-month EPS estimates are still rising and there is no signs of earnings estimates declines that have accompanied past market downdrafts.



In conclusion, the stock market is poised for a counter-trend relief rally in the context of an intermediate-term downtrend. Investment-oriented accounts should stay cautious and take advantage of any market strength to reduce equity weights. Traders can position for the rally, which is often brief but violent in bear markets.



Disclosure: Long TQQQ

47 thoughts on “Panicked enough for a relief rally?

  1. The next BIG opportunity will be when Putin is assassinated or arrested. Have a plan of action for that day solidly in place. Things that are going down the most now will rally the most. Think Europe, especially Germany.

    A recent report I read had six scenarios of the Ukraine war ending. Three involved Putin ousted in the end.

    It may or may not happen but have a game plan for that day. I have mine.

    Come on folks. Suggest some trades.

    1. Short ten year treasury. it has rallied based on Ukraine war, but should see a major sell off once Putin in ousted. Inflation numbers should add fuel to fire.

        1. TBT has a nasty decay over time. The next recession will cause the Fed to drop rates for who knows, 2 years maybe more during which time you get some decay.
          Compare a 12 years history of SCO and TBT.
          UCO on the other hand has horrible decay.
          SCO to be honest, the chart makes no sense it looks so promising

    2. SCO….I wrote so puts at 5, if they get handed to me I will write calls. I only lose if oil stays above 100 a barrel. If we get a recession will oil stay above 100?
      I am doing it very small and if oil goes higher and SCO goes lower I will repeat, but with electrification, work from home oil has a huge bearish pressure at these prices, and it’s not like the oil is not being pumped out of the ground, it’s a distribution problem. China will buy cheap Russian oil less from the rest.

      1. Never long inverse products, unless it is very short-term trading or part of pairing strategies. Even if fundamentally it goes flat you will be still losing to all technical/structural movements. It is similar, mathematically, to a geometric series with term ratio less than 1, as days go by.

    3. There are already discussions about a sales tax reduction in Germany in response to the Ukraine war.

    4. Curious why won’t you just allocate a small % of your portfolio in Russian stocks? I’d buy them in small, gradual increments.

      Many are down 90% and even more. Can do very well over coming months under your scenario.

      1. This logic does not makes sense. Say from 100 to 10, a drop of 90%. This indicates it is a damaged product. By risk control you will be buying a very small amount. Say it is up 20% (looks big in percentage), then it is up 2 dollars (very small in real amount), meaningless to your portfolio.

      2. I’d invest assuming Russia returns to somewhat normal in coming months and years. While the stocks may not return to former highs, they may retrace a large decline. E.g. retrace from 10 to 50 (still down from 100 in your example).

        That’s be a gain of 400%.

        Also, if I think a return to normal in Russia, I’d be adding on its way up making it a larger size of my portfolio.

      3. Also, there are not really damaged goods. Russia gas, oil, fertilizers, wheat and other products are as good as from other countries.

        There is a huge demand for these products.

        Remember, the assumption here is that Putin goes away. For me, that means lifting of all the sanctions and a slow and gradual return to normalcy, and cross-border trade.

      1. Ken,

        ‘Euro will fly after Putin is offed”.

        Does Euro also include GBP, which was under pressure too?

    5. Buy something that has good odds: US natgas drillers, based on long-term trend. It is clearly now US will be supplying LNG to Europe for years to come. The projection is 50% more from today’s level in five years when most of the new terminals and pipelines are in place.

    6. Putin being offed and the markets rallying in relief may be short lived. I have a feeling that the person who replaces him may not be much better. The view of Russian hegemony has to be more widely shared in the top circles. Putin alone couldn’t drive it.

  2. We can all hope, but 3/6 is not a probability in this case, and if it happens it could be months later.

  3. This is a war, but isn’t it the financial and supply chain disruptions from sanctions that make it worse than other wars?
    Also, shouldn’t the RSI at some time perspective support the relief rally thesis?

    1. I examined NAAIM closer. Not surprisingly, the NAAIM response lags the market (people react to market developments). To make it worse, it is a weekly survey, which builds in additional variable lag. It acts similarly to a fast moving average that crosses the price chart down, in order to signal a price reversal (up). (The negative edge of the NAAIM is the active one.) The weekly multi-year chart hides this detail.
      Some NAAIM edges cross their lower BB. These are relatively large drops, which naturally lead to rebounds. The buy signal can be early or late. Again, this detail is not apparent in a multi-year chart. By the NAAIM chart, the rebound Cam is looking for started already on Feb, 24 (actually it was just short of the lower BB). Since then the advisors have become more spooked, and anticipate a lower low (- with a rebound).

  4. In the ST, one might consider shorting oil futures.

    In the LT, I’m inclined to bet on the Ukrainian economy. I think the country has a bright future.

  5. Based on what I’m reading from China –

    ‘Wang said the Ukraine crisis should be solved through “dialogue and negotiation” and called on the United States, NATO, and the European Union to engage in “equal dialogue” with Russia. He said they should “pay attention to the negative impact of NATO’s continuous eastward expansion on Russia’s security.”

    -my best take re an off-ramp for Putin is an assurance that NATO will not seek to expand further in Eastern Europe.

    1. 1/The Ukrainian economy will be devastated.
      2/China has a pact with Russia
      3/Give in to “might is right”? (also China.)
      4/NATO is expanding by country application.
      5/Putin, if he stops the aggression, will not evacuate (Donetsk).

    2. So little focus was spent addressing NATO’s expansion during and before this war and the media is also eerily absent on this issue or at least from what i’ve read. Playing a game of chicken with a madman that commands one of the strongest military in the world is irresponsible. The Ukrainians, I fear, are being treated as just chess pieces by both Putin and the world leaders.

  6. Cam, Fidelity platform shows NAV of RSX at 29.22$ With close on Friday of $5.65. If Russian stocks are not trading, then NAV is just a conjecture, IMO.

  7. I’m not seeing much in the way of news that would explain a reversal in futures – so perhaps the overnight fear has dissipated simply due to cooler heads.

    I still think the past two weeks will in retrospect be seen as a decent entry point. The durability of any rally will depend on how quickly sentiment shifts.

    I’m currently back in the red ytd, but not too worried about it – yet.

    1. LONDON, March 7 (Reuters) – Russia has told Ukraine it is ready to halt military operations “in a moment” if Kyiv meets a list of conditions, the Kremlin spokesman said on Monday.

      Dmitry Peskov said Moscow was demanding that Ukraine cease military action, change its constitution to enshrine neutrality, acknowledge Crimea as Russian territory, and recognise the separatist republics of Donetsk and Lugansk as independent states.

      It was the most explicit Russian statement so far of the terms it wants to impose on Ukraine to halt what it calls its “special military operation”, now in its 12th day.

  8. Pretty tough call here. Stock prices are driven in the ST by the collective emotions of all market players. So there’s no telling how much further the indexes might decline – and even today I didn’t sense much panic. Taking the other side of the trade obviously becomes more difficult the longer prices continue to slide.

    1. They should have more interviews like this one on prime time TV. Professor Kotkin frames/paces his explanatory replies perfectly, in language understandable to just about everyone.

  9. In the midst of corrections, it’s easy to forget that a -10% to -15% decline has been the norm in most years. Right now the SPX is off about -13%.

  10. Back in the green for 2022.

    Even opened a position in EWG ~25 based on Ken’s take. I assume Putin’s still alive and kicking, but it just seemed poised (along with everything else) for a reversal this morning.

      1. 80% of investors are buy-and-hold – by definition they will all be holding down to 3800 or wherever the decline stops. Just as they held all the way down to SPX 667 in 2009. What’s remarkable is that buy-and-hold outperforms the vast majority of market timing systems.

        At this point, I may be one of those who hold down to 3800. However, (i) my ‘buy-and-hold’ exposure is capped at 40% exposure, (ii) I will continue to trade around the positions, and (iii) at this point in time I’m about +10% ahead of the SPX ytd so I’m less concerned about an additional market decline of -10% than I am about missing a +10% rally.

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