Take some chips off the table

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 prices. 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 be 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: Sell equities
  • Trend Model signal: Bearish
  • 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.


Nearing upside targets

I recently outlined several ways of estimating the upside potential of the current market rally. A number of tripwires have been triggered or nearly triggered. While the market may strengthen further, it’s time to take some chips off the table.


Firstly, the S&P 500 is nearing initial resistance at the combination of the first Fibonacci resistance level and descending trend line at about 4200.



As well, the S&P 500 Intermediate Term Breadth Oscillator recycled from an oversold to an overbought condition. While overbought markets can become more overbought, it would be prudent to be reducing some risk at these levels.



While these represent cautionary signals, some other indicators are still bullish.



Bullish signals

I also suggested watching for penetration of the VIX Index below its lower Bollinger Band as a sign of an overbought extreme, which hasn’t happened yet.



Another sell signal that hasn’t been triggered is a rise in the NAAIM Exposure Index, which measures the sentiment of RIAs, from below its 26-week Bollinger Band to the 26-week moving average. The NAAIM Exposure Index barely budged in the latest week.



Similarly, other sentiment indicators like the 10 dma of the put/call ratio has begun to normalize from an extreme fear reading that was last seen during the COVID Crash. However, the 10 dma hasn’t returned to a neutral condition as defined by the 200 dma.



On the other hand, the AAII weekly sentiment survey jumped to a bull-bear spread of -5, which is a neutral condition.




Constructive indicators

While the following are not actionable trading signals, there are nevertheless constructive for the bull case. Breadth is improving as. NYSE net highs-lows finally printed a series of positive readings.



As well, credit market risk appetite is flashing positive divergences. The performance of high yield and leveraged loans relative to their duration-equivalent Treasuries is outpacing the S&P 500.



The BoA Bull & Bear Indicator, which is primarily a contrarian sentiment model, fell from 0.6 to 0.4 last week. This is an indicator with an intermediate time frame and not a short-term tactical timing indicator. It fell below 2 and prematurely generated a buy signal on March 23, 2022 near the tail end of the March rebound. Readings are now the lowest since June 2020.




The easy money has been made

I interpret these conditions as the initial rebound is nearly over and the market is due for a pause, but stocks could work their way higher in a choppy manner over the next few weeks. Intermediate indicators such as the NAAIM Exposure Index, the CBOE put/call ratio, and the BoA Bull & Bear Indicator point to further upside potential.


However, the latest risk-on episode has the markings of a bear market rally. Price momentum is strong, but it’s not overwhelming. If history is any guide, past episodes where the five-day rate of change exceeds 10% have marked durable bottoms (grey vertical lines). If we change the threshold to 7% (pink lines), the results can be hit and miss. While the market has roared ahead in some cases, it also weakened after a brief rally. In light of the hawkish monetary backdrop, caution is warranted.



Finally, a bullish setup is appearing in the gold mining stocks (GDX), which has bearish equity market implications. The gold miners are oversold on the percentage bullish on P&F indicator (bottom panel), but exhibiting positive relative strength against gold. As well, the junior golds (GDXJ) are also showing positive relative performance against the seniors (GDX). The combination of an oversold internals combined with improving internals is potentially bullish for this group. Gold stocks are bottoming, which I interpret as potentially bearish for the overall equity market because of their negative beta characteristics.



My inner investor is cautiously positioned. My inner trader remains long the market, but he is starting to edge his way towards the exit. How your trading account behaves will be a function of your risk and reward profile. Be bullish, but reduce your risk.



Disclosure: Long SPXL


43 thoughts on “Take some chips off the table

  1. Thanks Cam for this second, stern warning to de risk, in as many words. Your messages are nuanced, but this is not. Last time, you waived a double red flag, market was close to the peak. Tom Demark’s signal for a countertrend rally all the way to 4300-4500 was prescient as well. At a personal level, my portfolio is flush with cyclicals and value stocks, with limited exposure to technology. Some of the tech and communication sector exposure that I have, is from broad based ETFs, however the rest of the portfolio is actively managed. So far, my stock portfolio is down about 3%, based on advice from you and stalwarts like Jim Stack from Investech, who has 50% market exposure (60% long and 10% single short, via SPDN). I run a very conservative ship, with about 20-30% stock market exposure (this is % of net worth). This advice is from the book Global Asset Allocation by Meb Faber (20-25% each in stocks, bonds, gold, cash and real estate). I do not have close to 20-25% gold exposure, however, do have significant real estate exposure that, is cranking out good rental income. I also do not have that much bond exposure either, but am looking forward to adding bonds to the portfolio. That said, real estate is poised to fall in capital value here, as well, no doubt about it. Yes, I shall now, increase exposure to gold, through GLD based on your earlier advice. From what you have written, it appears that GDX should also be purchased, as it is at a discount to GLD. Thanks again. Jim Stack has been sounding warning bells for a good part of this and last year. His gorilla index of hope and dream unprofitable stocks with very high valuations (ARKK types), is majorly down as a canary in the coal mine. Ken introduced us to this excellent analyst, a while back. Thanks Ken.

    1. The stern warning was for investment oriented accounts.

      The more nuanced bull/bear analysis is for traders. I wouldn’t be totally surprised if the S&P 500 made it to 4400-4500 but IMHO traders should be overly greedy here. Take partial profits if you’re long.

      1. I trade SPXL. I entered at 72 and got stopped out at 88$. The other trade is short treasury futures (ZNU22). For now, I have no trading positions. The short treasury trade has been one of the safer trades. I have been shorting/selling ZN, at every 20-25 ticks rally. Margin requirements for this are low as well. For now, I am simply watching ZN from the sidelines, waiting for TNX to crank higher than 3% (?), which it may not. Based on your earlier TLT missive, I am a little leery of short treasury trade, and am just watching from the sidelines.

    2. Very interesting D.V., thanks. I will also be adding some gold based on current technicals and Cam’s comments, although it can often be a frustrating trade.

        1. Thanks. They are making a case for stagflation. I am unsure if we get to this, but it sure may feel like this, as money supply comes down and GDP slows. IMHO, there is simply not enough there, to estimate how we unwind a massive debt overhang, globally, short of killing the economies by reducing money supply causing global recession. We are already seeing the effects of reduced money supply in some of the EM stocks (and others).

    3. D.V.
      Just curious, why do you think real estate is poised to fall? Is it because the prices have gotten out of control? Also, which type of Real estate, residential vs. commercial?
      Commercial has already been beaten up due to big box stores and Amazon wiping out strip malls etc. Covid-19 has hurt office space, especially in big cities, so commercial has already been on the ropes.
      My reason for asking are two folds, 1) Real estate is supposed to be good bet in Inflationary times. 2) I am in the process of buying some commercial real estate. Just wanted to hear your perspective.

      1. Mohit
        Money supply is shrinking and we are now seeing its effects on the economy (slowing). Housing and energy markets are on a tear because of structural issues. US houses are much much higher in prices by comparison to time averaged mean (by some metrics, about 40% or so overvalued, based on Investech estimates). Mortgages have jumped in interest rates and this is already showing reduced demand for housing. Housing inventory is tight and so rents (and prices) are up. Rents may continue to remain buoyant, but I am sure, rising mortgage rates will take a bite out of demand for housing. This is a typical cycle. You are correct, real estate is a hedge against inflation, but there is a good chance, we may be past the peak as we discuss this. I stay away from commercial RE because of Amazon effect, and work from home. REITS like Spirit realty, Simon Property group are supposed to have a positive correlation with inflation as well, but I remain leery of commercial RE also as economy slows down. Both SPG and Spirit have come down as well, as Fed funds rise and ten year treasury sells off. It is time to sell RE, not buy, IMHO. I have about 30% net worth in RE and because of capital gains taxes, I am unable to sell. That said, all my friends and I am waiting to buy RE here.

        1. D.V.
          Thanks for your analysis. I do agree rising interest and already expensive R.E. will dampen the demand and as such prices can come down but I feel like that is going to affect residential R.E. mostly.

  2. Cam,

    What’s driving the stocks higher and what may drive it to 4400-4500? Is it market positioning (a lot of Shorts / Puts), technical patterns, or fundamentals? I don’t think the market is assuming a Fed pause in near months yet. I think inflation will soften but not to 2% in months to come.

  3. Even more relevant than a ZBT that almost triggered might be Marty Zweig’s aphorism re market direction: ‘Don’t fight the Fed.’ Maybe it’s as simple as that.

  4. Hi Cam,,

    Can you explain “take some chips off the table” vs that you post that you are long SXPL?

    Is it too late to take say 5% across the board for all my equities? Is that what you mean? I am primarily investor-oriented.


  5. re: ‘Cam wrote: ‘As well, the S&P 500 Intermediate Term Breadth Oscillator recycled from an oversold to an overbought condition. While overbought markets can become more overbought, it would be prudent to be reducing some risk at these levels.’

    Good call. No one can predict what will happen in the next days let alone weeks and the ITBM oscillator is as good as any to scale back. This particular indicator is actually available on a free platform that I tried earlier when searching for ITBM and it is available in real time, not EOD or delayed. If the chart link below is not suitable, the nice thing about this platform is that a user can get a free account, change the indicator and the script and get some free realtime chart (free version is limited – refresh the browser page if it stops).

    This link may not last forever as it is a free set up:

  6. Correction:

    “The BoA Bull & Bear Indicator, which is primarily a contrarian sentiment model, fell from 0.6 to 0.4 last week. This is an indicator with an intermediate time frame and not a short-term tactical timing indicator. It fell below 2 and prematurely generated a buy signal on March 23, 2022 near the tail end of the March rebound. Readings are now the lowest since June 2022. ”

    Should read:

    “The BoA Bull & Bear Indicator, which is primarily a contrarian sentiment model, fell from 0.6 to 0.4 last week. This is an indicator with an intermediate time frame and not a short-term tactical timing indicator. It fell below 2 and prematurely generated a buy signal on March 23, 2022 near the tail end of the March rebound. Readings are now the lowest since June 2020. ”

    …since June 2020. I apologize for the error.

  7. I keep hearing veteran traders/investors saying ‘this is the most brutal bear market I’ve experienced.’

    It sure feels that way.

    1. I’ve closed positions in SPY/QQQ in the premarket session. Gave back all of Monday’s early gains and quite a bit more.

    2. Two poor trades in a row. Reopened positions in SPY/QQQ too early on Monday. Then closed the positions at essentially the bottom of the premarket session. No excuses – just bad moves.

    1. The original post with one URL removed was this: Traders avoid getting scalped themselves in a whipsaw market – in the ES or microES 15 minute chart – could try the TTM scalper indicator/strategy or similar reversal type trade signals. This only works in a whipsaw market and not normally. Example:


  8. One explanation for the price action today is that the Spearman rank correlatin of up volume for $SPX for example, has completed a 2 week cycle low and has started a new cycle up. We saw this almost exactly two weeks ago on Tuesday May/24/2022. Don’t really expect a huge ralley as last time though, today’s action was mild and it is yet another low volume plus high(ish) return, the third one in 7 trading days. In the past, this is a sign of top rather than a low. The last time we saw two of these low volume- high return days was one day before the Mar/30/22 top.


    1. Thanks, Alex_tm. Looks like you’ve come up with multiple systems for wrapping your head around chaotic market action.

      My Achilles heel has always been lapses in emotional control – I’m an emotional guy. Of course it cuts both ways and I often use my emotional response(s) to market action to gauge entries and exits.

      Are emotions really an Achilles heel? Yes. I would conservatively estimate that my net worth today would be twice as high had I been able to let winners run. (Cutting losses quickly is not a problem – which has also saved me countless times.) But it’s a lifetime of money left on the table that I sometimes regret. I’m always anticipating the end of a run in price.

  9. A couple of weeks ago I posted anecdotes from coworkers who were concerned about their 401(k)s, along with the observation that it might signal an end to the selloff.

    Over the past week, I’ve heard a few related comments that are somewhat troubling.

    (a) ‘Home ownership is overrated. I have friends who put everything they have into buying a home, but can’t afford a vacation.’ From a guy who has been talking about buying a home for years – first in the Bay Area, then in the Sacramento/Folsom area, and now says he’s content to live in a rented condo with his family.

    (b) ‘I planned to retire two years ago!’ A manager in his late sixties who over the past 7-8 years has had 100% of his retirement account invested in cannabis. He was flying high for a while – but has never sold a single position.

    (c) ‘I just need $5 million. That’s it. I’m done with [working] after that.’ A 39-year-old guy who believes he’ll achieve that milestone within ten years – buying and trading crypto currencies. Living with his folks in the meantime. If I were to guess, he’s currently progressed ~2% toward his goal.

  10. Scaling back into SPY ~414 and change as it appears the morning’s selloff is being absorbed by buyers.

    1. If I’m reading emotions correctly, it’s time to begin scaling in for the longer haul. JMO, of course. We may retest SPX 4070, at which I would scale in further. If we then break below 4050, that would negate my thesis.

    2. As they say, bear markets don’t scare you out – they wear you out. Nicely accomplished by the endless chop in yields and prices over the past two weeks.

    3. Is there anything left to scare investors further? Sure, there will always be something. But what often happens is a positive response.

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