A new cyclical bull?

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 (Last changed from “buy” on 26-Mar-2023)
  • Trend Model signal: Neutral (Last changed from “bullish” on 17-Mar-2023)
  • Trading model: Neutral (Last changed from “bearish” on 15-Jun-2023)

Update schedule: I generally update model readings on my site on weekends. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. 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 momentum buy signal

Technical buy signals are coming out of the woodwork, supported by strong price momentum and signs of broadening market breadth.


Ryan Detrick pointed out that the S&P 500 is on the verge of a five-month win streak of consecutive positive returns. Historically, market strength begets more strength.


I can sympathize. My slower-moving Trend Asset Allocation Model, which monitors a blend of global equity and commodity markets, is on the verge of a buy signal. While I am not inclined to front-run model readings, nor am I inclined to second guess model readings too much, I have some doubts. Here are the bull and bear cases.



A risk-on stampede

The signs of a risk-on stampede are forming. Credit market risk appetite indicators are confirming the advance in the S&P 500.



The folks at SentimenTrader are turning bullish. As one of many examples, Dean Christians observed that “the percentage of cyclical sub-industry groups up more than 40% from their respective 1-year lows”. This is an important signal from the markets that a cyclical recovery may have begun.



Commodity prices are also recovering, though the lack of bullish confirmation from the cyclically sensitive copper/gold and base metals/gold ratios is a little disconcerting.



A crowded long

In the short run, however, sentiment has become excessively bullish. Such crowded long conditions argue for caution.



The Bob Farrell AAII Sentiment Indicator, which is AAII bulls . (AAII bears + AAII neutral/2), is up sharply (red line in chart).


The retail investor was all bulled up going into earnings season. While the market response hasn’t been bad, warnings from cyclically sensitive companies like Fastenal and Rio Tinto are cautionary flags. In addition, banks reported that they are preparing for a recession by tightening lending standards. Tightening credit in the face of a possible slowdown is not only negative for consumer spending, it also runs the risk of setting off an unforeseen credit event that rattles risk appetite.



The early results from Q2 earnings season have been mildly disappointing. The EPS and sales beat rates are below historical norms and EPS estimate revisions are stalling. This is all happening against a backdrop of elevated forward P/E multiples. To be sure, only 18% of the S&P 500 have reported results. We should see greater clarity next week when about half of the weight of the S&P 500 report results.



With the relative performance of cyclical industries mostly in uptrends, recent earnings reports have seen many cyclicals exhibit pullbacks. Is this just a hiccup or something more serious?




A regime change judgment call

Where does that leave us? While the intermediate-term outlooks appears uncertain, the market looks like it’s poised for a short-term correction or consolidation.



The key question for investors is whether they should buy the anticipated dip. If this is the start of a new cyclical bull, excessively bullish sentiment doesn’t necessarily have to be contrarian bearish. There have been several instances in recent history when the S&P 500 has continued to advance while the AAII bull-bear was highly elevated, which can be characterized as “good overbought” conditions.



Similarly, an analysis of the CBOE equity-only call/put ratio (top panel) shows that bullish crossovers of the 50 and 200 dma of the ratio can signal secular bull trends. The last buy signal occurred in February 2023.



On the other hand, the macro risk is that the market is repeating the double-dip recession of 1980–1982. Just as stock prices recovered after the initial dip in 1980, the Volcker Fed squeezed the economy with painfully high interest rates. The economy suffered a second setback and didn’t recover until 1982. Under that scenario, we are roughly in Q1 or Q2 1981, which is just before the short rate peak.



Ultimately, the bull and bear decision amounts to a judgment call on regime change. Is the economy emerging out of recession or is there a slowdown waiting around the corner to sideswipe stock prices and market expectations?


My answer is one of the more valuable and honest ones in investing, “I don’t know.” While stock prices are vulnerable to a setback in the short run, the intermediate-term outlook depends on the newsflow on earnings, the market reaction, the Fed decision and other factors, such as evolution of expectations of Chinese stimulus in the coming weeks.


8 thoughts on “A new cyclical bull?

  1. 50/200 dma cross over is a time honored bullish technical signal. ZBT and Wayne Whaley thrusts also flashed a near buy signal around that time give or take.
    Professional investors remain underinvested, retail investors have been buying (see AAII data, and graphic posted by Cam (AAII vs. BOA fund manager survey; https://humblestudentofthemarkets.com/2023/07/19/scenes-from-q2-earnings-season/)
    Investech is battening down the hatches (Ken introduced us to this advisory a few years ago).
    I suppose the key is a looming economic slowdown and that could well be in the pipeline.

  2. Cam, since the March 13th low the Nasdaq has rallied 29.22% and S&P 17.65% respectively. In retrospect are there any indicators that you follow that would have identified such a massive rally?
    I request readers to share their thoughts.

    1. Here is my answer and don’t think I did this. This is all hindsight.

      Note your date of March 13. Note Cam’s timing above: Ultimate market timing model: Sell equities (Last changed from “buy” on 26-Mar-2023)
      Trend Model signal: Neutral (Last changed from “bullish” on 17-Mar-2023)

      So early March is a key period. Silicon Valley Bank failed on March 9. It appeared bank dominoes would fall. Stocks fell. Junk bonds fell. Fed Fund Futures plunged. Macro oriented rational investors (like Cam and I) became correctly cautious. Value stocks that are the 492 of the S&P 500 have sucked since then.

      My look at the charts says the market bottomed March 24, not March 13, the Monday after the bank’s weekend collapse. March 24 is when the Fed and Treasury came to the rescue of the whole banking system by lending at par for government bonds underwater bonds on bank’s balance sheet.

      So the government saved the day. Should investors like Cam and I and most of you have immediately dived back into stocks? Tough since we knew that credit conditions would be tighter. We also had Credit Suisse fail. The macro outlook was VERY clouded.

      But many institutional money managers don’t have the luxury of getting out of US stocks. So they must shift sectors and stay 100% in. Where should they go given the cloudy macro outlook in early April? Of course, safe, recession-proof, big growth names. These soared from March 24 while the economically sensitive stocks lagged badly. These folks wanted predictability and then lucked into an A.I. boost. Momentum players saw the trends and jumped on board with the gap widening between winners and laggards.

      For example, the Dividend Aristocrat ETF (must raise your dividend every year for 25 years!) is up only 4% since Mar 24 with a Growth ETF I follow up 20%.

      Look at S&P weighted versus unweighted and you see the big difference in performance from March 24. Look at Value Factor versus Growth, same thing. The charts look like wide open alligator jaws.

      So yes, we could have identified what money managers who must stay invested would shift to. But would we have followed. Remember, we were waiting for the Fed extreme rate increases to break something for the next big drop. They broke it but then fixed it in a couple of weeks. Amazingly investors or maybe just traders leaped back in.

      This reminds me of the March 2020 Fed/Treasury rescue of the Covid Crash and instant economic depression. We had a one month bear market! Those propeller heads at the Fed do wonders, very quickly. Maybe they are planning for rescuing these events.

      So, when a sudden economic disruption happens, expect recession-proof big growth companies to outperform economically sensitive sectors because institutions will shift. However that might mean going down 20% when Value goes down 40%. Also expect the Fed to rescue but if inflation is raging, maybe not. Nothing is certain.

    2. This is something here for us students’ reference only. I am sure everyone here has his own system. So I just share what I know from experience and industry contacts.

      1. For Intrepid, short-term frequent turnovers will not give you big return. Math proves that and taxes are a big concern.
      2. The correct trend following would have us identify October as the trend change pivot. March mini banking crisis did not change the trend. The process is incremental, just math extrapolation one step at a time in the time series, waiting for trigger. You need both necessary and sufficient conditions.
      3. For the whole 2022 there are lots of people accumulating shares while simultaneously shorting a group of stocks. But the majority of money is in accumulation of shares.
      4. It is possible to accumulate shares and not trigger VaR red button. This was done by gap down at the open and buying in the cash session. So a gain/loss parity can be maintained in a zone and not to trigger VaR algo and not catch attention of most people.
      5. There are a lot of manipulation going on in the markets. US and the World are controlled by big money. The pursuit of money is relentless and ruthless.
      6. If you insist on using only one parameter (add a few aux ones would be better but not too many) to efficiently identified the peak and valley, VIX would be the choice. Believe it or not, gigantic amount of money are riding on this non-sexy parameter.
      7. The biomarker for identifying the accumulation 2022 is that VIX was going thru lower high time series, and beginning in Oct was establishing a down channel. If not for RB crisis there would not be spike in VIX in March.
      8. Now comes in the aux parameters to further confirm a trend change. The most reliable one is SOXL, next would be TECL/TQQQ. A high volume up move would give us one more incremental evidence. Again one step at a time. Even without the AI frenzy there is still big profit by holding steady and continuously adding to positions.
      9 Managing money and having a mandate stated in prospectus with legal ramification is like going to a fist fight with both hands tied behind back, especially at turning points when those are the best time to make big money.

      The last practice is to look at two year rolling returns routinely. Since industry bonus is operating on yearly basis you should expect a very strong mean reversion bias from year to year. Nothing motivates people more than greed. They will collude and move mountains to make money. That’s how we got the GFC.

      And the last. Believe the charts more than ever. Everything that can move markets are modeled pretty exhaustively and the big data modeling are being modified while we are sleeping. Today markets move at lightning speed. There is no Pink Floyd to remind you that.

      1. Thank You Ken and Ingjiunn for your detailed inputs. There is a lot for me to think about and I genuinely appreciate it. Being a successful short term momentum trader I had missed the big picture. My concern was that I not repeat the same mistake again. Going forward I intend to add more long term trend following indicators in my repertoire.

  3. Perhaps it will be when the unfixable happens.
    One thing I cannot get out of my head is how when they started raising rates, the market went down, and down and down, but never really crashed. There was not the same reaction as in late 2018 to rising rates.
    So at the beginning of this cycle , who thought they would get to 5%? Not many, they thought we would have a redo of 2018, and after SVB things have just been going up.
    Reminds me of the little boy who cried wolf.
    Mortgage rates spike and house prices don’t tank. What’s going on?
    For individual investors who are not mandated to stay invested, when things don’t make sense, be cautious.
    What happened before Nixon closed the gold window? DeGaulle wanted gold and not USD, so the window got closed. Now that we have deficits of 20 trillion +, why should the gov’t pay all this interest? What is to stop congress from changing the rules to just print more? Not tomorrow of course, but if inflation sticks and keeping rates up for longer makes the debt a self reinforcing monster?
    This would be the final gasp of fiat?
    Remember that debt :gdp matters a lot when dealing with inflation and we are at an extreme.
    Debt doesn’t matter until it does.
    The market may shoot higher near term, but wasn’t it Baruch who said he left the last 10% for others?

  4. I just realized I showed the wrong chart after “A Crowded Long”. It should have been the Fear & Greed Index.

    I apologize for the error and the chart has been corrected.

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