Nine reason why this rally has legs

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: Buy equities (Last changed from “sell” on 28-Jul-2023)
  • Trend Model signal: Bullish (Last changed from “neutral” on 28-Jul-2023)
  • Trading model: Bullish (Last changed from “neutral” on 27-Oct-2023)

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter 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.



This rally has legs

Last week, I outlined bullish and bearish scenarios and estimated their odds at 70% and 30%, respectively. The bulls won.


A relief rally was more or less inevitable. Once the S&P 500 violated a rising trend line that began at the COVID Crash bottom, it scared the daylights out of the bulls and caused a panic. The weekly slow stochastic touched 10, which has marked either important bottoms or tactical bottoms in the past.



I believe the combination of a severely oversold condition, washed out sentiment and the lifting of market concerns will spark a durable rally into year-end. I can think of nine reasons why this rally has legs. The reading of 10 on the weekly slow stochastics is just the first.



Supportive sentiment

Sentiment models are supportive of a durable rebound. The weekly AAII sentiment survey showed that the percentage of bears came in at 50% and bull-bear spread at -26%. Pay attention to the level of bearish sentiment. Similar readings have marked either short-term bottoms or prolonged bear markets in the past. AAII sentiment is a condition indicator and not an actionable trading signal. Nevertheless, it does inform investors that survey respondents are panicked.



The AAII Survey describes retail trader sentiment. Goldman Sachs prime brokerage, which offers a window into hedge fund sentiment, reported that the equity exposure long/short funds are the most defensively positioned in 11 years. Moreover, the CTA trend-following hedge funds are likely maximum short equity futures in light of recent market action, and further gains would trigger a buying stampede to reverse from short to long.



The other side of the sentiment coin is insider activity. While most extreme sentiment signals should be faded, extreme bullish insider sentiment is a buy signal. Not only have insiders bought the latest dip, they also continued to buy even after the market began to rally, which is another sign of a durable advance.




Falling macro uncertainty