A bull market with election year characteristics

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 20-Nov-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.



A revived bull

As 2023 drew to a close, the revival of a long-term buy signal emerged. I have highlighted the utility of the bullish crossover of the monthly MACD histogram of the NYSE Composite Index before. In the past, such instances have signaled strong long-term buy phases (blue vertical lines).


This model first flashed a buy signal in June 2023, but MACD turned negative in September. As the market rallied off its recent October lows, the monthly MACD turned bullish again. There have been two other similar episodes of these MACD buy signalisakeouts. Once in 1999, and the other in 2012. Both traced out brief range-bound price patterns before breaking out to new highs. If the limited past (n=2) is any guide, stock prices should also rally to new all-time highs in the near future.




Election year seasonality

While I am bullish on equities, I don’t think that trees grow to the skies and prices don’t rise in a straight line. This is an election year. While history doesn’t repeat itself but rhymes, chances are that equity returns will be flat to choppy in the first few months and the majority of the gains will be seen in the latter part of the year.



The risk of transitory disinflation

In the wake of a powerful rally, what could derail the bull run? I think that the biggest risk is the transitory disinflation narrative.


The current market consensus features falling inflation and continued economic growth for the U.S. economy. In other words, a soft landing. The market is not discounting a series of Fed rate cuts that begin in March.


Even though the rate of inflation has been falling, some early worrisome signs that continued disinflation progress are stalling, which would halt the expected path of decline in the Fed Funds rate. Consider, for example, that the Atlanta Fed’s wage growth tracker is stuck for a second month in November at 5.2%, which is far too high in comparison to the Fed’s 2% inflation target.


As well, the Philly Fed’s prices paid index is has been edging up. While readings are not alarming, it nevertheless signals that inflationary pressures may be reappearing.


For a broader look, the New York Fed’s Global Supply Chain Pressure Index is rising again. This is a signal that the disinflationary pressures on goods may be over. In addition, the recent shipping disruptions in the Red Sea is likely to put additional pressures on supply chains and elevated the prices of goods.


None of these data points are worrisome in their own right. However, they do indicate that the “last mile” disinflation problem of moving inflation from 3-4% to 2% may not be more difficult than the market is expecting. This has the potential of pushing out the timing of rate cuts, which has the potential to unsettle the bond market and risk assets in general. The average hourly earnings print in the coming Jobs Report on Friday will be a key test of the transitory disinflation narrative.


My 2023 report card

At year-end, it’s time to publish a review of the results of my models, starting with the Trend Asset Allocation Model. As a reminder, the trend model applies trend following techniques to a variety of global equities and commodities to arrive at a composite score that yields a buy, hold, or sell signal for equities. We’ve had an out-of-sample record of weekly signals since December 2021.


I constructed a model portfolio that either overweights or underweights the S&P 500 by 20% against a 60/40 benchmark of 60% SPY and 40% IEF based on trend model signals. The model portfolio had another good year with a total return of 17.6%, which was ahead of the 60/40 benchmark of 16.7%.


As the accompanying chart shows, the long-term track record of the model portfolio showed almost equity-like returns with balanced fund-like risk



My trading model had a good year. The model portfolio of the trend model was up 28.9% excluding dividends, which was ahead of the S&P 500 capital return of 24.2%.



The week ahead

Looking to the week ahead, the S&P 500 has the potential to rise further. The index has staged an upside breakout through a cup and handle pattern and it’s approaching its all-time high. The VVIX to VIX ratio is also signaling more bullish potential. The VVIX, which is the volatility of the VIX, to VIX ratio has shown a tendency to peak before past peaks in the S&P 500. Moreover, the last two major tops in the market were preceded by negative divergences in this ratio.While there is no sign of a negative divergence, the ratio may be rolling over, which could be foreshadowing some short-term turbulence.