Did the NVIDIA-fueled rally exhaust the bulls?

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: Neutral (Last changed from “bullish” on 24-Jan-2024)

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.



NVIDIA’s week

The main market focus of last week was NVIDIA. Anticipation was building ahead of the company’s earnings report and option positioning was extremely bullish. In the end, the bulls were rewarded by a blowout report. NVIDIA’s stock surged and pulled the market up with it.


However, the advance was marred by poor internals. The rally in the S&P 500 took it to the top of its Bollinger Band, but it’s rare that upper BB rides are accompanied by negative RSI divergences and poor participation. Moreover, it’s unusual to see the market rally to an all-time high with the NASDAQ Summation Index flat when it should have been a source of strength.




Bullish exhaustion?

The NVIDIA-sparked advance looks exhaustive. Even if we were to ignore the non-technology related parts of the market and focus on the NASDAQ 100, it’s disconcerting that a semiconductor led rally is characterized by short-term NASDAQ 100 underperformance. Moreover, poor relative breadth (bottom two panels) represents another warning of poor internals under the hood.


Equally ominous are the price actions of QQQ and QQQJ, or the juniors. QQQ gapped to a new high on Thursday in the wake of the NVIDIA earnings report, but failed to follow through Friday by pulling back below the breakout. During this same period, QQQJ made a new lower high.


Renaissance Macro Research
pointed out that the combination of strong price momentum and extremely bullish positioning in NVIDIA has created a “buyers’ frenzy”. Historically, similar episodes have resolved in either corrections or consolidations.


Jason Goepfert observed that the post-NVIDIA earnings report rally saw the NASDAQ Composite up nearly 3%, but with poor breadth, as measured by fewer than 55% of issues advancing. This has only happened during the 1999–2001 dot-com bubble top period.


The 10 dma of the ratio of NASDAQ to NYSE volume has historically correlated to the NASDAQ 100. But even as the NASDAQ 100 reached fresh highs, relative volume failed to confirm the advance, which is a disconcerting sign of a lack of participation.


The usually reliable S&P 500 Intermediate Breadth Momentum Oscillator (ITBM) recently flashed a buy signal when its 14-day RSI recycled from oversold to neutral — but with a difference. Historically, failures of ITBM buy signals were characterized by near overbought readings, as measured by the percentage of S&P 500 stocks above their 20 dma (bottom panel). This is one of those occasions, which I interpret as limited upside for stock prices.



Respect the trend, but…

I am mindful of the exhibition of price trend and momentum. I also respect the adage that there is nothing more bullish than higher prices. Different varieties of price momentum factor ETFs have all been beating the market recently.


Keep in mind, however, the market was hyper-focused on NVIDIA last week and other news was pushed aside. The FOMC minutes were released. While Fed officials acknowledged that the hiking cycle was over, they also signaled that they are in no hurry to cut rates. Fed Governor Christopher Waller’s speech entitled “What’s the Rush?” last week summarized the Fed’s position well.

So, the data that we have received since my last speech [on January 16] has reinforced my view that we need to verify that the progress on inflation we saw in the last half of 2023 will continue and this means there is no rush to begin cutting interest rates to normalize monetary policy.

He concluded:

The strength of the economy and the recent data we have received on inflation mean it is appropriate to be patient, careful, methodical, deliberative – pick your favorite synonym. Whatever word you pick, they all translate to one idea: What’s the rush?

Any hope of a March cut is gone, and consensus is forming that the first cut will occur in June. The 2-year Treasury yield has been edging up ever since the release of the FOMC minutes, it’s unclear whether the stock market has fully reacted to this higher-for-longer scenario.


In conclusion, the NVIDIA-inspired rally last week was impressive, but poor market internals are pointing to an exhaustive move. The market is in need of a sentiment reset before the next sustainable bull run. While I remain long-term bullish on U.S. equities, traders should be cautious about the near-term outlook as the market can pull back at any time.