How serious is the market’s trend break?

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: Bearish (Last changed from “neutral” on 15-Mar-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.



What rotating correction?

It finally happened. I’ve been warning about the extended nature of the market advance since late January, and the pullback seems to have begun. The S&P 500 violated a rising trend line that stretches back to November last Thursday. Friday’s market rebound didn’t help as it left the index below the rising trend line.

At the same time, market breadth hadn’t broadened out since mid-January. While I had hopes that market weakness in one group would be offset by strength in another, the rotating correction scenario isn’t working out.


Initial support for the S&P 500 can be found at the 50 dma at about 5080, with secondary support at the NVIDIA earnings report price gap at around 5000 and strong support at the breakout turned support at about 4800.




Trend breaks everywhere

From a technical perspective, the break in the S&P 500 trend line is a signal of significant technical damage. In addition to the S&P 500, I am seeing breaks in rising trend lines or channels everywhere.
The semiconductor stocks, which are bellwethers of the AI-related boom, violated both absolute and relative trend lines.


The price momentum factor, as measured by the relative performance of momentum ETFs, are beginning to roll over.


Even most versions of the Advance-Decline Lines are breaking their uptrends.


Taken in combination, these trend breaks are indications that a risk-off episode is about to begin.


Buy the dip

However, investment-oriented accounts should view any weakness as an opportunity buy the dip. The usually reliable monthly MACD histogram of the NYSE Composite turned positive in June 2023, which has been a reliable signal of a long-term bull market.


I would also monitor the relative performance of large-cap growth stocks. The AI transformation is real and it’s only in the early stages of adoption. Investors should seize any opportunity to buy these stocks if the normalized relative performance of the NASDAQ 100 (black line) dips into the oversold zone.



Bullish tripwires

I would warn that it’s a little early to be buying the dip. I would like to see sentiment turn sour and panic, which isn’t in evidence just yet.


A sign of a tradable bottom is an oversold condition in the Zweig Breadth Thrust Indicator. The ZBT buy signal is triggered when the market moves from oversold to overbought within 10 trading days. While those occurrences are rare, the ZBT Indicator is nevertheless a useful sign of an oversold extreme.


Another sign of a short-term market bottom is insider activity. Insiders flashed a prescient buy signal when buys exceeded sales in late October. The rest, as they say, is history.


It’s possible that the pullback could be fairly shallow. One of the five of my tactical bottom spotting indicators have flashed a bottoming signal. The VIX Index recently spiked about its upper Bollinger Band. Other models that are getting close to a buy signal are the term structure of the VIX is flattening very quickly and could invert soon, and the NYSE McClellan Oscillator, which could become oversold soon. Historically, downside risk tends to be limited when two or more models that flash buy signals.


On the other hand, the chart of the 2-year Treasury yield, which is a proxy for Fed Funds expectations, shows a cup and handle pattern on the verge of an upside breakout. Should it break out, upside potential could be significant and could have severe bearish implications for equity prices. Next week’s release of the FOMC minutes could shed greater clarity on rate expectations and the direction of the 2-year yield.


In conclusion, multiple breaks in rising trend lines are signs that a risk-off episode is underway. Initial support for the S&P 500 can be found at the 50 dma at about 5080, with secondary support at the NVIDIA earnings report price gap at around 5000, and strong support at the breakout turned support at about 4800.
I am long-term bullish and investment-oriented accounts should regard weakness as a buying opportunity. I have outlined a number of bullish tripwires based on sentiment and technical indicators for investors to follow.


My inner trader remains tactically short the S&P 500. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.



Disclosure: Long SPXU

2 thoughts on “How serious is the market’s trend break?

  1. Market leadership is shifting to resources which comprise very little of the US market indexes so are hidden. Gold and its miners in particular broke out first a few weeks ago and last week silver and its miners shot up. Copper, base metals and energy seem to have bottomed and also starting a new bull market.

  2. S&P has been in a range of 5120-5250 over the last 3-4 weeks. What are the odds that consolidation continues till the earnings give a clearer picture, particularly the management commentary?

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