What’s bothering the stock market?

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 16-Apr-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.



A trifecta of woes

What’s bothering the stock market? Stock prices have had to contend with a trifecta of woes:

  • Fear of a hawkish pivot by the Fed;
  • Strong USD; and
  • Geopolitical risk and rising oil prices.
As a consequence, the bond market has weakened; the USD, which is affected by yield differentials and the safe-haven trade, has strengthened; oil prices surged in the wake of the Iranian missile attack on Israel and the Israeli counterstrike; and gold, which is another safe-haven trade, rallied and prices remain elevated.



The stock market is very oversold and ripe for a relief rally. The key question is: does the bounce represent a durable bottom or is there more downside ahead?



An oversold extreme

Rob Hanna at Quantifiable Edges revealed that his Capitulative Breadth Indicator (CBI) reached 13 on Thursday. Historically, readings at 10 or above have been short-term buy signals. As a reminder, the last signal occurred at the low last October.


One helpful sign for the bulls is that the gold mining stocks, which represent the safety trade, are showing signs of bullish exhaustion. RSI is rolling over and percentage bullish is overbought. (Disclosure: I remain long GDX, but I am scaling back my exposure.)


As well, the percentage of stocks above their 50 dma exhibited a breadth thrust by surging from an extreme oversold to overbought extreme. Such episodes have always resolved in a pullback in the indicator to below 50% (see circles), which was accomplished last week. We interpret this as a sufficient condition for a market bottom, though there are no guarantees as oversold markets can become even more oversold.


One constructive short-term development are the bullish divergences, as measured by improvement in breadth, even as the S&P 500 weakened and the 5-day RSI reached an oversold extreme.


The stock market is due for a bounce.


A durable low?

Here’s where the market stands today. The S&P 500 is extremely oversold, as evidenced by the low reading on the stochastic. A relief rally can happen at any time. It breached initial support at the 50 dma and is testing support at about the 5000 level, which is the price gap from February.

The key question is how stock prices behave after the bounce. Will the market weaken further or have we seen a durable bottom? (Please note that the levels shown in the lines are stylized and they are not forecasts).


Here are some nagging doubts. While short-term sentiment models are bearish, which is contrarian bullish, longer-term sentiment remains elevated. The monthly BoA Global Fund Manager Survey, which was taken before the market downdraft began, is the most bullish since January 2022, though readings are not extreme.


Even the weekly AAII sentiment survey is still net bullish and respondents aren’t showing signs of panic yet.


In addition, banking system liquidity is weak, which poses a headwind to stock prices.


Another key question is: “Where is the insider buying?”


Historically, insider buying (blue line) exceeded insider selling (red line) at key market bottoms. That condition isn’t evident today, though insider activity may be restricted as earnings season is just starting.



What to watch

As investors and traders wait for the inevitable bounce, here is what to watch. The following analysis is based on the assumption that geopolitical risk eventually recedes and all-out war doesn’t break out in the Middle East.


The technical analyst will monitor the durability of price momentum as the relief rally proceeds. The macro and fundamental analysts will monitor the bond market. In particular, the Quarterly Refunding Announcement (QRA) on April 29 and May 1 will be particularly important clues to bill and coupon supply in Q2.


Everyone will be watching the evolution of earnings estimates as earnings season proceeds. Forward 12-month EPS estimates continue to rise, though the EPS and sales beat rates are subpar by historical standards. Investors should get clarity on the fundamental outlook in the coming week as about one-third of the S&P 500 is expected to report their earnings.


In particular, three of the Magnificent Seven are expected to report earnings next week. Tesla will report earnings on Tuesday, and Alphabet and Microsoft on Thursday. Don’t forget that Friday morning will see the all-important PCE report, which is the Fed’s key inflation metric. Brace for volatility.



Both my inner investor and inner trader are bullishly positioned. 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 SPXL

8 thoughts on “What’s bothering the stock market?

  1. One of the problems I have is how people explain things.
    As an example, take gold.
    Gold is at a nominal all time high, no doubt about that.
    GDX is significantly off it’s highs of 2020 and 2022.
    So is this a divergence? You know when the market reacts negatively to good news and vice versa. This would be bearish for GDX.
    Or is it as some say that gold stocks are dirt cheap?
    My take on this is, that until GDX starts to outperform GLD, that GLD is the better vehicle….not necessarily right now of course, a pull back is very likely and all this gov’t deficits is a good tailwind for gold.

  2. Chinese consumers and their government are buying physical gold not the miners.

    Even Chinese small savers are buying small gold beads the size of shotgun pellets when they have extra cash. The Chinese government is cashing out of dollars and buying bullion as America weaponizes the dollar against Russian seized currency assets,

    Problem solved.

    1. MIners are meaningless to Chinese, and probably to all the average people. Its equity is all tied up with the mines. Equity is potentially worthless. It only exists in stable jurisdictions governed by laws. 2006 I invested a small amount of money into private offering by Lundin Mining when it was based in Vancouver. Lundin founder Adolf Lundin is a very capable explorer from Sweden. That year he died and his two sons took over. A large copper mine mixed with other precious metals was found in a South America country. My stake suddenly appreciated a lot. And then the usual happened. It was majority-nationalized, and investors only got 10%. In places like Latin America and Africa where Marxism is rampant and rule of laws if weak, the only people who can thrive are Chinese and Russians. Today most miners are just trading vehicles although a few of them have learned how to play the game in these volatile areas. Things look improved today as we are 30 years into the Internet age. Unfortunately mine resources are depleting fast and grade is getting lower and lower.

      1. I lost my shirt in a junior miner (GSS). They kept on diluting their shares by having to raise equity. On top of that the energy cost, labor problems and “C”. made my investment tank even though the price of gold was rising. I forget to add out of the blue one day they decided to hedge their gold by selling futures.

        Add one more to a painful learning lesson!

      2. Look at a long term chart of GDX:$GOLD, it’s been going down for a long time, since it started in 2007.
        Look at COPX compared to copper. Very different look. Looks more like a double bottom.
        A lot of copper is mined in the same kind of places as gold, although I confess I did not dig into the holdings of COPX compared to GDX. So I don’t think it’s all about jurisdictions.
        BOC selling treasuries and shifting to gold makes sense, and maybe when they are done gold fades and eventually the miners show some strength against the metal. But for right now, buy the metal not the equity, or wpm or rgld.

        1. You can think of a gold mine as a series of call options on gold stretching into the future, with the duration as mine life and strike price as the cost of extraction.

          Over time, as old mines have gotten played out, gold companies have replaced production at higher costs. In our model, that means the strike prices have adjusted upwards, so it’s no surprise that gold shares have lagged gold.

  3. One general factor is 2023-24 is the first time in years where total equities in the market are declining as buy-backs outpace IPOs.

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