A roadmap for the rest of 2024

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:

Another upper BB ride

The S&P 500 went on an upper Bollinger Band ride and unusually pulled back on Thursday after the soft CPI report and closed below the upper BB on Friday. What’s unusual is the risk-on tone adopted by the rest of the stock market even as heavyweight technology stocks in the S&P 500 weakened. The small-cap Russell 2000 gapped up and staged an upside breakout through a key resistance level in response to the prospect of lower interest rates owing to the weak CPI print.
 

Historically, the S&P 500 has consolidated sideways for a few days after upper BB rides. Will this time be any different, or does small-cap strength foreshadow further price advances in the near future? What about the rest of 2024?
 

The bull case

Here is what’s different this time. As we approach Q2 earnings season, fundamental momentum as measured by forward 12-month EPS revisions have been strong.
 

Many of the laggards, such as the Russell 2000, small cap QQQ, and bank stocks, which are just reporting earnings, are staging upside breakouts.
 

A pause ahead?

Here is the case for near-term consolidation. The first reason is seasonality. Historically, the month of July has been seasonally strong for the S&P 500, but most of the gains have occurred in the first half of the month.
 

To be sure, seasonality can inform investors about the climate but also the specifics of the weather pattern ahead. The Zweig Breadth Thrust Indicator, which is an overbought/oversold indicator, is nearing an overbought condition that has signaled periods of sideways consolidation in the past year, which was a period when the market was on a bullish rampage.
 

On the other hand, indications of banking system liquidity have been turning down. Liquidity has shown a rough correlation to the S&P 500 in the past and falling liquidity could pose a headwind to stock price gains.
 

The Citi Panic-Euphoria Model is wildly euphoric.
 

A rough roadmap

On the other hand, an analysis of VIX seasonality calls for implied volatility to bottom in late July and rise until an October top, followed by declines into year-end.
 

My base-case scenario is based on an analysis of current market conditions and seasonal patterns of a near-term top in July and sideways consolidation for the remainder of the month. Expect a rally in August, which could be consistent with an anticipation of a September rate cut in the wake of the July 31 FOMC meeting and Jackson Hole speeches. Volatility and risk should rise into the November election, followed by a post-electoral rally into year-end.