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: Neutral (Last changed from “bullish” on 26-Jul-2024)
- Trading model: Bearish (Last changed from “neutral” on 06-Sep-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 Hindenburg warning
What if the Magnificent Seven are done with their bull phase? As megacap growth stocks comprise roughly 40% of S&P 500 index weight, the math becomes increasingly challenging. The rest of the market will have to do the heavy lifting in order for the S&P 500 to advance.
The odds of that scenario becoming reality is rising. The market just flashed a Hindenburg Omen warning. In plain English, the ominously named Hindenburg Omen occurs when a highly bifurcated market loses momentum and starts to turn down. While one Hindenburg signal can be safely ignored, a cluster should make investors sit up and take notice. In the last 10 years, there have been 13 such clusters. Nine (pink bars) have resolved bearishly, while four (grey bars) were benign. As the accompanying chart shows, the market has flashed another cluster of Hindenburg Omen signals for five consecutive weeks.
The odds aren’t in the bulls’ favour, particularly when the bifurcation is evident between megcap growth, which comprise about 40% of S&P 500 weight, and the rest of the index. Even if the S&P 493 is strong, it’s difficult to make the math work if the Magnificent Seven significantly weakens.
The fate of the Magnificent Seven
Is the Magnificent Seven done? The jury is still out on that score. The absolute and relative performance of the Magnificent Seven ETF shows a peak in early July, followed by weakness and a rebound and consolidation.
On one hand, the relative performance of the NASDAQ 100 (black line), which serves as a proxy for large cap growth, touched the oversold level Technically, that should be enough for these stocks to rebound.
The relative performance of the Semiconductor Index, which leads the AI revolution, tells a mixed story. The good news is it recovered after testing a key relative support zone (dotted lines). The bad news is it remains in a relative downtrend (solid line).
On the other hand, Callum Thomas at Topdown Charts observed that tech valuations are highly stretched and they have only been exceeded by the dot-com bubble era of the late 1990’s.
From a sentiment perspective, FactSet reported that companies AI on their earnings calls have peaked. Is this a contrarian indication of peak AI frenzy?
More bearish news
Here’s more bearish news. Equity risk appetite indicators are also exhibiting negative divergences. In particular, global cyclical indicators, as measured by the copper/gold and base metals/gold ratios, are weakening.
As well,
Ryan Detrick observed that the final two weeks of September suffers from poor seasonality.
Just remember that any weakness should be just a blip. The S&P 500 remains in a long-term uptrend.
Watch the SEP
The investment highlight of the coming week will be the FOMC decision. The hotter than expected CPI and PPI reports cemented expectations of a quarter-point rate cut at the September meeting. However, the market is now discount two consecutive half-point cuts at the next two meetings, which may be an overly ambitious expectation.
The Fed hates surprising the markets. Watch the Summary of Economic Projections (SEP) for the dot plot projections, as well as expected rates of economic growth, inflation, and unemployment. If the Fed were to correct the market, that’s where the correction will be most evident.
The usually reliable ITBM remains on a sell signal.
In conclusion, I continue to expect market sloppiness for September and possibly October. Investment oriented accounts should regard any near-term weakness as a buying opportunity. Pullbacks are normal at this point of the election year, and I expect higher stock prices by year-end.
My inner trader is (painfully) maintaining his short position in 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
You know the one about wise guys learning from the mistakes of others. Along the same vein, why is Buffett heading for the exits on AAPL?
He has to start leaving early because of size.
I also don’t think the bull is done, we need that last manic rush to new highs accompanied by euphoria and maybe a Barrons front page tossed in for good measure.
Yes it must be a painful short position.
Gold for the time being might be a crowded trade with many late converts. There could be a period of digestion. One market which intrigues me and has the potential of making many multi-millionaires is Natural Gas. I would now begin to trade it from the long side. As usual, please do your homework before jumping in.
Appreciate your well placed caution on gold. Is the Nat Gas call a short term trading call or a longer term secular call? It would help if you care to elaborate. Thanks.
It is an intermediate call. I am trading UNG.
Trust is a big thing right now as we enter a fog of uncertain outcomes. Out of equities, bonds, bitcoin, commodities or gold, the only one that can be trusted is gold. That will keep it going and keep on surprising. Certain other ones might do better if the world goes in a direction that favors that one but gold will be chugging along as well.
With all the uncertainty ahead, why trade out of a stabilizer in your portfolio?
If you want to trade, buy and sell puts and calls for some short term action.
So, “40% of the S&P 500 is in tech and the math does not add up”.
“The S&P 500 remains in a long term uptrend”.
One of these statements is incorrect. At some point, if the long term bull market has to remain intact, the 40% tech component must continue to keep going higher, albeit at a lower rate, as the “other 493” start to pull the wagon. What this suggests is a significant, short term deeper pull back in tech and S&P 500 (which is at this stage a derivative of tech), and then a rally in both. The “other 493” are unlikely to rally that fast IMHO. It will take a longer term outperformance of the “other 493” to make up for tech/MAGs decline.
I wonder if we get a “buy the rumor sell the news” moment on Wednesday . They can give whatever excuse they want, as in “the cut was not big enough” “the market had already priced it in”. So I would not be surprised to see the market get slammed, but we are still in a bull market, so I’m just watching.