Bitcoin 100K: Buy or fade the animal spirits?

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 15-Nov-2024)
• Trading model: Bullish (Last changed from “neutral” on 15-Oct-2024)

 

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. 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.

Crypto leads the stampede

Now that Bitcoin has exceeded the psychologically important 100,000 mark, it is becoming evident that the FOMO risk-on stampede is in full force. The risk-on mood can also be seen in the relative performance of speculative growth stocks, as measured by the Ark Investment ETF (ARKK), which has shown a roughly correlation with Bitcoin. In addition, ARKK has staged an upside breakout from a multi-month base.
 

Is it too late for traders to hitch a ride on the risk-on train or should they fade the rally? Here are the bull and bear cases.
 

Bullish breadth

Technical analyst Willie Delwiche confirmed my observation of intermediate-term strength by observing that over half of S&P 1500 industries are making new 52-week highs, which is an indication of broad-based strength.
 

The price momentum factor, which measures the propensity of rising stocks to keep on rising and leading the market, has also been strong. The relative performance of different momentum ETFs are all rising.
 

An extended advance

The bears will argue that the market’s price advance appears extended. The 10 dma of the CBOE put/call ratio has reached the froth zone. Past instances have generally resolved in market pullbacks.
 

The post-election rally has been impressive. The S&P 500 (top panel) reached the top of its Bollinger Band last week, which is an overbought condition. The market has often gone on upper BB rides under such circumstances in the past, but the market has either consolidated sideways or staged shallow retreats whenever the upper BB ride was over. One warning of possible weakness can be seen in the equal-weighted S&P 500 (bottom panel), which never reached the upper BB in the last advance. I interpret this development as a sign of short-term underlying weakness that calls for a period of consolidation or minor weakness.
 

A case of narrow leadership

The recent S&P 500 rally has been marked by narrow leadership. Even as the S&P 500 reached all-time highs last week, both the equal-weighted S&P 500 and the Russell 2000 are lagging the S&P 500 in the latest advance. Similarly, the percentage of S&P 500 above their 50 dma were declining. Even though intermediate breadth indicators remain strong, these breadth negative divergences could be warnings of short-term weakness ahead.
 

The narrow leadership has been characterized by a sudden rotation from value into growth, whose dominance has been global in scope.
 

I have some doubts as to the short-term sustainability of growth leadership. Semiconductor stocks, which have been the growth bellwethers, are exhibiting a series of lower highs and lower lows, both on an absolute basis and relative to the market.