Still no change: Just a sell signal set-up

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: Neutral (Last changed from “bullish” on 17-Jan-2025)

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.

 

Good news, bad news

The tactical news is the short-term technical picture hasn’t changed very much in in the last few weeks. The market is still choppy and range-bound.
 

Bearish confirmations

I am seeing other confirmations of long-term weakness. I have highlighted the negative breadth divergence from different Advance-Decline Lines, which failed to make an all-time high even as the S&P 500 did so in January.
 

Technical analyst Willie Delwiche confirmed the negative breadth divergence globally by pointing out the contraction of global markets making new highs.
 

 

Other indicators are flashing warning signs. The BoA’s Sell Side Indicator, which measures Wall Street strategist sentiment, is within a hair of a sell signal. Street sentiment is becoming a little giddy, which is contrarian bearish.

SentimenTrader also observed that the S&P 500 Sharpe Ratio, which is an indicator of risk-adjusted returns, recently approached 2.0 and retreated. While the sample size is small (n=2), past instances were “too good to be true” episodes that resolved in bear markets.
 

Michael Howell of CrossBorder Capital, who is the guru of global liquidity, is calling for the top of a 5–6-year liquidity cycle in mid-2025 in an interview. This is consistent with my view of a major market top in H1 2025.
 

That said, all of these warnings fall into the category of condition indicators. They are warning conditions, but don’t work as immediate sell signals. As an example, Howell’s latest (gated) Substack update shows that global liquidity has stabilized due to improved central bank liquidity from the PBOC and ECB, but Fed liquidity remains a problem. Not all is lost yet.
 

Q4 earnings season has been a bit of a disappointment as the results can be described as neutral to weak. Forward EPS revisions stalled last week, which is indicative of a loss of fundamental momentum. The EPS beat rate was in line with the 5-year historical average, but the sales beat rate was below.
 

No tactical sell signal

That said, all of these warnings fall into the category of condition indicators. They are warning conditions, but don’t work as immediate sell signals.
 

From a short-term perspective, the S&P 500 staged an upside breakout from a bull flag (dotted lines) and left an unfilled price gap just below 5900. As long as the index stays above the dotted breakout line, it opens up the possibility of a test of the all-time high. However, the technical structure of the market remains choppy and range-bound.
 

However, the bulls should be overly excited until they can see an upside breakout to fresh highs and the technical underpinnings of any breakout. Keep in mind that analysis from Almanac Trader shows the second half of February tends to be seasonally negative.
 

In conclusion, plenty of warnings of a long-term market top are appearing, but the warnings belong to the category of condition indicators and not actionable trading signals. Current conditions amount to just a sell signal setup, and a review of the short-term technical picture shows a resilient market structure. Long-term investment-oriented accounts should de-risk to more neutral positions. Traders can wait for more definitive signs of downside breaks before turning defensive.