Why the market won’t crash from here

Posted by Cam Hui -
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 28-Feb-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.

 

 

A Confirmed 5% Canary Warning

The S&P 500 flashed an Andrew Thrasher 5% Confirmed Canary warning last week, which is defined as “the underlying index declines 5% within 15 days from its 52-week high, and closes under 200 dma for two consecutive days”. The signal is based on a research paper that won the 2023 Charles Dow Award.
 

 

If history is any guide, subsequent drawdowns have been higher than average (green bars).
 

 

Does this mean it’s time to assume a position of maximum defensive portfolio positioning?
 

 

At a Crossroad

Regular readers know that I turned intermediate-term cautious on U.S. equities in late January, and the stock market has declined since then. What happens now?

 

In the short term, the S&P 500 could be regarded as at a crossroads. The index breached a rising trend line while the 5-week RSI was oversold. Investors saw a similar fake-out before in October 2023. Will stock prices recover, as they did in 2024, or is this the start of a significant decline?

 

 

It is said that history doesn’t repeat itself but rhymes. Here is a highly speculative template for the possible path of the S&P 500 based on its market action in 2023. I copied and pasted the highlighted portion of 2023 bear market into 2025. I aligned the 5-week RSI readings (top panel) so that the readings are similarly oversold. The S&P 500 was fitted to appear like early 2023 when the S&P 500 dropped sharply and the 40-week moving average, which is roughly equivalent to the 200 dma, were aligned together.
 

 

The exact trajectory of the stock market in this projection is pure fantasy, but it does provide a template for the rest of 2025. Here is my base-case scenario against the backdrop of my intermediate-term cautiousness. The most likely S&P 500 path for 2025 is a relief rally that falls short of the old highs, followed by a choppy decline into H2. Expect several volatility events during that time frame characterized by steep drops and rip-your-face-off rallies.
 

 

Exhausted Bears

Sentiment models are supportive of a relief rally rather than a market crash from these levels. While sentiment indicators should be regarded as condition indicators and not actionable trading indicators, they are nevertheless useful in determining upside and downside risk and reward. In the absence of further unexpected shocks, current conditions should put a floor on stock prices.

 

Consider, as an example, the Fear & Greed Index, which is showing signs of extreme fear. Stock prices just don’t crash with sentiment at these levels.
 

 

The AAII weekly sentiment survey showed that bears stayed at about the 60% level for a third week, which is indicative of retail panic and contrarian bullish.
 

 

From an anecdotal perspective, portfolio manager Steve Deppe also reported a sense of blind panic in his client base.
 

 

As well, I had been watching for a spike in the put/call ratio as a sign of panic, even though the 10 dma had been elevated. I finally saw it late last week, but is it enough?
 

 

For the last word in contrarian sentiment, I offer the latest cover of The Economist.
 

 

 

A Momentum Unwind

An analysis of risk appetite indicators yields some clues to the nature of the latest pullback. The relative performance of junk bonds roughly tracks the S&P 500 (green line), while the high beta/low volatility ratio (red line) has plunged. I interpret the relative performance of junk bonds as a sign that financial conditions are not overly stressed. Instead, the downdraft was the result of a price momentum and high beta unwind of a crowded long positioning in the Magnificent Seven.
 

 

There are constructive signs that the price momentum factor unwind is bottom. The relative performance of different price momentum ETFs are all showing signs of reversal.
 

 

In conclusion, I am intermediate-term cautious about the stock market based on continuing signs of weak breadth. In the short run, however, sentiment has become overly bearish and the price momentum unwind that sparked the latest downdraft seems to be abating. My base case calls for a short-term relief rally, followed by a choppy decline into H2 2025.

 

 

My inner trader remains long 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 SPXL

 

11 thoughts on “Why the market won’t crash from here”

  1. Hi Cam, if you had to guesstimate, do you see the decline in H2 2025 as a retest of the lows or do you forecast lower lows?
    Thanks

    1. Hard to tell. It depends on whether the economy goes into an actual recession or just a vibecession, in which growth expectations are just reset.

      In the case of a recession, typical pullbacks are in the 20-50% range, while growth resets tend to be far less.

  2. This makes me think of black swans. Those things that a not foreseeable . Then big money may be caught on the wrong foot.
    The tariffs is not a black swan. Trump has been talking about them for a long time.
    Perhaps when they let Lehman go was a black swan because nobody thought that after Bear Sterns that another big player would be allowed to fail.
    So when the magician is waving the cloth in your face, what is he hiding?
    The tariffs imo is too obvious. Remember LTCM in Sept 98 long before the top by about a year and a half. The dip in Aug 2006 also almost a year and a half before the Oct top.
    Tops are often a process and take time. So don’t be surprised if 6 months from now we are making new highs , tariffs be damned and euphoria is the flavor of the day.
    This is not the time to load the truck, the market is overpriced, but the fear is strong, only we aren’t at the puke out bottom are we? So maybe the fear is wrong.

  3. Another thing that people may have wrong is the narrative about politicians wanting to be re-elected so that their behavior is predictable. I won’t argue with their wanting to be re-elected, but what’s the real reason? What do power and influence coddle? The ego?
    Does Mr. T have ego issues? Perhaps.
    So does the narrative that since re-election is a non issue mean as much as is presented? Does he want expensive egg all over his face?
    We’ll see, but the tariffs are his schtick , he can blame Biden for problems, but the tariffs will be a tough sell, and being as obvious as they are, I expect a deluge of blame. Heck you can get blamed for doing the right thing, happens all the time. Tough on the ego.

    1. Excellent thoughts.
      I try to always see from Others’ Ego(s) perpectives (the other person, in any transaction) and then things like motivation and actual actions become clearer and it becomes quite understable, and sometimes even predictable.

  4. Sure looks like a bounce is coming but the macro background is extremely unusual and risky in a brand new way with consumers and businesses frozen in the headlights of the tariff war and the tearing down of American national and international institutions.

    Torsten Slok’s Friday daily letter (link below) shows the unprecedented, in many cases back to 1980, of soft data surveys showing sudden huge negative moves. He along with other Strategists I trust, like El Erian and Summers say this soft data weakness might lead to an extreme, sharp fall in hard data that will show us dropping into a recession, who knows how deep?

    The only time we had a tariff war coming off a stock market bubble was 1929-1930 and that didn’t end well.

    There is a saying back then that most traders lost all their money in 1929. The smart ones lost their money in 1930.

    Most of today’s investors have never lived in a period of government fiscal austerity. It is not fun and investing like the deficits are still boosting the economy is a mistake.

    America’s damaged global brand will hurt American international champion company sales and not just Tesla. We will hear more of that in future earnings calls. How open ended might that be? Also, there will not be a Fed put if inflation remains sticky.

    My guess is a relief market rally shorter than expected, and then corporate earnings guidance going into April being progressively weaker as hard economic data also falls faster and harder than we’ve ever seen. Then ……..?

    Sorry to be a downer. It’s just that I have never seen such an open ended downside possibility over the next year or two as we have today.

    Here is Torsten Slok’s article (sign up, it’s free).

    https://www.apolloacademy.com/the-daily-spark/?utm_medium=email&utm_source=pardot&utm_id=701Dp00000017sOIAQ&utm_campaign=2025_EXT_Daily+Spark

    2. I’ll take that as a reflection on sentiment. How come there has not been massive selling? Maybe we are all deer in headlights.
      So can sentiment go much lower? Of course it can, but how likely?

  5. A fellow finds a brass bottle on a California beach. He rubs it and out pops a genie. The genie is too tired after giving wishes all day so only gives the man only one wish. The man thinks for a while and says he always wanted to go to Hawaii but hated flying and gets seasick on boats so asks the genie to build a road to Hawaii so he can drive there. Genie says that’s way too hard. The ocean is so deep and the amount of steel and concrete would be enormous. He says give me another wish. The fellow thinks and says, he wants to get rich in the stock market so he wants to get inside Trump’s head to know what he’s thinking and planning about for the next day. The genie says, do you want two lanes or four?

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