How to trade the momentum reversal

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 Risk-off Reversal

The most recent BoA Global Fund Manager Survey revealed a sudden reversal in risk appetite. Global institutional investors stampeded out of risky assets and rotated from U.S. equities into Europe and China. Most of the selling was concentrated in the U.S. Magnificent Seven, which had been the market leaders. It was a stunning display of a reversal in price momentum.

 

 

 

Charting the Momentum Unwind

The reversal in price momentum can be seen at two different levels. Within the U.S., Magnificent Seven leadership topped out in late 2024 and weakened relative to the S&P 500. Selling pressure increased in February. Even as the S&P 500 rebounded in the last week, the Magnificent Seven only stabilized but failed to gain ground.
 

 

From a global perspective, U.S. global leadership reversed itself after leading global markets in 2023 and 2024. Investors rotated into Europe, Japan and China.
 

 

Is the momentum unwind over? What can investors expect?
 

 

Reversing the Risk Appetite Reversal

Within the U.S., the relative performance of price momentum ETFs is turning up and the reversal has coincided with a reversal in risk appetite.
 

 

The risk appetite reversal is likely to continue. AAII weekly sentiment spent a fourth consecutive week in the extreme fear zone, which is contrarian bullish and supportive of a continuation of the relief rally.
 

 

The NAAIM Exposure Index, which measures the sentiment of RIAs who manage individual investor funds, is within a hair of its lower Bollinger Band. In the past, readings below the lower BB have been effective tactical buy signals.
 

 

The reversal in risk appetite is likely to see U.S. large-cap growth stocks rebound. The NASDAQ 100, which is heavily weighted with Magnificent Seven stocks, is near oversold on at 12-month normalized basis relative to the S&P 500 (black line).
 

 

As well, the forward P/E  of the Magnificent Seven has reset to more reasonable levels.

 

 

Market positioning is also supportive of a short-term rebound. CTAs are starting to reverse their crowded shorts, which opens the door to a sharp short-covering rally. As well, numerous brokerage firms have

 

 

As well, numerous brokerage firms have published estimates of large equity buy flows from quarterly re-balancing because stocks have underperformed bonds in Q1.
 

 

A Global Momentum Reversal?

The question of whether the momentum trade of a rotation from U.S. into Europe and China is ready to reverse is a trickier question. While the price momentum factor has turned up in the U.S., global rotation at a sector level hasn’t shown strong signs of reversal yet. The stampede of funds out of U.S. tech into China tech, and from U.S. financials into European financials, is continuing. While there are some early signs of stabilization in these factor return patterns, they aren’t definitive enough to call the turn.

 

 

The main takeaway from this analysis is global markets saw a sudden reversal in risk appetite out of the Magnificent Seven. While risk appetite has recovered in the U.S. equity market and a relief rally will likely continue, the jury is still out on whether the stampede into non-U.S. will continue. Despite the recent sell-off, respondents in the BoA Global Fund Manager Survey are still ranking the long Magnificent Seven as the most crowded trade. The unwind has further potential to go.
 

 

Looking to the week ahead, the S&P 500 exhibited a weak bounce and the index failed to regain its rising trend line, though the 5-week RSI remains oversold. While the market structure is supportive of a continued relief rally, it’s entirely possible that the market weakens in the coming week to re-test its recent lows in anticipation of the reciprocal tariff announcements scheduled for April 2.

 

 

I reiterate my view that any relief rally is unlikely to be sustainable. The U.S. equity market is experiencing significant long-term breadth deterioration that’s consistent with an intermediate-term top. Investors may be better served by diversifying their U.S. exposure into non-U.S. equities for the coming market cycle.

 

My inner trader is still long the S&P 500 and he recently added to his position. 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

 

7 thoughts on “How to trade the momentum reversal”

  1. Looking at the chart of MTUM vs S&P 500 the recent relative rebound looks impressive. However when I look at the raw MTUM chart it looks very similar to the SP500. The current 14 day RSI for MTUM is 44.52 vs 41.69 for the SP500 so there doesn’t seem to be that much between them.
    Maybe part of the cause of this relative rebound is simply that MTUM has been more volatile than SP500 in the last few months. For example, the difference between the February high and the March low for MTUM was about 15.7% compared to only 10.15% for the SP500.

    1. That’s why I chart the relative performance of MTUM and other momentum ETFs. Each ETF is built slightly differently, but the relative return patterns are the same.

  2. A key will be the follow-up from the extremely negative soft data (opinion) statistics and whether we experience an epic drop in hard data to follow. Will the Trump chaos cause a sudden freezing of consumer buying and corporate decisions? Will America’s international brands be shunned suddenly and deeply? American investors are too complacent about this, in my opinion. We need an anthropologist to help us see how humans will react. Here’s is the best one.
    Gillian Tett is a brilliant economic anthropologist. This interview is a MUST watch to understand what’s going on. She is an anthropologist and head of Financial Times editorial board.   Understanding human behaviour will likely be more insightful to what will happen in the global economy and investment markets than the economic theories that treat people as economic rational actors.  She predicted the GFC subprime crash in 2008 while reporting for Financial Times on Wall Street by seeing the mass mania of sub-prime traders around her. 

    https://www.youtube.com/watch?v=3PXVrLH4zSU&list=WL&index=3

    Larry Summers is an economic truth teller that has forecast the Post Sea Change environment accurately and brilliantly. This video is also a MUST watch to understand what’s happening.

    https://youtu.be/fJVpQivUj0U?si=xNyW2DxpWbSNC_N2

    1. thank you for the link to the Gillian Tett interview. They have a transcription link for all those (like me) who prefer reading to listening.

      It’s a useful and interesting interview, but they try rather hard to put a shine on the situation. It just reminds me of the tea leaf-readers who spent the Zero years trying to explain how George W. Bush, down to earth businessman president, was going to turn his guns-and-butter policy into a roaring success. I think a foolish policy speaks for itself, and all that matters is whether Trump is going to chicken out or not, when the inevitable negative reaction from the bond market comes. (When exactly it’s going to come is something I have absolutely no clue of).

      1. She speaks to the animal spirits of non-US cultures acting differently than Trump expects causing unexpected negative consequences for the global and US economies including American consumer reactions.

        I see this already in an EXTREME anti-US brand vocal opinions here in Canada. Shocking. We will see this in global American company sales hit fast and hard with next month’s earnings calls also telling of lower forecasted foreign sales.

  3. The chart going back to 1997 showing AAII bulls/bears, look at the dip in the SPX. It’s tiny. That doesn’t mean things cannot get much worse, but all the noise, all this moving money around, is that contrarian bullish? Maybe the new normal is everyone yells when it’s a top, but nobody listens. The chart does not show a bear market period. It could go down enough to become a bear market chart, but not yet. We fear losing our gains. If this applies to oneself, sell some, lower risk and sleep better. At some point we get a nasty downturn, but I would wait for trend line support to be broken on a monthly chart, and some rise in $$HYIOAS on a weekly chart. The good thing about monthly charts, there is less noise. The bad thing is the noise is in the candles. So jerking around on FOMC meetings or earnings reports barely shows. Not only are we self victimized by our fear, we also hurt ourselves with our impatience. Who could have held on to NVDA in its rise from 15 cents in 2009? Not me! But if one cashed out when the monthly RSI 14 went below 70, and got back in when prices moved back up, one would have done well. Monthly RSI on the SPY has gone below 70, so this market bears watching closely. Whenever that monthly RSI went below 70, it took months for prices to recover, which fits with a rally of limited duration, but tells us nothing about prices in one year, could be higher or much lower.

    1. There are two AAII surveys. The history shown is the weekly opinion survey, which swings around a lot. I use that survey for short-term trading/sentiment.

      There is also the monthly asset allocation survey. The monthly survey asks what people are doing with their money, instead of what their opinion of the market is (which can be fickle). The asset allocation survey is a better contarian indicator of long-term returns but not very useful from a trader’s perspective.

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