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 Generational Breakout
In case you missed it, the price of gold staged a generational upside breakout relative to both the S&P 500 and the 60/40 balanced fund, as measured by Vanguard’s VBINX (bottom two panels). On an absolute perspective, gold already broke out of a cup and handle pattern at 2100, indicating significant upsid0e potential. From a cross-asset perspective, past breakouts have coincided with periods of severe financial stress.
A Cross-Asset Warning
While the sample size is extremely low (n=2), past relative breakouts of gold coincided with equity bear markets. The first time this happened was in the 1970s, when Nixon suspended the convertibility of gold into USD in 1971. Gold was gradually re-valued upward from $35. What followed was the oil shock in the wake of the Arab Oil Embargo and the runaway inflation of the 1970s, which was ended by the severe recession imposed by the Volcker Fed.
The second episode signaled a period of financial stress. It began with the bursting of the NASDAQ Bubble and culminated in the GFC and the Eurozone Crisis of 2011.
Here’s what happened to the S&P 500. The first gold breakout episode sideswiped the Nifty Fifty bull and culminated in the 1980–1982 bear market. With the second relative breakout of gold against stocks in 2002, the equity market was already in a bear market. It didn’t end until the GFC blow-up and the Eurozone Crisis of 2011.
A Hard Asset Era
While relative breakouts of gold didn’t always foreshadow equity bear markets, it is a signal of macro stress, which has led to bear markets with significant drawdowns. History doesn’t repeat itself, but rhymes. With the U.S. equity market highly valued on an absolute basis and relative to other markets, what happens next?
One sure answer is the relative breakout is a signal of an era of hard asset outperformance against paper assets. The long-term point and figure chart of gold using a 5% box and 3-box reversal shows a measured target of $5,600, which represents significant upside potential.
Callum Thomas of Topdown Charts pointed out that investors are showing little enthusiasm for gold and gold mining stocks, which is supportive of a long-term gold bull.
Short-Term Extended
On the other hand, gold mining stocks are extremely extended in the short run. The gold mining ETF (GDX) recently achieved a fresh high while exhibiting a negative RSI divergence. The gold miner to gold ratio reached its upper 50-day Bollinger Band, an overbought condition. And so did the percentage bullish indicator. Relative breadth indicators (bottom two panels) are also highly extended.
A better alternative for hard asset investors looking to deploy cash today might be the energy sector. Energy stocks are on the verge of an absolute and relative breakout, and relative breadth indicators are positive without being as extended as gold.
The key risk for the energy sector is the stress being felt as a result of Trump’s tariff regime. The Dallas Fed’s quarterly energy survey is signalling signs of stress in the oil patch. So much for the last part of Treasury Secretary Bessent’s 3-3-3 plan of reducing the deficit to 3% of GDP, boosting GDP growth to 3% and increasing U.S. energy by 3 million barrels of oil per day.
Don’t Sell Everything
In conclusion, the relative breakout of gold against the S&P 500 and 60/40 portfolio is a signal of financial stress ahead and an era of hard asset outperformance against paper assets. That said, equity market tops are processes, and this is not a sell everything moment for the U.S. stock market.
Tactically, the market broke down through a bear flag, which is a bearish continuation pattern, though the longer term uptrend (dotted line) remains intact and it’s oversold on the 5-day RSI. Net breadth, as measured by 52-week highs-lows, has been flashing a series of constructive lower lows, and the put/call ratio spiked above 1, indicating a rising sense of panic. I interpret this to mean that the market is likely to test the old lows next week, and the test will be successful.
Expect some volatility on the day of the announcement. It’s unclear what’s priced into the market. Will Trump’s bark be worse than his bite? As a little-known example, Canada’s Globe and Mail reported that Commerce Secretary Howard Lutnick called Ontario Premier Doug Ford shortly after Trump’s announcement of a 25% tariff on auto imports to assure him that tariffs on Canadian auto imports will be softened. It’s this kind of uncertainty in the decision process that creates market volatility and makes business planning difficult.
The NAAIM Exposure Index, which measures the sentiment of RIAs who manage retail investors’ funds, fell below its 26-week Bollinger Band last week. This is as close to a “can’t miss” contrarian buy signal that has led to tactical rebounds that anyone can find in trading systems.
My base-case scenario calls for a tactical recovery in stock prices into April. What happens next will depend on the evolution of economic data. So far, the soft sentiment data has fallen, while hard data has held up well. Trump’s on-again-off-again approaches to trade and foreign policy has cast a cloud of uncertainty to business expansion plans, which is likely to manifest itself in lower capital expenditure and hiring in H2. Right now, soft data deterioration is driving a growth scare, but it’s the decline in the hard data that would actually plunge the economy into recession. I expect a growth scare in H2 2025, with an estimated one-in-three chance of a plunge into recession.
My inner trader continues to be long the S&P 500. He is holding some dry powder to buy the dip should the stock market weaken early in the week to test its recent lows. 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
I commented on Louis Gave’s research on the Gold to S&P 500 ratio breaking below it’s 200 day moving average trendline signaling trouble ahead. A reader correctly said this has given a lot of false signals. I went to my chart software and found that Gave’s trendline is actually a 7 year S&P 500 to 7 year bullion moving average. It gave a brief false signal during the Covid Crash but has been on the right side of VERY long term trends. It went negative in February 2025. Ominous given the unprecedented Trump/MAGA narrative we are starting.
I think what you are referring to is what Northstar calls a capital rotation event.
But all this is driving in the rear view mirror which of course is the only viewpoint we have.
I believe human nature does not change, or at least it takes millennia of evolution. So one can predict that the technological advancements should continue because this is something mankind has done since the discovery of fire and invention of the wheel. What cannot be predicted is the black swans ( is Trump a black swan?).
Those in power don’t want to give up power, and that includes republicans. At what point if enough of them feel their electoral base is rising up against them will they continue to support Trump?
But debt does not vanish in a recession unless defaulted on, which is toxic for liquidity. We have a lot of debt, and once those dominoes start to fall ( or apples spilling from the cart) it’s hard to stop.
You know how boxers duck and feint, is this what is happening? Of course people are nervous, but maybe this pleases Trump.
No idea what happens next. Either the longer uptrend holds or it breaks and then the downside could be scary.
Commodities of global consumption might be a place to go. Remember that the US is not as dominant a component of global economy as it used to be, so a cold in the US may not mean pneumonia for the world.
A formula for happiness is when reality exceeds you expectations, and ofc high expectations that are not met often leads to unhappiness. So, since everyone is so freaked out over tariffs and the whole world’s supply chains for US companies being jammed and the rest of the world pushing back on US products, expectations are low, which if something that is not so terrible happens we could get the required euphoria for a blow off top.
If we get a true crash, then gold is likely to go down with the crash.
Things we really need are food, shelter, electricity is good, as is toilet paper.
$$HYIOAS has not truly broken out in my book, but at some point the big one is coming.
I believe that when $$HYIOAS is above its 330 – day moving average, then one can expect trouble ahead. So I’d say it has truly broken out. But what rule do you have in your book?
Closer to 4.
The high in august 24 was 3.92, so a solid move above that would get me really nervous.
Look at a weekly chart and you’ll see since June 2022, a series of lower highs and lower lows. No matter what the fear mongers say, that’s a downtrend.
The vibes are awful, which is contrarian bullish.
Now move above 4 could also be a sideways consolidation, but it can really blast upwards.
When I harness my inner robot, I just tell myself, “hey it’s in a trend until it isn’t”. Unless you don’t agree that lower highs and lower lows are not a downtrend, which I don’t think is your mindset, then it’s still in a downtrend.
Maybe next weekend I’ll say it seems to be turning up if it is over 4. I think most of will agree you can’t really tell a top or a bottom, not reliably anyways. You also never know how long a trend can last. Divergences, exhaustion gaps, etc they all can help.
Talking of divergences look at BTC:Gold, weekly charts, nice divergences of RSI in 2021 and 2024. I’m too old to go long gold and short bitcoin, steer clear of MSTR if BTC is about to drop.
thank you!
Looking at the longer-term chart of HYIOAS, I see two previous instances where values were really low (below 2.7), and then turned up. 1997, and 2007.
Three times lucky?
1997 I think was sniffing out Ltcm, 2007 was the GFC.
Both times the markets went higher, 2007 not by much, but the real bear took longer to show up, but it did.
Is there still a Fed put?
1997 was the Asian debt crisis 4 countries I think were involved, LTCM in 1998 involved the Russian ruble. It seems that it’s always about debt.
We have a loan refinancing wall coming up. How will those zombie companies fare?
This whole debt pile is fragile, tuning it up with a sledgehammer is a bad idea.
The US can print a zillion dollars, so all debts can be covered. Moral of the story is that if $$HYIOAS is going higher and higher, the market could be a dangerous place.