A Trend Model update: Still cautious

My Trend Asset Allocation Model is a market timing model that has been running since 2013. While the model only issues buy, hold and sell signals for stocks, investors nevertheless need to make their own decisions on how much to buy and sell. Based on my out-of-sample signals, I created a model portfolio by varying the equity weight by 20% around a 60% SPY and 40% IEF benchmark. The turnover characteristics of the model portfolio is manageable, averaging 3.5 signals per year in the last five years.

The risk-adjusted returns of the model portfolio are strong. The model has beaten the 60/40 benchmark on 1, 2, 3 and 5-year time horizons, as well from inception for the period from December 31, 2013 to April 29, 2025. In addition, it was able to achieve these returns with controlled risk, equivalent to roughly an 85/15 stock/bond asset mix with 60/40 risk. As the dotted line in the chart depicting relative performance shows, the model mainly reached the superior risk-adjusted returns by sidestepping the really ugly bear markets over the study period.

• 1 year: Model 9.5% vs. 60/40 8.7%
• 2 years: Model 13.3% vs. 60/40 11.4%
• 3 years: Model 9.6% vs. 60/40 7.7%
• 5 years: Model 10.9% vs. 60/40 9.0%

 

Here is what it’s saying now.
 

 

Trend Asset Allocation Explained

The philosophy of trend-following investing is simple. Use a long-dated moving average to establish the trend and a short-dated moving average for risk control. These classes of models tend to identify macro-economic trends which are persistent. Applied properly and with the proper risk controls, an investor using such an approach should be able to achieve superior returns.

The Trend Asset Allocation Model is based on the application of trend-following principles to global stock markets and commodity prices. I use it to monitor the main three trade blocs, the U.S., Europe and Asia, which is mainly China, to arrive at an overall risk-on, neutral or risk-off signal for asset markets.
With that preface, let’s take a quick tour around the world to see what the model is telling us now.

 

 

A Tour Around the World

Starting in the U.S., the S&P 500 is recovering after a downdraft. It is testing the 50 dma from below and remains under the 200 dma.

Technically, the recovery above the 50 dma would be a sign of a trend change. However, trend-following models suffer from an implementation feature of possible whipsaw signals around a moving average. In practice, I would like to wait for confirmation before making a formal change of signal.
Rank the U.S. as neutral to negative based on the speed of the recovery. If prices were to stabilize at these levels, it would be raised to a neutral reading.
 

 

Across the Atlantic, European stocks are exhibiting a similar pattern of pullback and recovery (all indices are shown in local currency). While European trends paralleled U.S. ones, the magnitude of the decline was less. Rank Europe as neutral.
 

 

It’s a different story in Asia. I tend to discount the Chinese stock market as it doesn’t reflect the Chinese economy. I instead rely on the behaviour of other Asian markets as signals of the Asian trade bloc. Most Asian markets are trading below their 50 dma. Call this a negative.
 

 

As China is a voracious consumer of commodities, commodity price signals are important indicators of the health of the Chinese economy and the global economic cycle. Global commodity prices are weak. In particular, the cyclically sensitive copper/gold and the more broadly diversified base metals/gold ratios are not showing any signs of life.
 

 

In conclusion, my quick tour around the world shows that the main components of my trend-following models are either weak or neutral. Putting it all together, this calls for a risk-off defensive posture to portfolio construction.

The combination of a weakening G10 Economic Surprise Index, which measures whether economic releases are beating or missing expectations…

 …and expectations of an escalating trade war is not conducive to strong equity returns.