Trust the Thrust, or Sell in May?

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: Bearish (Last changed from “neutral” on 11-Apr-2025)
• Trading model: Neutral (Last changed from “bullish” on 14-Apr-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.

Buy and Sell Signals

The S&P 500 made an impressive recovery off the trade war panic sell-off. The market regained the 50 dma and it stands above “Liberation Day” levels, though the index is overbought and it is encountering a zone of resistance.
 

Along with the market recovery, I am seeing a resurgence of momentum-driven buy signals, or at least constructive signs for stock prices. Against that, the stock market is also facing a number of bearish headwinds, such as the “Sell in May” negative seasonality influence.
 

The Bull Case

Here are the bull cases. The market recently flashed a rare Zweig Breadth Thrust buy signal. The historical experience of post-World War II ZBT buy signals has shown a 100% positivity rate on a 6- and 12-month horizon.
 

I have voiced my concerns about the latest ZBT signal last week and won’t extensively repeat them (see 4 Reasons to be Cautious About the ZBT Buy Signal). Suffice it to say that past ZBT buy signals were accompanied by strong fiscal or monetary tailwinds, which is not in evidence today.
 

As well, SentimenTrader highlighte00d a high yield bond breadth thrust with bullish implication.
 

Finally, the S&P 500 Advance-Decline Line staged an upside breakout to an all-time high in the latest rally. That said, the A-D Lines of other indices worsen the further you go down market cap bands, which is still an ongoing concern.
 

The Bear Case

Here is the bear case for equities.
 

The Wall Street adage of “sell in May and go away” has been endlessly dissected for its seasonal effects and found lacking. However, Callum Thomas found that the conditional seasonality when the S&P 500 is below its 200 dma shows weakness during the “sell in May” period.
 

The SentimenTrader analysis of the high yield breadth thrust also has its own flaws. I analyzed the return spread of high yield bonds against their equivalent-duration Treasury prices and found that the latest price action exhibited a minor negative divergence. The “breadth thrust” observed was likely attributable to changes in Treasury prices, rather than any effect from high yield bonds.
 

A review of the relative performance of defensive sectors shows that of the four sectors, two are in relative uptrends, one has rolled over and one is consolidating sideways. This is not conclusive evidence that the bulls have decisively seized control of the tape, breadth thrust or no breadth thrust.
 

 

As well, stock prices will have to contend with a headwind of declining banking system liquidity, which is exhibiting a negative divergence against the S&P 500.
 

 

 

The Case for Caution

Looking forward, the macro and fundamental reasons for the “Liberation Day” downdraft haven’t gone away. Expect market risk to be elevated, which is another reason for caution. The accompanying chart shows the evolution of risk during Trump 1.0. Perceived risk, as measured by the VIX Index and the term structure of the VIX, was benign in his first year because his main policy was on the enactment of investor friendly tax cuts; 2018 ushered in the era of the trade war, and risk levels became elevated. Risk spiked in 2020, but that was attributable to the economic shock of COVID-19.
 

 

Until trade frictions are credibly resolved, I expect risk levels to stay elevated for the foreseeable future, which is not conducive to a bullish renewal. The message from the market is “policy induced volatility is not over”.

Trump factors are still trending up, which indicates a high level of anxiety that’s consistent with elevated volatility. The trade war factor is in an uptrend while exhibiting a series of higher highs and higher lows. The inflation expectations factor is flirting with an upside breakout, indicating elevated tariff-related inflation fears. Foreign sovereign debt has staged an upside breakout against Treasuries, indicating uncertain levels of confidence in USD assets.
 

 

Trade tensions are unlikely to be resolved soon. A Financial Times article outlined the reaction of some institutional investors to CEA Chair Stephen Miran after a meeting at the White House:

Some participants found Friday’s meeting counter-productive0 with an audience that knows a lot, the talking points are taken apart pretty quickly.”

Hedge funds were forced out of the market by risk managers in the latest downdraft and they are underweight risk. Signs of normalization in volatility have led to higher levels of risk tolerance from VaR models, which will whet the risk appetite of trading desks. One sign is the strength in the relative performance price momentum factors.
 

 

Should you be bullish or bearish? It depends on your time horizon.