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 “bearish” on 16-Apr-2025)
- Trading model: Neutral (Last changed from “bullish” on 14-May-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 Bullish Recovery
The bullish recovery of the S&P 500 has been astounding in speed and magnitude. Not only has the S&P 500 regained its 200 dma, but also the NYSE Advance-Decline Line has made an all-time high. This is a welcome bullish development. That said, weakness in the mid- and small-cap A-D Lines is disconcerting.
A Trend Model Upgrade
As a consequence, I am upgrading the signal of my Trend Asset Allocation Model from bearish to neutral.
As a reminder, the model applies trend-following principles to global stock markets and commodity prices to create a composite signal for asset prices. I use a long moving average to define the trend, a short moving average for risk control. Let’s take a quick tour around the world to see how the technical picture has evolved over the past few weeks.
In the U.S., the S&P 500 has strongly rallied through its 50 dma and 200 dma.
Across the Atlantic, European markets show a similar pattern of strength. The Euro STOXX 50 is trading just short of its all-time high.
In Asia, the stock markets of China and its trading partners are also recovering, though not as strongly as the U.S. and Europe. Taiwan is still below its 50 dma and Japan tested its 50 and pulled back.
Commodity prices, which are sensitive cyclical indicators, have also bounced back, albeit somewhat weakly. The Invesco/DB Commodity Index is struggling with resistance at the 50 and 200 dma. Weakness is mainly attributable to energy prices, which has a significant weight in the index. By contrast, the equal-weighted index has cleared moving average resistance. The cyclically sensitive copper/gold and base metals/gold ratios have all bottomed and turned up.
Putting it all together, the general picture is a technical recovery from deeply oversold conditions. The combination of some stock indices that can be interpreted as starting uptrends and relative weakness in Asia and commodities create the composite picture of a neutral reading on risk appetite.
The patient is healing, but still needs to rest.
Reasons for Caution
In the short run, the market rally has gone too far and too fast. It’s time for a pause or brief pullback.
The 5 dma of the total put/call ratio fell to a low of 0.74 last week, which is put sentiment back in the froth zone. Sentiment has changed from fear to complacency. Keep in mind, however, that sentiment is a condition indicator and not a trading indicator.
The market recovery was mainly driven by a stampede into U.S. growth stocks, or the Magnificent Seven. The value and growth factor responses in non-U.S. developed markets was not as strong. In fact, much of the market weakness and recovery was a value and growth story. As trade war anxiety grew, the fast money hedge fund crowd fled growth for value and they were forced out of their position by risk managers at the bottom. Since then, they have been rebuilding their exposure.
While the rebound off the April bottom was very fast and strong, the leadership was narrow, which is a concern. An analysis of four major quantitative factors that explain U.S. equity returns shows that leadership was driven by price momentum. Quality was weak. Growth was dominant over value and large caps beat small caps. That’s another way of saying that the Magnificent Seven has become the only game in town again.
Time for a Breather
In conclusion, the recovery off the April panic bottom has been extremely strong, but the market may need some time to take a breather in the short run.
The rebound produced numerous price momentum-based buy signals, one of which is the rare Zweig Breadth Thrust. There have only been nine ZBT buy signals since Marty Zweig wrote about his technique in 1986. The market was higher 100% of the time in the out-of-sample period 6 and 12 months later. The only instances of short-term failures occurred when the Fed was tightening, which is not the condition today.
However, I would sound a word of warning about all of the breadth thrust and price momentum buy signals. Past price surges were usually sparked by a sudden change in monetary or fiscal regime, which is not the case today. Even though recession risk is fading, the trade war isn’t over and the market may be under-pricing the odds of a growth scare later this year. The Fed will stay on hold until it sees how inflation and inflation expectations evolve. The S&P 500 is trading at a forward P/E of 21, which is high by historical standards. As well, the U.S. Treasury needs to re-finance $9 trillion of debt in 2025 while facing an uncertain tax and budget process which could spark a bond market tantrum.
The news of the Moody’s downgrade of U.S. debt saw the markets adopt a risk-off posture. The accompanying chart of SPY shows the index lost all of the gains on the day to close the after-hours session in the red. In light of the extended and narrow nature of the advance, this may be the catalyst that sparks a pullback or consolidation. It remains to be seen how bearishly the market interprets the downgrade. Stay tuned.
In Weimar Germany the stock market did well because it represented something real as opposed to the mark.
People talk about fiscal dominance.
Since Covid, how many trillions have been spent by the gov’t? 8 or likely more by now. Let’s settle on 8 which is a lot. This year the budget deficit will be what, 2 trillion?
So if we follow the money so to speak, where does it go? Even if it goes to the casino the casino ends up holding it, it’s not destroyed, and it doesn’t end up in some ginormous mattress. It goes somewhere.
I’ve mentioned buybacks before, the biggest beneficiaries of these are those getting stock options as compensation. This is a big motivation for buybacks. The earnings % on the S&P are unusually high, by that I mean margins. Some say that is because of the nature of tech….whatever. But these earnings allow buybacks, continued fiscal deficits put money somewhere to the tune of 2 trillion a year. So how much of this is a reflection of a federal gov’t out of control?
This will likely continue to elevate the markets until something really really breaks and then money is destroyed or bond rates go sky high.
So they want banks to buy more bonds, is that correct? So they will want all the debt to be bought at low rates regardless of inflation?
Regarding bonds, do you want to buy a long bond at current yields? Only if it is hedged to a fixed long term risk…eg life insurance…if inflation goes to 20 %, long bond crash, but you still get your 4% and no global disaster causes mass deaths, the payout along the road is in nominal amounts, so if that million $ life policy will buy you a hamburger in 30 years…too bad for the beneficiaries, not the insurer. But I don’t want those bonds in my IRA.
Can anyone truly believe this will end well?
But for now, the ship is still afloat and that rising tide of fiscal deficits may keep things going.
As far as Moody’s downgrade. Why now? Could it have anything to do with big money being on the wrong foot?
What happened after the 2 downgrades before? Market corrected and went to new highs after.
Remember how those mortgage backed PoC’s back in 2007 or so were graded triple A? FWIW, I don’t trust those guys. Expect a lot of fanfare about the downgrade, it’s all about scaring people, as if we aren’t scared enough already.
My call on this is the market takes a hit and then recovers and goes higher. Makes no sense.
Moody’s is the last holdout of the triumvirate. SP Global and Fitch’s already did the downgrade 2011 and 2023 respectively. The world is drastically different today, in just a few years.
Everyting in the world is of lower quality today. People are more vulgar. Moral standards are nonexistent or at least arbitrary. Academic standards are ridiculously low. Almost all students are cheaters. Ivy League schools produce low-quality graduates with unfounded arrogrance. College and institutional researchers are engaged in data manipulation if not outright data fraud. General public is on steady diets of TikTok-like short clips and it is celebrated as some tech innovation miletone. It is just too numerous to elaborate.
In this kind of human regress environment what is a nation to do? It goes lower and lower like water flows to the lowest point because it is the easiest path. US is now on this kind of path. US is not alone. In fact the whole world is on a similar path. Now with the context clearly understood one should not act standing out like a sore thumb, especially in the investing game. After all money is just a notion, neither good or bad. One understands the game and how to win the game according to the changing context until you live out your life.
The world of average people will get even more mediocre. And there is a small cohort who really understand and control the transformative tech. Interesting to see how human species evolve.
We all have to evolve. Right thought, right speech, right action. The thought in my opinion is the hard one because no one can point out our errors like can be done with speech and action. I include intention with thought although it is not the same, also needs to be right.
People are not honest with themselves so they blame others. Nothing new there.