Buy the Cannons: Exploring the Bull Case

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-May-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.

The Minority Report

As I write these words, the U.S. has chosen to enter the war against Iran. The extremely thin contract-for-difference trading for the Dow is down about -1%. Is this a time to embrace the contrarian adage of “buy on the cannons, sell on the trumpets”?
 

I have been fairly cautious about the U.S. equity market, but like all good investors, I would like to consider the bull case. While my base case still calls for a trading range for the S&P 500 for the remainder of the year, and the index is still flashing a negative RSI divergence warning, I am open to the possibility that stock prices could break out to all-time highs. I estimate the odds of that bullish as one-in-three or four.
 

Here are my reasons to be bullish.
 

The Zweig Breadth Thrust

The market flashed an extremely rare Zweig Breadth Thrust buy signal, which is a sign of extremely strong bullish momentum, on April 24. ZBT buy signals are rare. There have only been nine out-of-sample signals since Marty Zweig outlined his technique in 1986. The market has advanced 6 and 12 months later every time. The breadth thrust fizzled on three occasions, when stocks failed to rise immediately after the buy signal. In each of those occasions, the Fed was raising rates, which is not the case this time.
 

A Liquidity Tailwind

Fading Recession Fears

In addition, the latest BoA Global Fund Manager Survey shows that recession fears are fading. This reduces the left-tail risk of a catastrophic recession bear market and boost expected returns. Combined with light to neutral institutional positioning, the higher expected return should boost risk appetite and equity allocation.
 

We can see a similar effect by analyzing the evolution of forward 12-month EPS estimates. Earnings estimates are rising again after a brief pause, and the increase provides some degree of valuation support to equity prices.
 

Semiconductor Leadership

From a technical perspective, semiconductor stocks, which have been the leadership in much of the latest bull phase, are flashing a buy signal. Not only did the Semiconductor Index stage an upside breakout, it staged relative breakouts against the S&P 500 (middle panel) and Utilities (bottom panel). The semiconductors to utilities ratio is a useful indicator of risk appetite, and its upside relative breakout is supportive of the bull case.
 

Positive Seasonality

Another tail-wind for stocks is seasonality. The S&P 500 was up an average of 3.6% in July in the last 16 years.
 

Bullish Triggers

Here is what I am watching as triggers for a bullish revival and an upside breakout to new all-time highs.

The S&P 500 and NYSE Advance-Decline Lines have already staged upside breakouts to all-time highs, which are bullish signals. I am watching to see new 52-week highs-lows breakout above their 2025 highs, which would be a sign of bullish momentum.
 

 

The Russell 2000 is tracing out an invested head and shoulders pattern, but the breakout above the neckline failed. The relative strength chart (bottom panel) is showing a constructive saucer-shaped bottoming pattern. Should the small-cap Russell 2000 convincingly strengthen above neckline resistance, it would be a signal that the bulls have taken control of the tape.
 

 

Finally, my long-term timing model flashed a sell signal in late January when the 14-month RSI of the NYSE Composite flashed a negative divergence. This model will turn bullish once the monthly MACD turns positive, which it did earlier in June on an intra-month basis, indicating that this model is on the verge of a buy signal. Should the market strengthen sufficiently for MACD to turn positive, it would be a sign to sound the all-clear for long-term equity investors.