The Animal Spirits are Back in Charge! – Humble Student of the Markets

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: Bullish (Last changed from “neutral” on 27-Jun-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.

A Speculative Breakout

It is said that there is nothing more bullish than a new high, but how should investors interpret the latest round of upside breakouts?

The S&P 500 made a fresh high Friday. Even before Friday’s upside breakout, the high-octane and speculative parts of the stock market have already staged upside breakouts to all-time highs. The NASDAQ 100 and the ARK Innovation ETF (ARKK), which represents speculative growth stocks, have already broken out. By contrast, the equal-weighted S&P 500, which measures the average stock in the index, is well below its highs.

The animal spirits are back and the market is becoming frothy.

Animal Spirits Take Control

I am seeing numerous signs of speculative fever that’s supporting high stock prices. The Goldman Sachs “retail favourite” basket recently reached a fresh high since 2021. The title of a recent Bloomberg op-ed speaks for itself: “SPACs Are Back. What Could Go Wrong This Time?”

MarketWatch reported that the JPMorgan strategy team unveiled a model to determine the probability of stock market direction. The model is based on a combination of volume, value, positioning, flows, economic momentum and price momentum relative to their own history. The model concluded that there is a 96% chance that stock prices will rise in the next six months.

Ed Clissold at Ned Davis Research found that low-quality stock rebounds are not unusual after 15-20% bull corrections. What is unusual is the magnitude of the low-quality recovery.

I highlighted last week several bullish tripwires. My long-term market timing model based on the monthly NYSE Composite is on the verge of a buy signal. This model presciently flashed a sell signal at the end of January when the 14-month RSI exhibited a negative divergence. Now it’s on the verge of a buy signal as its monthly MACD will turn positive for June, barring a major market downdraft on Monday.

A Trend Model Upgrade

I am upgrading my Trend Asset Allocation Model signal from neutral to bullish. As a reminder, the Trend Model employs trend-following techniques on global stock markets and commodities to form a composite score.

The strength of the model’s signal is attributable to strength in European markets and emerging markets, which has been supported by a weak USD.

In the U.S., stock price strength is supported by improving fundamentals. FactSet reported that the number of S&P 500 companies issuing positive EPS guidance has been rising and readings are above average.

Key Risks

Investors should be warned that this is no textbook buy signal. Ideally, a Trend Model buy signal would be accompanied by commodity strength, which would be a sign of a global cyclical upturn. However, noise from an energy price spike attributable to geopolitical tensions masked the commodity price signal. In addition, cyclically sensitive copper/gold and base metal/gold ratios are not giving signs of a cyclical rebound. I would be more comfortable with a bullish thesis if I was seeing market signals of a global cyclical recovery.

As well, the technical behaviour of gold mining stocks is also signaling bullish caution. If the S&P 500 is breaking out to fresh highs, why are gold miners in an uptrend, and why is the relative performance of these stocks to the S&P 500 trading sideways since April? Relative breadth of the gold miners (bottom two panels) is still positive, which is a signal of consolidation. Gold mining stocks are regarded as safe-haven risk-off assets, and they should be exhibiting greater weakness during an equity bull phase.

A review of leadership of the top five sectors which comprise over 75% of S&P 500 weight shows that the advance has entirely been driven by technology stocks. Narrow leadership and signs of market froth should be interpreted as a warning, but not a sell signal. Just don’t overstay the party.

In conclusion, the market’s animal spirits have taken control of the tape and U.S. equity prices appear to be headed for further highs. Medium- and long-term indicators have improved sufficiently that I am upgrading my Trend Asset Allocation Model from neutral to bullish. However, investors should monitor non-confirmation patterns from commodity prices that may be signs of signal reversal in the coming weeks.

I would summarize the risk and reward of owning stocks this way. Global bond and foreign exchange markets are exhibiting skepticism over U.S. fiscal and monetary policy, as evidenced by the outperformance of foreign sovereign bonds against Treasuries and USD weakness (top two panels). However, growth and speculative-oriented equity investors are piling into U.S. stocks for their growth characteristics. As long as the animal spirits prevail and U.S. relative performance is flat (bottom panel), equity prices should continue to rise.

Putting it another way, Societe Generale found that the three-month trailing fund flows are higher for non-U.S. than U.S. equities. As long as U.S. equity fund flows remain positive, the U.S. bull should stay intact.

I think ,most of us feel that something bad will happen eventually in the market. If one goes back to the south seas bubble or the tulip bubble and look at markets since then, there have always been crashes, panics, depressions etc so why should this time be different? It isn’t we just don’t know the when.
It’s the dualism or schizoid nature of the markets. What is good for one aspect of life is bad for another.
Take AI and robotics as an example. Everyone is gung ho on this, and for good reason. But how many jobs will be lost? How much will this affect spending? Companies need to sell their stuff, but to sell stuff you need buyers.
If enough people are unemployed will they vote for UBI? This is a regime change in the USA, but if unemployment soars, and even gig jobs like Uber, DoorDash,Instacart go the way of the bot or drone, this will cause a lot of pain.
The old story of the haves and have-nots.
How much is the fiscal dominance subsidizing the US economy by the back door? Call it a second order effect.
Well federal deficits are not stopping soon, so expect that tailwind to continue for now.
I read an article by Hussman the other day and he was looking at the usual market cap to GDP stuff, and USD. It occurred to me that the $ of 2000 may not be comparable to that of today. In essence, has the rate of depreciation of the purchasing power of the $ accelerated? If that is true, then comparing 10 year forward expectations today is not like in 2000.
The best I could find on my own is comparing SPY:GLD, or if one prefers $SPX:$GOLD. In this the SPY is not exceeding 2000, not even close, only gold is in a bull market. Could not find SPX compared to CPI.
So, I expect the fiscal deficits to persist, nobody in charge wants to shoot themselves in the foot, on either side of the aisle. But if in 2028, there is a very socialist democrat in charge who will focus on the Uber-rich and Wall Street we could get a real crisis. When the AI and robots will impact us on Main Street, I dunno, but we are safe for a while.
We all need to eat, we all need staples and things like toasters etc these may be the safe havens of the future.

1 thought on “The Animal Spirits are Back in Charge!”

yodoc2003 says:

June 29, 2025 at 9:18 am

I think ,most of us feel that something bad will happen eventually in the market. If one goes back to the south seas bubble or the tulip bubble and look at markets since then, there have always been crashes, panics, depressions etc so why should this time be different? It isn’t we just don’t know the when.
It’s the dualism or schizoid nature of the markets. What is good for one aspect of life is bad for another.
Take AI and robotics as an example. Everyone is gung ho on this, and for good reason. But how many jobs will be lost? How much will this affect spending? Companies need to sell their stuff, but to sell stuff you need buyers.
If enough people are unemployed will they vote for UBI? This is a regime change in the USA, but if unemployment soars, and even gig jobs like Uber, DoorDash,Instacart go the way of the bot or drone, this will cause a lot of pain.
The old story of the haves and have-nots.
How much is the fiscal dominance subsidizing the US economy by the back door? Call it a second order effect.
Well federal deficits are not stopping soon, so expect that tailwind to continue for now.
I read an article by Hussman the other day and he was looking at the usual market cap to GDP stuff, and USD. It occurred to me that the $ of 2000 may not be comparable to that of today. In essence, has the rate of depreciation of the purchasing power of the $ accelerated? If that is true, then comparing 10 year forward expectations today is not like in 2000.
The best I could find on my own is comparing SPY:GLD, or if one prefers $SPX:$GOLD. In this the SPY is not exceeding 2000, not even close, only gold is in a bull market. Could not find SPX compared to CPI.
So, I expect the fiscal deficits to persist, nobody in charge wants to shoot themselves in the foot, on either side of the aisle. But if in 2028, there is a very socialist democrat in charge who will focus on the Uber-rich and Wall Street we could get a real crisis. When the AI and robots will impact us on Main Street, I dunno, but we are safe for a while.
We all need to eat, we all need staples and things like toasters etc these may be the safe havens of the future.

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