The Bullish Elephant in the Room

Posted by Cam Hui -
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 “bearish” on 27-Jun-2025)
  • Trading model: Bullish (Last changed from “neutral” on 10-Jul-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.

 

 

Bullish Tripwires

I’ve been fairly cautious on equities in the past few weeks, but that’s changing. There is a bullish elephant in the room that is becoming evident and can’t be ignored.

 

Two weeks ago, I outlined the bull case for stocks, which was characterized as having the odds of one in three or four (see Buy the Cannons: Exploring the Bull Case). At the time, I set out three bullish tripwires, all of which have been triggered.

 

The small-cap Russell 2000 was tracing out an inverse head and shoulders pattern and it was unclear at the time whether it would stage a breakout above the neckline. The Russell 2000 has decisively broken out.
 

My long-term timing model was on the verge of a buy signal based on the MACD crossover of the NYSE Composite from negative to positive. That signal was triggered and it has extensively discussed in these pages.

 

 

The final trigger was a broad improvement in breadth. The S&P 500 and the NYSE Advance-Decline lines had broken out to all-time highs, but net 52-week highs-lows hadn’t made a new 2025 high. Fast forward to today, that indicator (bottom panel) made a 2025 high last week, and the mid-cap S&P 400 A-D Line also broke out to a new high. The only shoe left to drop is the small-cap S&P 600 A-D Line, which is lagging and yet to make an all-time high. At this rate, that’s only a matter of time.
 

 

 

The “Liberation Day” Panic

Here is how the bear market turned into a bull market.
 

Market participants were panicked and liquidated their equity positions in the wake of the “Liberation Day” announcements. The decline was exacerbated by the discipline of risk managers who forced trading desks and hedge funds to reduce their leverage and position sizes and led to a panic V-shaped bottom. Market psychology turned cautious and it had become overly concerned about the left-tail of the risk distribution without paying attention to the right (positive) side of the distribution.

 

Since the panic, numerous surveys have shown that investors have slowly rebuilt their equity positions. Readings are at about neutral levels, but nowhere near crowded long levels that would raise red flags.

 

 

Public confidence was similarly shaken. Consumer sentiment had fallen to levels consistent with major market lows and represented buying opportunities.
 

 

 

A “Less Bad” Economy

In the meantime, the right side of the risk distribution began to assert itself. Things started to go right, at least less bad.

 

The Economic Surprise Index, which measures whether economic releases were beating or missing expectations, rebounded from modestly negative levels to neutral.
 

 

The latest NFIB optimism survey shows that hard data (dark line) ticked up, though the soft expectations data (light line) modestly fell. The NFIB survey is useful as small businesses have little bargaining power and they are sensitive barometers of the economy. This is the picture of an economy that’s less bad.
 

 

Household finances were becoming less bad. Credit card delinquencies appear to be peaking.
 

 

Trump’s tax bill passed and became law. An analysis of the spending shows that the deficits were front loaded while the projected tax savings were back loaded. While the deficits were disconcerting to the bond market, higher near-term deficits translated into fiscal stimulus in the first few years, which is growth positive and welcome news to the stock market.
 

 

Over in the jobs market, initial jobless claims are declining (blue line) but continuing jobless claims (red line) are steadily rising, which is a picture of employers who aren’t firing but job seekers are having a hard time finding employment. The economy is weak, but there is no downturn. Another sign that the economy is becoming less bad.
 

 

The U.S. economy is showing signs of resilience. Real GDP growth historically ranged between 2% and 3% and it remains in that range. Fears of a tariff-induced recession were overblown. Most economic models project negative GDP growth effects of between -0.5% and -1.0%. As one of many examples, the Budget Lab model shows “-0.6% lower from all 2025 tariffs. In the long-run, the U.S. economy is persistently -0.3% smaller”.

 

 

 

A Buying Stampede

The combination of the market panic and subsequent recovery in fundamentals and psychology have resolved in a buying stampede. There are numerous technical signs of breadth thrusts and price surges that have historically resolved bullishly.
 

 

Investors have piled into low-quality stocks in a beta chase to play catch-up. The WSJ reported that “Meme Stocks and YOLO Bets Are Back and Fueling the Market’s Rally”. This will not end well, but not until positioning rises from neutral to crowded long readings. At the current rate, I estimate the excessive froth will become a problem in the August–September time frame.
 

 

 

Waiting for Tariff Godot

While a rally into August and September is my base-case scenario, much depends on how tariffs affect inflation and operating margins in the coming months. The June FOMC minutes showed a broad agreement that tariff effects will show up in the inflation data but there was disagreement about the magnitude and timing of the effects.

 

An analysis of import prices, which exclude tariffs, shows that they are rising. That’s a signal that foreign exporters are not in aggregate reducing their margins to accommodate U.S. importers to offset tariff effects. Tariff effects will appear at some point in the future, and they will have a negative effect on inflation and growth. The timing and magnitude of the effects are just unclear. There has been little economic cost to the tariffs, but investors will view the June CPI report next week as another key indicator of the tariff’s effects on inflation. However, the economic effects of tariffs are delayed because collection implementation applies to new ship loads and the CBP can delay payments up to 50 days.
 

 

Torsten Slok at Apollo labeled this the MBA vs. Ph.D. disagreement. Top-down Ph.D. forecasters are expecting a growth slowdown, but bottom-up company analysts with MBAs expect continued earnings growth. The bottom-up view is supported by improvements in company Q2 earnings guidance. The first test of my bullish thesis will occur with the onset of Q2 earnings reporting season.
 

 

In conclusion, market psychology panicked and became overly concerned about left-tail risk and sold equities in the wake of the “Liberation Day” tariff announcements. Better, or less bad, news emerged and investors rebuilt the positions from a crowded short to a neutral position. Price momentum is dominant and I expect that the rally will continue into the August–September time frame, which is consistent with the 4-year seasonal pattern of the S&P 500.
 

 

Tactically, it isn’t unusual for the S&P 500 to either consolidate or pull back after an upper Bollinger Band ride. The consolidation has so far been mild but one test will appear on Monday after Trump threatened a 30% tariff rate on Mexico and the European Union over the weekend. Keep in mind that the stock market has shrugged off such tariff threats before. The S&P 500 rose the next day after Trump’s announcement of a 50% tariff rate on Brazil, and fell a modest -0.3% on the threat of a 35% tariff rate on Canada. The market just doesn’t seem to take Trump’s economic initiatives very seriously anymore, particularly in light of his demand last week that the Fed should cut interest rates in response to economic strength. Will investors a disorderly risk-off stampede next week, or a TACO-mania?
 

 

I believe the main risk to my bullish scenario is the timing and magnitude of tariff effects on inflation and margins, and the first test will become evident with the upcoming CPI report and Q2 earnings season.

 

Subscribers received a trading alert last week that my inner trader had begun to accumulate a long position. It’s impossible to spot the exact bottom in light of the current headline-driven environment, but the odds favour an upward bias in stock prices in the coming weeks. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

 

 

Disclosure: Long SPXL