The Dog that Didn’t Bark

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.

 

 

A Speculative Buying Stampede

You can tell a lot about the character of market psychology by the way it responds to news. In the past week, the stock market has faced the challenge of unexpected tariff levels of 30% on Mexico and the European Union, higher-than-expected levels of tariff pass-through in the CPI report  and a Trump trial balloon to fire Fed Chair Powell for cause. In the end, the S&P 500 rose on the week.

 

The rally off the April bottom is characterized by a FOMO stampede of low-quality stocks. The accompanying chart illustrates the degree of speculation. Bitcoin has surged to an all-time high, and the relative performance of ARK Investment ETF (ARKK) rose sharply to a new recovery high. It all looks very frothy.

 

The signature moment in the Sherlock Holmes tale, “The Adventure of Silver Blaze”, was the dog that didn’t bark. Holmes deduced that a guard dog didn’t bark because he was approached by someone he knew. Similarly, the latest seemingly frothy advance is showing few signs of speculative excess, indicating further upside potential.

 

 

 

Sentiment Not Stretched

Sentiment readings don’t look stretched. The latest weekly AAII sentiment survey shows that the bull-bear spread in neutral and in retreat for one week.
 

 

Similarly, the latest NAAIM Exposure Index, which measures the sentiment of RIAs who manage individual investors’ funds, fell for a second consecutive week.
 

Moreover, TS Lombard found that the count of news stories containing the term “melt-up” had been steadily falling even as S&P 500 returns rose.
 

 

 

Supportive Fundamentals

The fundamental backdrop is also supportive of further price gains. As Q2 earnings reporting season begins, the preliminary EPS and sales beat rates are well above historical averages. As well, the bottom-up aggregated forward 12-month EPS estimates are rising strongly.
 

 

There were also bullish signs from a top-down perspective. The June CPI and PPI report shows a narrowing CPI-PPI spread. Despite all of the anxiety over narrowing operating margins from tariff implementation, this latest data point is an indication that tariff-related margin effects should be relatively tame in the goods sector.
 

 

 

No Signs of an Imminent Top

From a technical perspective, I see no signs of an imminent top. The relative performance of defensive sectors is all trending down, indicating no signs of an immediate market downturn.
 

 

Credit and equity risk appetite indicators are both confirming the advance in the S&P 500.
 

 

In addition, junk bond funding costs, which are sensitive barometers of the market’s animal spirits are tame. I interpret these conditions as supportive of the FOMO risk appetite chase.

 

 

 

Waiting for the Breakouts

I am waiting for upside breakouts as signals of another upleg in stock prices. The S&P 500 has been consolidating sideways in a narrow range after its recent upper Bollinger Band ride. A definitive upside breakout would be a convincing signal that the bulls have firm control of the tape.
 

 

The small-cap Russell 2000 staged an upside breakout through the neckline of an inverse head and shoulders pattern, but it’s struggling to overcome relative resistance (bottom panel). An upside relative breakout would be a signal that these high-beta stocks are joining the risk-on party.
 

 

 

Beware of the Bond Vigilantes

The key risk to the bullish thesis is the weakness in the bond market. Inflation expectations are rising in response to signs of higher tariff pass-through in the CPI data and the threat to replace Fed Chair Jerome Powell. The 30-year Treasury yield has breached the psychologically important 5% level.
Should these conditions sustain themselves, the market could take a sudden risk-off pivot as bond yields spike, which makes stocks less attractive on a relative basis.
 

 

In conclusion, the stock market recovery off the April panic bottom is characterized by a speculative FOMO chase for risk. I call this a “the dog that didn’t bark” market as there are few signs of speculative excess. As well, technical indicators are supportive of higher prices in the short run. The main risk to the bull is an unwelcome rise in inflation expectations, which could rattle the bond market as well as stock prices.
 

My inner trader remains long the S&P 500. 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