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: Neutral (Last changed from “bullish” on 31-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.
Watch Out For September
August 2025 was good month for U.S. equities. The S&P 500 reached an all-time high and returned 2.1% for the month. It is said that strength begets strength. My Trend Asset Allocation Model, which applies trend-following techniques to global stock markets and commodities, remains on an intermediate-term risk-on signal.
As investors approach September, however, they may encounter some seasonal headwinds.
Jeffrey Hirsch of Almanac Trader documented how September is the worst month for stocks on a seasonal basis, and “post-election years DJIA and S&P 500 have declined in 10 of the last 18 Septembers”.
The most likely trigger is turmoil in the bond market. I am seeing signs of a set-up for a bond market tantrum.
Intermediate-Term Bullish
I would like to reiterate that my Trend Asset Allocation Model is intermediate bullish on stocks. As the trend model is based on inputs from global stock and commodity prices, let’s take a quick tour around the world.
Starting in the U.S., the Dow, the S&P 500 and equal-weighted S&P 500 achieved all-time highs last week. There is nothing more bullish that fresh highs. The breadth of the advance has been broad, which I interpret as constructive for the equity bull case.
From a global perspective, the percentage of countries that are trading above their 200 dma is consistent with past bull trends.
Commodity prices are neutral to slightly bullish. Headline commodity indices (top panel) are weighed down by their large weight in the lagging energy complex. The equal-weighted commodity index is testing overhead resistance. However, the cyclically sensitive copper/gold ratio was distorted by tariff effects, but the broadly based base metals/gold ratio is trading sideways.
I interpret these trends as intermediate-term bullish for risk appetite.
Bond Market Tantrum Ahead?
However, a case could be made for a possible bond market tantrum in the near future.
My former Merrill colleague Fred Meissner recently voiced concerns about the inability of TLT, the 20+ Year Treasury ETF, to stage a meaningful rally despite a bullish technical signal: “TLT is still a buy recycle on the daily stochastic and looks like a rally should occur. The fact that this is not happening is a concern for the bond market, in spite of all the ‘interest rate cut’ hype.”
Here is some more colour to Fred’s analysis.
Inflation expectations are rising. It’s no wonder why TLT is struggling to rally. TIPs are outperforming zero-coupon long Treasuries. The long end of the yield curve, the 10s30s, is steepening. The 30-year Treasury yield is also trending up. A break in the dotted resistance line (bottom panel) could be the spark for a full-fledged bond market tantrum.
July core PCE, which is the Fed’s preferred inflation metric, came in at 0.3% for the month. Despite coming in in line with market expectations, the readings are rising and moving away from the Fed’s 2% inflation target. More concering is the evolution of Supercore PCE, or Services PCE ex-Energy/Housing, is not affected by tariffs, and it continues to firm.
In his Jackson Hole speech, Fed Chair Powell opened the door to a quarter-point rate cut at the September FOMC meeting. But the Fed is still data dependent and Powell leaned into the narrative of the downside risks to employment. Investors will see the last employment report this Friday before the September meeting.
I have pointed out that recent initial jobless claims (red lines, inverted scale) have been weak. The risk to the market consensus is a strong August jobs report. The inverse relationship between initial jobless claims and nonfarm payroll shown in the accompanying chart implies an August nonfarm payroll growth of 130,000–140,000, which is well ahead of the consensus forecast of 73,000. Such a report makes it far more difficult for the FOMC doves to support a September rate cut in response to labour market weakness.
In addition, the U.S. Census Business Trends & Outlook Survey shows few major signs of labour market weakness. Current headcounts are down slightly (solid blue line), but the trend is better than it was a year ago (dotted blue line). More importantly, employer headcount intentions (solid orange line) are showing a slight expansionary bias.
I would also add that nervousness over the bond market isn’t restricted to the U.S. I am not seeing investors flee USD assets. The duration (interest sensitive) adjusted prices of non-U.S. sovereign bonds have been trading sideways relative to Treasuries since “Liberation Day”, and the USD has shown a similar sideways pattern.
Instead, yield curves are steepening all over the world, indicating growing nervousness about rising inflation.
The Risk Appetite Prognosis
The next question for investors is what happens to equity risk appetite should the bond market throw a tantrum. The logical analytical answer is that it should be bullish for equities, as higher nominal growth and inflation should push stock prices up.
Cyclical stocks, which should benefit from strong nominal growth, are not showing much signs of life. The continuing negative divergence between cyclicals and the S&P 500 raises concerns about the outlook for short-term market strength.
Broadening breadth is a constructive sign for equity bulls, but breadth improvement may encounter some temporary headwinds. The Russell 2000 ETF (IWM) staged an upside breakout from an inverse head and shoulders pattern in June, with a measured objective of about 248. IWM continued to rise and broke out on both an absolute and relative basis to the S&P 500, which are bullish signs. But relative breadth (bottom panel) has become extended and it’s pulling back, which is a possible signal that small caps are ready for a breather. Moreover, the S&P 600 Advance-Decline Line has moved sideways and failed to break upward in the last two months, which is another negative divergence.
As well, banking system liquidity continues to weaken. Bloomberg reported that Dallas Fed President Lorie Logan, who used to run the New York Fed’s trading desk and should be highly cognizant of liquidity pressures, said money markets could face temporary pressures around the end of September: “We could see some temporary pressure around the tax date and quarter-end in September.”
Finally, in Friday’s late breaking news, a Federal Court of Appeal affirmed, in a 7-4 decision, that Trump’s reciprocal tariffs levied under IEEPA are unlawful, but stayed the implementation of its decision until mid-October to allow the Administration to appeal the decision to the Supreme Court. The court decision affects all baseline 10% tariffs on almost all countries, plus the reciprocal tariffs announced on “Liberation Day”, and additional anti-fentanyl levies on China, Canada, and Mexico.
This is certainly a blow to Trump’s trade strategy and should be regarded as equity bullish. The court decision was announced just before 6pm ET, which was before the end of after-hours trading, but SPY showed little or no reaction. I interpret this to mean that either the markets expect that the market believes that either the Administration will find some workarounds, or this is a sign of bullish exhaustion.
My trade war factor shows elevated levels of anxiety, but both bond and stock implied volatility are low and in the “Assertive Trump” zone. How will the White House respond to this legal setback? This is an environment that’s ripe for an unexpected announcement that spikes volatility.
In summary, I remain intermediate-term bullish on equities as global trends point to higher prices in the coming months. However, the risks of a bond market tantrum are increasing as global rising inflation expectations threaten the bond market. It’s unclear how a bond market tantrum might affect equities. While higher nomination growth and inflation should be equity bullish, a review of the market’s technical internals calls for short-term caution.
