Seasonal Weakness Ahead?

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.

Seasonal Weakness Ahead

The market is entering a period of seasonal weakness for risk assets. While I see no explicit warnings of bearish triggers, there are plenty of risks. Here are some steps that investors and traders can take to guard against unexpected volatility.
 

Fundamental Headwinds

First, valuations are elevated. The S&P 500 is trading at a forward P/E of 22.1, which is near the top of its historical range. While that isn’t an automatic sell signal, and stock prices can rise from current levels, this level of valuation leaves little room for error.
 

Recent price gains were supported by strong sales momentum, but that may be in the past. The WSJ cautioned investors to take the Q2 earnings reports with a grain of salt, because “consumer spending isn’t driving company profits as much as reducing expenses and improving efficiency”. Last week’s Fed Beige Book reported “flat to declining consumer spending because, for many households, wages were failing to keep up with rising prices.” As well, tariffs are starting to bite as “nearly all districts noted tariff-related price increases” with many saying “tariffs were especially impactful on the prices of inputs.”
 

Inflation Jitters

Not only is gold a classic inflation hedge, it’s also regarded as a risk-off asset, which is a disconcerting cross-asset signal for risk appetite. A more benign interpretation of the price surge is the expectation of a rate cut, which reduces real rates — bullish for gold.
 

Callum Thomas at Topdown Charts argued that commodities are cheap compared to gold and investors should start rotating gold into other commodity stocks after gold’s strong run in the past year.
 

While I concur with that assessment on an intermediate-term basis, commodities need signs of a cyclical upturn to outperform. I am not seeing signs of outperformance by cyclical groups at the moment, which is another cautionary flag for equity risk appetite.
 

Meanwhile, the move in gold seems extended. Gold stocks are extremely overbought and they have overrun their rising trend channel.
 

Global mining stocks are also overbought and approaching trend resistance, though relative to the S&P 500 it remains range-bound (bottom panel). As an explanatory note, I focus on global mining stocks (PICK) instead of U.S. mining (XME) because there aren’t many U.S. mining companies and I use PICK as a proxy as a more diversified representative sample of the group.
 

If the move in gold and more broadly diversified mining stocks is attributable to expectations to a decline in real interest rates, their overbought conditions may be an indication that market expectations of rate cuts are overdone. Keep an eye on the PPI report due Wednesday and CPI report due Thursday as possible inflection points in sentiment.
 

Not Bearish, Just Cautious

From a technical perspective, breadth conditions don’t support a bearish narrative. Different Advance-Decline Lines, with the exception of small-caps, broke out to fresh 2025 highs and they are holding above their breakout levels. I interpret this as a constructive intermediate-term breadth signal.
 

I am also not seeing significant divergences in my equity risk appetite indicators.
 

Sentiment readings are not extreme, indicating neither a crowded long nor a crowded short.
 

However, MarketWatch reported that JPMorgan’s analysis of “hedge fund positioning suggests pullback to come…the hedge fund universe increased net leverage and developed an over-concentration in select long positions that threatens a pullback in markets short-term”.
 

In addition, Michael Howell, who keeps an eye on financial system liquidity, issued the following warning:

Evidence how the Fed and Treasury’s latest deliberate draining of liquidity is prematurely tightening financial conditions, causing stress in U.S. funding markets, and increasing the risk of a market disruption or accident, especially given the weak economic backdrop and a large debt refinancing wave approaching. While this hasn’t crashed the markets yet, it is not bullish and could even derail the financial system if it continues further. President Trump is eager to replace Fed Chair Powell and shake up the FOMC, but Powell & Co’s dogged determination to reduce the size of the Fed balance sheet could mean that their successors inherit a poison pill legacy.

Indeed, the accompanying chart shows that financial liquidity (blue line) has been falling for the past few weeks. The ON RRP account (red line) has fallen from a peak of 2.3 trillion to nearly zero. Bank reserve balances are likely to decline in the near future, which will lead to slower money growth and pose a headwind to risk assets. As a reminder, last week we highlighted the warning from Dallas Fed President Lorie Logan, who used to run the New York Fed’s trading desk: “We could see some temporary pressure around the tax date and quarter-end in September.”
 

In conclusion, the market is entering a period of negative seasonality. I am seeing fundamental headwinds in the form of elevated valuations and earnings uncertainty from tariffs, which won’t be visible until Q3 earnings season. The technical outlook appears relatively benign. My base case calls for some choppiness ahead. We are near-term cautious, but not bearish.