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.
A House Divided
The markets adopted a risk-on tone after the FOMC decision to cut rates a quarter-point. The S&P 500, the NASDAQ Composite, and even the small-cap Russell 2000, reached all-time highs. It is said that there is nothing more bullish than a new high.
On the other hand, Abraham Lincoln also famously said, “A house divided against itself cannot stand”. While I find new highs constructive, especially if they are accompanied by evidence of strong breadth and momentum, that’s not the case in the current circumstances. In fact, I am seeing evidence of breadth divergences. In other words, it’s a market divided against itself, can it stand?
Consider the Russell 2000 ETF (IWM), which staged an upside breakout from an inverse head and shoulders pattern in June with a measured objective of about 248. The price of IWM is nearly at its technical objective, but the small-cap Advance-Decline Line has gone nowhere. Should the bulls be concerned?
A Fed Divided
As the Fed’s interest decision sparked the risk-on pivot, let’s start with an analysis of the FOMC decision. The Fed cut rates by 25 basis points. For the first time in the history of the Fed since it started holding press conferences after the decision announcement, the star of the show wasn’t what the Fed Chair said, but the Summary of Economic Projections (SEP) and the dot plot.
The SEP showed that the Fed raised its GDP growth projections for 2025, maintained its unemployment and inflation projections, and lowered the unemployment rate projections for 2026 and 2027. Nevertheless, it cut rates because the balance of risks to employment were skewed to the downside.
Powell characterized the September cut as a precautionary move. The Fed Chair also said that the Fed is in a “meeting by meeting” situation on future rate decisions. Taken as a whole, this doesn’t sound like a Fed that’s eager to cut rates.
The markets nevertheless adopted a risk-on tone, which seems puzzling and overly enthusiastic.
The other star of the FOMC show was the dot plot. A significant number of members expect no cuts for 2025, and a slight plurality expect one or two cuts, with one outlier expecting five quarter-point rate cuts. It does take a genius to guess the outlier is new Fed Governor and Trump ally Stephen Miran.
Moreover, the median dot plot is penciling in two quarter-point rate cuts for the remainder of 2025, which is consistent with market expectations, but only one cut in 2026. By contrast, the market is expecting three rate cuts in 2026.
As well, Guy Berger observed that the jobs picture may not be as bad as feared. Hiring from the pool of non-employed is bottoming. If employment is bottoming, the non-linear risks of a deteriorating jobs market may be fading.
The market’s risk-on tone seems to be ignoring that not only is the Fed divided, but also there is a wide gulf between the Fed’s and the market’s expectations of the 2026 interest rate path, as well as the possibility of a positive jobs market surprise.
A Market Divided
Over in the financial markets, some reactions are puzzling, especially from a cross-asset perspective. Even as short-term rates fell, bond yields rose, which steepened the yield curve. These responses are consistent in a Fed easing environment. The bond market is less than enthusiastic about the Fed cutting as stagflation risks rise.
Market breadth indicators are not confirming the stock market’s bullish tone. Even as the S&P 500 advanced to new highs, the percentage of S&P 500 bullish on P&F and the percentage above their 50 dma are showing signs of deterioration.
Equally concerning is the continuing weakness in the mid- and small-cap Advance-Decline Lines even as their respective indices advance to new recovery highs.
As a sign of the deterioration in breadth indicators, the accompanying shows the S&P 500 Intermediate Term Breadth Momentum Oscillator (ITBM), which flashes a buy signal whenever its 14-day RSI recycles from oversold to neutral (top panel). ITBM measures the breadth momentum of the components of the S&P 500, and its momentum pulled back from neutral to oversold last week in the face of an advance in the index. The combination of rising stock prices but deteriorating breadth momentum is a highly unusual condition.
The glass half-empty interpretation is the market’s breadth deterioration is a warning of an imminent correction. The glass half-full interpretation is this is a buy signal set-up and any pullback should be regarded as a buying opportunity.
My interpretation is the market is becoming a little too frothy and giddy as it focuses mainly on the bull case while minimizing the perception of downside risk.
Market conditions are setting up for a negative policy surprise. Implied equity and bond market volatility are low, but trade war anxiety is high. This raise the risk that the Trump Administration engaging in policy over-reach in a way that unsettles markets. The
WSJ reported that “Trump’s Team Explores Government-Backed Manufacturing Boost” by allocating a $550 investment billion fund promised by the Japanese government, but the deal looks like smoke and mirrors and it’s an open question whether any of the money is forthcoming:
The exact contours of Japan’s $550 billion investment have been the subject of some dispute. Shortly after Trump announced the deal with Japan, the country’s trade negotiator, Ryosei Akazawa, outlined a view of the $550 billion investment pledge that was slightly different from Trump’s interpretation. Akazawa said Japan would offer a mix of investment, loans and loan guarantees. Japanese officials have said the expectation is for the money to be used to benefit Japan.
Howard Lutnick described any potential investment as a “capital call” to Japanese and other investors, which may or may not be met.
Lutnick has described Japan’s investment as a capital call, using a common Wall Street term that refers to requesting money from committed investors as projects are identified.
“They are going to give America money when we ask for it to build the projects. How do they plan to fund it? That’s their business,” Lutnick told CNBC in an interview.
In conclusion, the market’s bullish tone is constructive for the price of risk assets, but numerous negative divergences raises the risk of a short-term pullback. These conditions puts a different spin on Lincoln’s famous quote of “a [market] divided against itself cannot stand”.
