Buy the Dip For the Year-end Rally

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: 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.

 

 

Consolidation and Test

The S&P 500 ended an upper Bollinger Band ride weakened to the 50 dma support level. Past pullbacks in the most recent bull trend have ended when the 5-day RSI became oversold. As expected, the market rebounded and it has begun to consolidate sideways. If history is any guide, investors should see an upside breakout through the consolidation range in the next few days. I would look for the VVIX, or the volatility of the VIX, to decline below 100 as an bullish all-clear signal.
 

 

Stock prices are on track for a rally into year-end.
 

 

Global Momentum

My scenario of a market rally is driven by signs of global stock market momentum. Technical analyst Wayne Whaley studied past instances when the S&P 500, NASDAQ Composite, Nikkei Average and FTSE 100 were all positive YTD on November 7. He found a strong upward bias in forward returns for all four market indices.
 

 

 

Supportive Sentiment

Normally, signs of strong price momentum would be accompanied by bullish sentiment. This year, sentiment readings have tended to tilt bearish. As price momentum builds, this should create a FOMO stampede for risk.

 

Start with the weekly AAII sentiment survey. Bearish sentiment rose and bullish sentiment fell, indicating that most respondents will be caught offside should stock prices rise.
 

 

As well, Goldman’s prime brokerage arm survey of hedge fund clients shows that hedge funds were shorting stocks at an extreme level.
 

 

The bullish catalyst is the emergence of dip buying by institutional investors. The BoA survey of its client activity shows that retail investors were the most persistent dip buyers in 2025, but institutions are now starting to buy the dips in stock prices. At a minimum, this puts a floor on stock prices. At best, it creates the potential for a beta chase and FOMO stampede into year-end.
 

 

 

A Possible Rotation

It’s possible that the appearance of institutional buyers will spark a change in leadership. There are some early indications that Magnificent Seven stocks are weakening and the rest of the S&P 500 is starting to outperform. However, the shift is not definitive and the relative performance of the equal-weighted S&P 500 remains in a downtrend.
 

 

A similar shift from growth to value is also evident across all market cap bands and internationally.
 

 

A review of sector rotation using RRG charts tells a mixed picture. Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotate to lagging groups (bottom left), which change to improving groups (top left), and finally complete the cycle by improving to leading groups (top right) again.

 

There were no sectors in the leading top right quadrant, though technology is close. What’s unusual is, that, while technology is in the bottom right weakening quadrant, its clockwise pattern foreshadows a return to the top right leading quadrant instead of the usual rotation to the bottom left lagging quadrant. I interpret this as the sector undergoing a minor pullback within an uptrend.
 

 

 

Positive Fundamental Momentum

While a shift in market leadership would a welcome change indicating an internal rotation and correction, it isn’t a necessary condition for a rally into year-end. As hedge funds are bearishly positioned, an alternative scenario could see them buy the dip in AI stocks in a beta and performance chase into year-end.

 

Aggregate fundamental momentum is strong. The Financial Times highlighted research from Deutsche Bank that U.S. companies are reporting the strongest earnings growth since 2021.
 

 

S&P 500 forward 12-month EPS estimates are rising, indicating positive fundamental momentum.
 

 

Finally, insiders are buying the stock of their companies. While this is an inexact market timing indicator, a series of weekly insider puts upward pressure on stock prices.
 

 

In conclusion, the combination of positive price and fundamental momentum point to a rally into year-end. Sentiment readings are not extended, which is supportive of a beta performance chase. There are also early signs of a leadership shift from growth to value, indicating a welcome internal correction and broadening breadth, but that’s not a necessary condition for an additional price advance.

 

Buy the dip.