A Healing Bull

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 26-Nov-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.

Head & Shoulders Still in Play

I highlighted a potential head and shoulders formation in the S&P 500 last week, and the pattern is still in play, with a warning to bears that H&S patterns are incomplete until the neckline breaks. The bulls are hoping that the index breaks out to a fresh high, which would invalidate the right shoulder, which should peak lower than the head.
 

I am inclined to agree with the bulls, as I am seeing signs of healing everywhere that are supportive of a further market advance.
 

Signs of Healing

Numerous signs of breadth improvement are supportive of the bull case. The S&P 500 Advance-Decline Line recently broke out to a new all-time high, which is bullish. The NYSE Advance-Decline Line isn’t far behind and it’s just below its highs. Both percentage of S&P 500 bullish on P&F and percentage above their 50 dma broke out above their resistance levels. As well, new 52-week highs-lows have returned to positive readings, which is what investors like to see in a sustained market advance.
 

Risk appetite indicators are also confirming the rise in stock prices. Equity risk appetite, as measured by the relative performance of high beta to low volatility stocks, is rising. Credit risk appetite, as measured by the duration-adjusted relative price performance of junk bonds to Treasuries, is similarly confirming the recovery in the S&P 500.
 

The relative performance of defensive sectors is not raising any cautionary flags. With the exception of healthcare, which rallied based on changes in a regulatory regime, the other three defensive sectors are weak.
 

The Animal Spirits Are Back

In addition, the market’s animal spirits are returning. The relative return of recent IPOs is just turning up after a major top in September. As IPOs are just bottoming while the S&P 500 is testing its all time highs, I interpret this as an indication that sentiment is still weak, indicating further upside potential.
 

A more subtle sign of the market’s animal spirits can be found in the performance of the two major small-cap indices. The Russell 2000, which is the lower-quality index composed of more unprofitable companies, is on the verge of an all-time high. By contrast, the S&P 600, whose membership has a stricter profitability criterion, is testing overhead resistance, but short of an all-time high.
 

In other words, the low quality is leading the market recovery.
 

In addition, prime brokerage books report that hedge funds are maximum short low-quality unprofitable technology stocks, which sets up the potential for an explosive short covering year-end rally.
 

Fundamental Momentum

 

Forward 12-month EPS estimates are still rising strongly, indicating positive fundamental momentum.

 

 

Key Risk: A Hawkish Cut

In the short run, the market could experience some volatility in reaction to the FOMC rate decision. The market is widely discounting a quarter-point cut. At the market implied odds of 89%, the Fed will cut rates as it hates to surprise markets. Had the decision been a toss-up, Powell would have signaled a higher level of indecision within the committee during the blackout period even if it involved a “leak” to a reporter covering the Fed beat.

However, the FOMC is widely divided and there are certain to be dissenting votes in the rate decision and interpret the cut as a hawkish cut. The market may pivot to a risk-off tone once it realizes the deepening schism at the Fed.
 

 

In conclusion, while the charts are signaling bull-bear indecision on the surface, technical signals favour a short-term bullish resolution for a rally into year-end and beyond. This is consistent with Jeffrey Hirsch’s seasonality analysis of a choppy first half of December, followed by a rally into year-end starting in mid-December.