A Welcome Sentiment Reset

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). As this site is shutting down on March 31, 2026, my inner trader is retiring so that there will be no tradings outstanding at the end of the quarter. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 to 16-Jan-2026 is shown below, and the chart will no longer be updated.

 

 

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)

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.

 

 

What Positioning Rinse?

Coming into last weekend when news of Trump’s Greenland annexation demands hit the tape, it appeared that the stock market was poised for a positioning rinse. The BoA Global Manager Survey found that respondents’ cash levels had reached an all-time low, and very few managers had taken out tail-risk hedges. Investors were all bulled up, and the Greenland news was a potential catalyst to spark a correction.
 

 

Instead, the bears ended up becoming disappointed. When the market re-opened on Tuesday after the MLK long weekend, the S&P 500 gapped down and closed -2.1% on the day. But you can tell a lot about the nature of market psychology by the way prices react to news. The S&P 500, the NASDAQ Composite, the equal-weighted S&P 500, and the small-cap S&P 600 all rallied quickly to close Tuesday’s opening gap.

 

The Monday open from the previous weekend saw the news break of a Department of Justice investigation into Fed Chair Jerome Powell. The stock market opened in the red, but closed the day in the green.

 

This kind of price action is a pattern of underlying strength.

 

 

 

A Sentiment Reset

Instead, what investors saw was a panic on Greenland Tuesday and a sentiment reset. ETF flows saw the worst cross-asset decline since the “Liberation Day” panic in April as money stampeded for the exits.
 

 

Mark Hulbert, who monitors investor newsletter sentiment, confirmed the panic in a MarketWatch article: “The average short-term timer that my firm tracks reduced recommended equity exposure on Tuesday by almost 20 percentage points, as judged by the Hulbert Stock Newsletter Sentiment Index. That’s one of the biggest one-day HSNSI drops since 2000, which is how far back data extend.”
 

Up until now, my base-case scenario had been calling for a short-term market top in late January or February. This sentiment reset opens the door to a rally of longer duration.

 

 

Breadth and Cyclical Tailwinds

Notwithstanding the effects of the Greenland scare, market breadth had been steadily improving. The percentage of S&P 500 beating the S&P 500 has reached the second best levels in 50 years.
 

 

A review of the relative performance growth and value sectors shows that growth sectors are going nowhere.
 

 

By contrast, the relative performance of value sectors, which are cyclically sensitive, are all surging, with the exception of financial stocks.
 

 

For the sake of completeness, the accompanying chart shows the relative performance of defensive sectors, which are forming relative bottoming patterns. However, they probably need a period of consolidation before becoming the market leader.
 

 

 

An Extended Rally?

These conditions are consistent with the analysis I presented last week (see A Time to Reap). Early 2026 is a time for U.S. equity investors to reap the benefits of Trump’s 2025 policies. Investors are seeing falling risk premiums from fading policy uncertainty and the stimulative and pro-cyclical elements of the OBBB Act. Moreover, the Greenland panic reset investor sentiment and set up conditions for an extended rally in the coming weeks.

From a global perspective, the percentage of markets reaching 52-week highs reached the highest levels in decades. This is a bullish sign.

 

 

The strength in small-cap stocks is another notable bullish sign. A historical study (n=11) where small caps outperformed large caps by over 5% in the month saw strong momentum-driven gains. While investors should be cognizant of the price momentum effects of small-cap relative performance, the momentum effects are mitigated by the presidential cycle effects. Mid-term election years tend to be difficult for stock prices up until the election in November.
 

 

That said, I have a concern that the market may have unfinished business to the downside. My Bottom Spotting Model did not fully fire on the day of the Greenland panic. Only the VIX Index spiked above its upper Bollinger Band, while the others did not flash buy signals. Historically, buy signals from two or more components of my model flash buy signals.
 

 

The Greenland crisis was defused when President Trump declared he had “formed a framework for a future deal” in consultation with NATO Secretary General Mark Rutte. The specifics of the framework are not known, but they reported including giving the U.S. sovereign claims to pockets of Greenland’s territory to base military forces, much in the manner the British secured bases in Cyprus. The Danish and Greenland prime ministers refuted the detail and asserted that Rutte had no authority to negotiate on the issue of Greenland sovereignty. This story isn’t over, and the crisis may boil over again.
 

As well, the U.S. appears to be assembling military assets for an Iranian bombing campaign. Trump has also threatened a 100% tariff rate on Canada should it conclude its announced trade deal with China. It remains to be seen how the market reacts to these potential sources of volatility.

 

2 thoughts on “A Welcome Sentiment Reset”

  1. “Up until now, my base-case scenario had been calling for a short-term market top in late January or February. This sentiment reset opens the door to a rally of longer duration.”

    I agree with this assessment, but would like to ask Cam: what is your take on JC Parets’ “Omen” forecast? It’s based on the observation that a certain kind of breadth thrust indicates late-state irrational exuberance, hence a bad outlook 12 months after it’s generated (unless it’s generated again).

    “Whenever 55% or more of S&P 500 stocks make a 20-day high, the next 12 months have never produced a negative return.”
    According to which we’d be in dangerous territory after mid-May.
    https://trendlabs.com/the-omen-details-and-disclaimer/

  2. My view of a more extended rally is a short-term call. Parets’ analysis is consistent with the choppiness in a mid-term election year. For now, the trend is your friend, etc.

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