A Market of Stocks, Not A Stock Market – Humble Student of the Markets

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)

The Hindenburg Stalemate
The market got another Hindenburg Omen again last week. As a reminder, the ominously sounding Hindenburg Omen signal is triggered whenever a bifurcated market in an uptrend loses price momentum. While some signals resolve in a benign manner, others have seen the market correct into major drawdowns.

I have referred to the bifurcated nature of U.S. equity market internals in the past few weeks, and the bifurcation continues. The market is becoming a market of stocks, each of which move according to its fundamentals, instead of a stock market that moves together.

The bifurcated nature of the market can also be reflected in the extremely elevated readings of the NYSE High Low Index that I highlighted last week. The accompanying chart shows that similar episodes have resolved in market pullbacks of different magnitudes in the last five years.

Is the S&P 500 destined to break down into a major pullback? Here are bull and bear cases.

The Bull Case
The bull case rests mainly on the market’s strong breadth. Both the S&P 500 and NYSE Advance-Declines Lines made fresh all-time highs. This is not intermediate-term bearish.

For another perspective on market breadth, the number of S&P 500 stocks beating the index this year is at an all-time high.

In particular, positive breadth has been led by a revival in cyclical industry relative performance.

Zooming out from to U.S. to global equities, both the MSCI All-Country World Index (ACWI), which is heavily weighted in U.S. stocks, and ACWI Ex-U.S. are at or near all-time highs. A decision to turn bearish here is a decision to actively buck the global bull trend.

What do you have to worry about?

The Generals and the Troops
Even as cyclicals exhibit strong performance, the heavyweight growth stock leadership in the S&P 500 has been struggling. Breadth analysis is often couched in the metaphor of the generals and the troops. If the generals lead the charge (the market rises) while the troops (the broad market) lag, that is presented as a warning of a negative divergence. On the other hand, bullish investors can be more confident if the troops lead the charge.

This brings me to the analysis of weighted relative performance. The accompanying chart shows the relative performance of the top five sectors of the S&P 500, which represent over three-quarters of index weight. The relative returns of these sectors are either down or flat, and especially weak recently in the top three sectors by weight.

By contrast, the leadership cyclical sectors consisting of industrial, energy and material stocks comprise a mere 13.8% of index weight. This presents a conundrum for investors focused on the S&P 500 benchmark, which is a cap-weighted index of what is supposed to be a broadly based basket of stocks.

Here is the key question for the market bulls reliant on the support of positive market breadth: Can a narrowly weighted leadership of cyclical stocks with 13.8% index weight overcome the weak relative performance of the top three sectors comprising 57.3% of index weight?

A Late-Cycle Advance?
That said, the leadership of cyclical industries comes with its own warning sign. Veteran technical analyst Walter Deemer recently observed that the rise in energy stocks is typically a warning of a late-cycle advance and a maturing bull. By contrast, financial stocks tend to lead during young bull phases.

The accompanying chart indicates that Deemer’s observation has some merit. Clusters of surges in relative performance between energy and financial stocks (bottom panel) have been warnings of a maturing bull, but they are inexact intermediate-term timing indicators. If the clusters persist, I would interpret them as preliminary and intermediate-term signs of a late-cycle advance.

Indeed, investors are seeing other preliminary signs that the resurgence of cyclical leadership may not be sustainable. The yield curve is starting to flatten, which is a bond market signal of slowing economic growth. However, I regard these signs as highly preliminary. Even if the combination of energy/financial pair performance surges and a flattening yield curve were to manifest themselves in slowing growth expectations, I expect them to fully manifest themselves in late 2026 or 2027.

In conclusion, the U.S. market is highly bifurcated as the S&P 500 trades in a sideways holding pattern. The bifurcation can be explained by the weakness in large-cap growth and technology names, which is offset by cyclical stock strength. While similar episodes can resolve in severe pullbacks, investors are left waiting for a short-term bullish or bearish catalyst to resolve the split nature of market breadth.

I was disappointed by the market reaction to the news that the Supreme Court had struck down Trump’s reciprocal tariffs announced on “Liberation Day” under the IEEPA authority. Trump announced the imposition of an across-the-board 15% tariff under the Section 122 of the Trade Act of 1974, which has a ceiling of 15% and can last only 150 days unless Congress acts. The shift has the effect of constraining Trump’s trade authority and leverage in future negotiations. He won’t be able to threaten extreme duty rates (50%) as a tool in foreign policy initiatives (Greenland). This represents a loss of face ahead of his summit with Xi in early April.

The development should be a bullish development. But instead of melting up, the S&P 500 rose less than 1% on the news, and my trade war factor barely budged. This is not the sort of reaction expected from a bullish catalyst.