A Cowardly Bull

 

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.

 

Bullish, But…
My Trend Asset Allocation Model is bullish, so I am intermediate-term bullish. My Trend Model applies trend-following techniques to global stocks and commodity prices. The accompanying chart shows that the MSCI All-Country World Index (ACWI), ACWI ex- U.S., and commodity prices (all in USD) are in solid uptrends.
 

However, a number of cracks are appearing under the surface that are making me into a cowardly bull.
 

Possible Cyclical Stall
The bullishness of my trend model is based on signs of a reflationary rebound, as evidenced by the revival of cyclical leadership.
 

Beneath the surface, however, cyclical sector leadership is starting to stall. Consider, for example, the technical condition of the industrials sector. Price performance is starting to roll over and there are signs that relative breadth is weakening (bottom two panels).
 

The technical condition of the materials sector shows a similar extended pattern. Both absolute and relative price performance are stalling, and relative breadth is deteriorating.
 

The relative performance of the other major cyclical sector, energy, is being held up by a geopolitical risk premium specific to the sector and it has not showing signs of weakness.
 

Another worrisome sign is the relative performance of defensive sectors, which are all forming saucer-shaped bottoms. This is a sign that the bears are preparing to take control of the tape.
 

The reflationary stall can also be seen at a macro level from the evolution of the Citi Economic Surprise Index (ESI), which measures whether economic releases are beating or missing expectations. The ESI for the U.S. peaked in early 2026 and pulled back.
 

Possible Stall in Non-U.S. Leadership
Looking globally, investors have seen in the past few months that U.S. equities have lagged the rest of the world, with all global non-U.S. regions showing strength, with the exception of China.
 

The pattern of non-U.S. leadership may be about to change. I am seeing a similar pattern of cyclical disappointment at a top-down level with the G-10 Economic Surprise Index.
 

The performance of non-U.S. equities was supported by strength in earnings strength. However, EAFE earnings growth is showing signs of stalling, though EM earnings growth continues to shine.
 

In Case of War, Break Glass 
Looking to the week ahead, the risk of a Mideast war is rising after the latest round of U.S.-Iran talks ended inconclusively. At the time of writing, the U.S. hasn’t initiated an attack. If an attack were to happen, the market is likely to respond with a risk-off tone. My base case is the TACO (Trump Always Chickens Out) trade and a relatively short war. Trump can’t afford the political cost of prolonged elevated oil prices ahead of the mid-term elections that could crater the economy and cause a recession. I  therefore expect any conflict to last not much more than a week, followed by a settlement along the JCPOA framework that Trump abandoned, and a declaration of victory by both sides. Under such a scenario, I  refer readers to a past publication detailing the techniques to spot short-term market bottoms (see High Conviction Idea: My Most Reliable Timing Models).

However, I am inclined to view this buy signal with some skepticism. Other sentiment indicators are not indicating high levels of alarm and the market is nowhere near an oversold condition. The major U.S. averages are mostly range-bound and the equal-weighted S&P 500 is in a well-defined uptrend. The only technical blemish that I can find is a minor violation of an uptrend by the small-cap Russell 2000 (dotted line). I interpret this reading as a sign that NASDAQ and software stocks are washed-out.
 

In conclusion, the global trend in stocks and commodities continues to be bullish. Market leadership has shifted from growth stocks to cyclicals. Beneath the surface, however, cyclical and non-U.S. leadership is starting to stall. I am inclined to give the bull case the benefit of the doubt, but closely monitor the markets for signs of significant cyclical deterioration.