Important Questions for Both Bulls and Bears

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)

 

 

The Fog of War
As the stock market struggles with the daily fog of war headlines, it has arrived at a key crossroad. The accompanying chart shows the evolution of different major U.S. equity averages. I have some questions for both bulls and bears.

 

The obvious questions are whether the indices can hold support (solid lines) or rally above the falling trend lines (dotted lines). The first shot across the bow of the bulls are the S&P 500 and NASDAQ 100 violations of short-term support, depicted by arrows, but the break has not been fully confirmed by the other averages and last Monday’s panic outside day reversals are mostly holding (red rectangles). More importantly, how market internals evolve in the coming days and weeks will determine whether the bulls or bears have control of the tape.
 

 

 

The Bears’ Challenge
Here are some difficult questions for the bears.

 

First, sentiment readings are already at a crowded short. How far down can stocks fall from here?
 

 

As well, investors are stampeding for downside protection. S&P 500 put positioning is at an off-the-charts level. Readings are more extreme than the COVID Crash and the “Liberation Day” panic lows, just to name a few major market downdrafts.
 

 

The NAAIM Exposure Index fell below the lower 26-week Bollinger band. This is one of the high probability tactical buy signals that I identified in the past (see High Conviction Idea: My Most Reliable Timing Models).
 

 

An embarrassing development for the bears is the relative performance of defensive sectors. To be sure, defensive sectors made rounded saucer bottoms in relative returns, which signaled technical deterioration, but why did three of the four sectors weaken on a relative basis when the market fell on war jitters (red arrows)?
 

 

 

The Bulls’ Challenge
The bulls have their own challenges as well. To be sure, the stock market is very oversold and sentiment readings are extreme, which sets stock prices up for a relief rally. But can the bulls sustain the advance after initial relief rally?

 

I turned bullish in January when it became evident that the Trump Derangement Syndrome (TDS) had become overdone (see A Time to Reap). The combination of fiscal stimulus and pro-cyclical elements of the OBBB Act and reduced policy uncertainty were going to drive a cyclical rebound. Since then, cyclical industry relative performance rose. With the onset of the war, cyclical relative performance has turned down except for oil and gas and semiconductors. If and when stock prices bounce, what happens to cyclical leadership? What narrative will lead the market upwards if the bulls take control of the tape?
 

 

Non-U.S. stocks were the leadership before the war. The U.S. market became a safe haven, largely because its economy was more insulated from energy shocks. What happens after any rebound? Can investors expect a renewal of non-U.S. leadership or will it revert to a narrow leadership of U.S. large-cap growth stocks?
 

 

World markets have instead suffered a severe deterioration in global breadth. The percentage of markets above their 50 dma have fallen to levels consistent with corrections and bear markets. Can the bull continue after such technical damage?
 

 

 

Where’s the Alpha?
After reviewing the challenges for the bulls and the bears, what’s the verdict?

 

There are three very valuable words in investing, and they are: “I don’t know”. I can imagine that in the not-too-distant future, investors will see a newsflash that Iran has agreed to negotiations with the coalition, which will be met with a melt-up response. After that, much depends on how the situation evolves. Will the geopolitical temperature recede or will the global economy slide into an energy-induced slowdown?

 

I don’t know.

 

Tactically, the markets are sufficiently stretched to the downside that they are poised for a relief rally. After that, my crystal ball gets very cloudy. Will the rebound resolve in a W-shaped or V-shaped recovery? I don’t know.

 

Under these circumstances, I suggest that investors take what alpha is available to them. The market is offering a source of alpha in the form of excessively bearish sentiment. Under-invested investors can deploy extra cash by taking advantage of the fear by constructing synthetic long positions by selling an overpriced put option and buying an underpriced call option on issues that they favour. Other investors can consider replacing existing long positions with similar synthetic longs to take advantage of excessively skewed option pricing.

 

Consider, for example, the June SPY call and put options. SPY closed on Friday at 662.63. The implied volatility (IV) of the out-of-the-money put options are higher than the out-of-the-money calls. As a higher IV translates to high option pricing, an investor willing to be long the market could sell a put and buy a call on SPY and arbitrage the difference in option premiums.

 

 

5 thoughts on “Important Questions for Both Bulls and Bears”

  1. I have read and watched numerous information about the Iranian war. Here are two of the best.

    Iran Expert
    https://youtube.com/shorts/uZF2DFgI8AM?si=zo-g6SkB5XLMeqIR

    Drone Expert
    https://youtube.com/shorts/uZF2DFgI8AM?si=zo-g6SkB5XLMeqIR

    The conclusion I come to is that the Straits of Hormuz will be closed by Iranian drones for a very long time to fulfill the Iranian regime’s goal of causing a severe global recession, an epic shock to Gulf States sense of well-being and the political ruin of Donald Trump. Iran wants the world to know their power in controlling the global energy jugular vein.

    American military claims that they will take out the Iranian drone manufacturing are not true. Russia has been trying to knock out Ukraine drone production for four years unsuccessfully. Iran is the size of Texas, huge compared to Ukraine. Ukrainians make drones in garages. This year, Ukraine is projected to make seven million drones. How many will Iran make in places that US satellites can’t spot? In comparison, America will produce less than a hundred THAAD defense missiles.

    New drone warfare is rendering expensive THAAD defensive systems obsolete. The Gulf State’s deal for protection from America isn’t working. Vital desalination plants and food imports are at risk. The aircraft carrier group is great for show but not effective in a drone war. Welcome to the new type of warfare where the one trillion dollar defense budget doesn’t win in two weeks or one year.

    This situation is as new as the Covid crisis or an asteroid heading for earth. Using previous episodes to model what will happen likely won’t work. This time the FED and Treasury don’t have the liquidity to flood the economy.

    Investors are not prepared for this global nasty recession. Quant A.I. programs are wrong-footed in pre-Feb 28 holdings.

  2. Ken? There’s something weird going on with your links; they show a fictive version of Trump at a game show.

      1. Enjoyed ALL of the videos you posted. The garage drone factory is a great catch. I will try to build on your analysis in that guerrilla warfare’s effectiveness will also be at risk due to drone swarms searching over every corner of the woods and mountains. Supply chains are important for drone manufacturing and can be easily targeted by boots on the ground, naval and air superiority. If drones the size of bugs exist in the future I’m sure the combat landscape will change into something more gentlemanly, civilized, and illuminati-like where surgical strikes such as blackmails, assassinations, and precision bombings will decide the war rather than crude methods such as putting boots on the ground and carpet bombing.

        1. The opinion that “Supply chains … can be easily targeted by boots on the ground, naval and air superiority.” may or may not be correct.

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