A Time for Caution

Posted by Cam Hui -

A Trend Model Status Report
My Trend Asset Allocation Model has performed remarkably on an out-of-sample basis by beating the 60/40 benchmark almost every year since inception. It outperformed a 60/40 benchmark while exhibiting 60/40 like risk.
 

 

The Trend Model applies trend-following principles to a variety of global equity markets and commodity prices to arrive at a composite score.
 

What is the model saying now?
 

I downgraded the model reading from bullish to neutral last week. The accompanying chart shows the trends of different major components. The S&P 500 weakened below its 200 dma and it is struggling to regain that level. Non-U.S. equities, as measured by the MSCI All-Country World Index Ex-U.S., did weaken but remains above its 200 dma. Commodity prices are well above their 200 dma, though I would tend to discount the effects of these readings as commodity strength is attributable to a supply shock, and not the global demand-driven strength the Trend Model is designed to mean.
 

 

Here are the bull and bear cases for equities.

 

 

The Bull Case
The internals of the recent recovery in equity strength have been a remarkable exhibition of cyclical strength. Cyclical stocks, which were on a tear in early 2026, resumed their leadership despite oil shock and supply chain concerns.

 

 

The economically sensitive small-cap Russell 2000 tested its 200 dma support, which held, and its relative performance turned up in a synchronized fashion with cyclical stocks.

 

My equity and credit market risk appetite indicators turned up before the stock market rally and formed positive divergences. I interpret this as a constructive bullish sign for equity strength.
 

 

Remember all the concerns about cracks in private credit? The relative price performance of junk bonds and leveraged loans are recovering, and even the price-troubled lender Blue Owl Capital is stabilizing.

 

 

The stabilization in credit is leading to a bounce back in financial stocks on a relative basis. Relative breadth indicators (bottom two panels) bottomed out in late February and have been improving ever since.
 

These are all bullish signs of a healing market.

 

From a tactical perspective, I reiterate my outline to a possible bullish pivot from yesterday’s publication. First, Ozan Tarman, vice chair of global macro at Deutsche Bank, revealed in a Bloomberg podcast that in speaking to global macro hedge funds, he concluded that the pain trade is a squeeze higher, though the left-tail of the return distribution is quite fat.

 

Here is my upside squeeze scenario:  Both Vice-President Vance and Israeli sources have said somewhat the same thing recently. The coalition has achieved the majority of its objectives. In other words, they are running out of targets to bomb, and they are reaching the point of diminishing returns with further bombing. In military terms, that’s called culmination.

 

 

A Geopolitics Decanted podcast with retired Rear Admiral Mark Montgomery, who was the Director of Operations at the U.S. Navy’s Pacific Command, tells the story of the next phase of the campaign. Use A-10 and Apache helicopters to degrade the coastal defenses, followed by the initiation of escorts of tankers and other cargo ships through the Strait of Hormuz.

 

The U.S. and Israeli military have shown strong tactical and operational competence in carrying out this campaign. The question that overhangs the war is the strategic direction of the war. Montgomery laid out the steps that the U.S. Navy would undertake to escort convoys through the SoH.

 

A White House announcement that the U.S. is preparing to escort convoys through the Strait would spark a rip-your-face-off bullish stampede and change the market narrative of the war.
The risk is an overreach to land ground troops, either to seize one or more islands, or part of the Iranian mainland. The WSJ reported that the Iranian-backed Iraqi militia has adopted Russian drone tactics to which American forces have little or no defense, which could render a ground invasion a military disaster right up there with the Battle of Kesserine Pass and the Charge of the Light Brigade.

 

The Bear Case
While the stock market is signaling a bullish recovery, the Treasury market is signaling caution. The yield curve is flattening, which is a sign that bond investors expect slower economic growth.
 

 

The Citigroup U.S. Economic Surprise Index, which measures whether economic indicators are beating or missing expectations, is rolling over, indicating slower growth expectations.
 

 

At the same time, the 10-year Treasury yield has risen, driven mainly by an increase in term premium, indicating market concerns about the future fiscal response.
 

 

As a consequence of the uncertainty of the inflationary effects of an oil spike, the market is now discounting no rate cuts by the Federal Reserve until late 2027.
 

 

 

No Time for Heroes
In summary, global stock prices have weakened, and the S&P 500 has suffered some technical damage by violating its 200 dma. Stock market internals point to a bullish outcome led by small-cap and cyclical leadership. The bond market begs to differ as it is signaling slower growth and possible stagflation ahead. I interpret these conditions as a time to be cautious in asset allocation, which is why I downgraded my Trend Model from bullish to neutral, indicating investors should rebalance their portfolios to their target stock-bond benchmark weights. This is not a time to be a hero.

 

If I was to engage in Fedspeak, the tidk balance is risks is evenly distributed. The last time the world saw a prolonged oil spike was in February 2020 when Russia invaded Ukraine. The S&P 500 violated its 200 dma shortly before the invasion, and proceeded to weaken further until Q4 2022. On the other hand, current equity market internals point to a cyclical rebound.

 

Which view will ultimately be correct? I don’t know. That’s why the Trend Model is neutral.

 

In light of the elevated level of macro risk and uncertain technical backdrop, I am advising investors to reduce risk to a neutral level in their portfolios.

 

 

Goodbye and Good Luck
This concludes the final publication of Humble Student of the Markets. I will continue to write at Fred Meissner’s site on a monthly basis. You can subscribe at a discount rate using the code “CamTrial”. In the meantime, I plan on engaging in father-daughter bonding over video games like Baldur’s Gate 3

 

 

…and Crusader Kings 3.

 

 

My best of luck in your future investing endeavours.

 

11 thoughts on “A Time for Caution”

  1. Thank you Cam for all the good thoughts you shared with us. We wish a joyful retirement!

  2. Hard to believe, it’s come to an end!
    I play World of Warcraft, horde now after many years as alliance. Enjoy Baldur’s Gate.

  3. All the best in retirement, Cam! I’ve enjoyed reading your analyses here and on seeking alpha for many years. Thank you!

  4. Congratulations Cam on a successful retirement and thanks for all your teaching and guidance. You remain one of the most knowledgeable analysts with extraordinary insights. I have learnt a lot over the years from you.

  5. Thanks Cam….I look forward to seeing your calm and sane analysis over at Fred’s site. I had to check my records, it seems to have been 10 years since the launch of the new website….where has the time gone?! 😉

  7. Thanks for all your insights over the years. It has been an interesting journey. All the best for the future.

  9. Thanks, Cam. I’ve enjoyed your thoughts over the years.
    I’m glad we’ll still hear from you on a limited basis.
    Wish you the best in your next chapter.

    1. Cam, I can’t beleive that i will have to close my Humble Student of the Market Tab. It has been up on my screen for years. Wish it wasn’t so…
      The best to you

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