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Mid-week market update: Is the much anticipated market pullback starting? The U.S. equity market recently saw a violent rotation from growth to value, led by downdrafts in market darlings like NVIDIA and Palantir. Notwithstanding the change in leadership, I have been monitoring the evolution of the VVIX, or the volatility of the VIX, which spiked […]
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 […]
Trump’s pressure for a rate cut from the Federal Reserve is growing. Treasury Secretary Scott Bessent said in a TV interview last week, “If you look at any model for the Fed Funds rate, it suggests that we should probably be 150, 175 basis points lower.” Stephen Miran, who is Trump’s pick to fill […]
Mid-week market update: Yesterday’s July CPI report came in roughly in line with market expectations. Headline CPI was a hair below consensus, while core CPI was a hair above consensus. Even as the bond market greeted the report with caution, the stock market responded with a risk-on stampede in the expectation of a September rate cut. […]
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 […]
Last week, I outlined the case for fiscal dominance (see Will the Next Fed Chair Matter Much to Policy?). U.S. debt to GDP is rising and not stabilizing. In all likelihood, the Fed will follow the path of the BoJ of cutting short rates, restarting quantitative easing and yield curve control to suppress long rates, […]
Mid-week market update: Two components of my Bottom Spotting Model flashed buy signals last Friday. The VIX Index spiked over its upper Bollinger Band, and the NYSE McClellan Oscillator reached an oversold condition. In the past, the triggers of two or more component buy signals were signs of tactical bottoms. This time, my inner […]
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 […]
As reporters tried to elicit the Fed’s reaction function from Jerome Powell during the July post-FOMC press conference, Bloomberg’s Michael McKee asked a very different question relating to the juxtaposition of fiscal and monetary policy in the years ahead: McKEE: Do you have concerns about the cost to the government of keeping rates elevated for […]
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 […]
Q2 earnings season was supposed to be a key test of how the Trump tariffs would affect corporate earnings and margins. The coming week will see the bulk of the S&P 500 by weight report results. So far, the preliminary verdict has been relatively benign. Negative effects from tariffs seem to be the exception rather […]
Mid-week market update: One key development that I had been monitoring is the upside or downside resolution of the sideways consolidation that often occurs after the market ends an upper Bollinger Band ride. Investors may have a tentative answer. It’s an upside breakout. The S&P 500 and equal-weighted S&P 500 finally staged an upside breakout […]
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.
Sentiment readings don’t look stretched. The latest weekly AAII sentiment survey shows that the bull-bear spread in neutral and in retreat for one week.
Similarly, the latest NAAIM Exposure Index, which measures the sentiment of RIAs who manage individual investors’ funds, fell for a second consecutive week.
Moreover, TS Lombard found that the count of news stories containing the term “melt-up” had been steadily falling even as S&P 500 returns rose.
The fundamental backdrop is also supportive of further price gains. As Q2 earnings reporting season begins, the preliminary EPS and sales beat rates are well above historical averages. As well, the bottom-up aggregated forward 12-month EPS estimates are rising strongly.
There were also bullish signs from a top-down perspective. The June CPI and PPI report shows a narrowing CPI-PPI spread. Despite all of the anxiety over narrowing operating margins from tariff implementation, this latest data point is an indication that tariff-related margin effects should be relatively tame in the goods sector.
From a technical perspective, I see no signs of an imminent top. The relative performance of defensive sectors is all trending down, indicating no signs of an immediate market downturn.
Credit and equity risk appetite indicators are both confirming the advance in the S&P 500.
I am waiting for upside breakouts as signals of another upleg in stock prices. The S&P 500 has been consolidating sideways in a narrow range after its recent upper Bollinger Band ride. A definitive upside breakout would be a convincing signal that the bulls have firm control of the tape.
The small-cap Russell 2000 staged an upside breakout through the neckline of an inverse head and shoulders pattern, but it’s struggling to overcome relative resistance (bottom panel). An upside relative breakout would be a signal that these high-beta stocks are joining the risk-on party.
The key risk to the bullish thesis is the weakness in the bond market. Inflation expectations are rising in response to signs of higher tariff pass-through in the CPI data and the threat to replace Fed Chair Jerome Powell. The 30-year Treasury yield has breached the psychologically important 5% level.
Should these conditions sustain themselves, the market could take a sudden risk-off pivot as bond yields spike, which makes stocks less attractive on a relative basis.
In conclusion, the stock market recovery off the April panic bottom is characterized by a speculative FOMO chase for risk. I call this a “the dog that didn’t bark” market as there are few signs of speculative excess. As well, technical indicators are supportive of higher prices in the short run. The main risk to the bull is an unwelcome rise in inflation expectations, which could rattle the bond market as well as stock prices.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXL
Consider the nature of U.S. trade in context. By country, the lion’s share of U.S. imports comes from the North American trade bloc at 29%, followed by China at 14% and Europe at 24%.
The accompanying chart shows the U.S. goods trade balance by country. Keep in mind that the U.S. runs a trade surplus in services, such as from technology platforms, that is not shown in the chart, and the reported trade deficits are accounted for by specific circumstances. The U.S. would have a trade surplus with Canada if oil and gas imports were stripped out, and much of the trade deficit with Ireland, and the EU by extension, is attributable to pharmaceutical intellectual property rights parked there owing to its low-tax regime.
Even though a trade truce was achieved, the U.S. objective to isolate China on trade failed. The recent release of China’s H1 2025 trade shows a surging trade surplus. More importantly, China is posting a $115-billion monthly trade surplus even in the face of 40% U.S. tariffs.
The latest round of the trade war revealed the key supply chain chokepoints that China controlled, such as its prominent position in the production of certain rare earths.
You get the idea. China cannot be isolated. Be prepared for Trump to engineer a face-saving deal where he can declare victory. Don’t be surprised at further positive developments but no strategic breakthroughs that erode China’s competitive position in the upcoming Trump-Xi meeting.
China’s manufacturing workforce is over 100 million, compared to about 13 million in the U.S. In effect, Trump’s industrial policy is to replace high value-added industry employment such as artificial intelligence and biotechnology with low value-added jobs such as making sneakers and apparel.
In the 1950s, American intelligence suggested that the Soviet Union was leapfrogging U.S. capabilities across a range of military technologies. Then on Oct. 4, 1957, the Soviet Union launched the first satellite, Sputnik, into space.
Americans were shocked but responded with confidence. Within a year the United States had created NASA and A.R.P.A. (later DARPA), the research agency that among other things helped create the internet. In 1958, Dwight Eisenhower signed the National Defense Education Act, one of the most important education reforms of the 20th century, which improved training, especially in math, science and foreign languages. The National Science Foundation budget tripled. The Department of Defense vastly increased spending on research and development. Within a few years total research and development spending across many agencies zoomed up to nearly 12 percent of the entire federal budget. (It’s about 3 percent today.)
Today’s leaders don’t seem to understand what the Chinese clearly understand — that the future will be dominated by the country that makes the most of its talent. On his blog, Tabarrok gets it about right: “The DeepSeek Moment has been met not with resolve and competition but with anxiety and retreat.”Populists are anti-intellectual. President Trump isn’t pumping research money into the universities; he’s draining it out. The administration is not tripling the National Science Foundation’s budget; it’s trying to gut it. The administration is trying to cut all federal basic research funding by a third, according to the American Association for the Advancement of Science. A survey by the journal Nature of 1,600 scientists in the United States found that three-quarters of them have considered leaving the country.
The response to the Sputnik threat was to go outward and compete. Trump’s response to the Chinese threat generally is to build walls, to erect trade barriers and to turn inward. A normal country would be strengthening friendships with all nations not named China, but the United States is burning bridges in all directions. A normal country would be trying to restore America’s shipbuilding industry by making it the best in the world. We’re trying to save it through protectionism. The thinking seems to be: We can protect our mediocre industries by walling ourselves off from the world. That’s a recipe for national decline.
For investors, the reduction in trade tensions has two investment implications.
In the short run, economic policy uncertainty is receding but it’s not fully normalized. It’s time to adopt a risk-on posture.
Tactically, U.S. equities lagged the most during the trade war panic, and they are recovering and should be the leadership in the short term. Emerging Markets ex-China outperformed as the USD weakened, but the USD appears to be stabilizing and the outperformance of this region may not continue. The other regions, Europe, Japan and China, are likely to lag during the recovery phase.
In the long run, Trump’s America First policies of continuing trade wars and efforts to reshore low value-added industries are likely to erode U.S. productivity and competitiveness. The S&P 500 is already trading at a highly elevated forward P/E of 22.2. Equity investors should not expect U.S. equities to continue to outperform global stocks in the next expansion cycle.
The BoA Global Fund Manager Survey tells the same story. Risk positioning is normalizing, but readings aren’t excessive.
Remarkably, reported equity exposure is barely overweight despite the recent buying stampede.
In the absence of significant and unexpected shocks, the path of least resistance for stock prices is up.
The Board of Governors of the Federal Reserve System shall have power to levy semiannually upon the Federal reserve banks…an assessment sufficient to pay its estimated expenses and the salaries of its members and employees…and such assessments may include amounts sufficient to provide for the acquisition by the Board in its own name of such site or building in the District of Columbia as in its judgment alone shall be necessary for the purpose of providing suitable and adequate quarters for the performance of its functions. After September 1, 2000, the Board may also use such assessments to acquire, in its own name, a site or building (in addition to the facilities existing on such date) to provide for the performance of the functions of the Board…The Board may maintain, enlarge, or remodel any building or buildings so acquired or constructed and shall have sole control of such building or buildings and space therein.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
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.
My long-term timing model was on the verge of a buy signal based on the MACD crossover of the NYSE Composite from negative to positive. That signal was triggered and it has extensively discussed in these pages.
The final trigger was a broad improvement in breadth. The S&P 500 and the NYSE Advance-Decline lines had broken out to all-time highs, but net 52-week highs-lows hadn’t made a new 2025 high. Fast forward to today, that indicator (bottom panel) made a 2025 high last week, and the mid-cap S&P 400 A-D Line also broke out to a new high. The only shoe left to drop is the small-cap S&P 600 A-D Line, which is lagging and yet to make an all-time high. At this rate, that’s only a matter of time.
Here is how the bear market turned into a bull market.
Public confidence was similarly shaken. Consumer sentiment had fallen to levels consistent with major market lows and represented buying opportunities.
In the meantime, the right side of the risk distribution began to assert itself. Things started to go right, at least less bad.
The latest NFIB optimism survey shows that hard data (dark line) ticked up, though the soft expectations data (light line) modestly fell. The NFIB survey is useful as small businesses have little bargaining power and they are sensitive barometers of the economy. This is the picture of an economy that’s less bad.
Household finances were becoming less bad. Credit card delinquencies appear to be peaking.
Trump’s tax bill passed and became law. An analysis of the spending shows that the deficits were front loaded while the projected tax savings were back loaded. While the deficits were disconcerting to the bond market, higher near-term deficits translated into fiscal stimulus in the first few years, which is growth positive and welcome news to the stock market.
Over in the jobs market, initial jobless claims are declining (blue line) but continuing jobless claims (red line) are steadily rising, which is a picture of employers who aren’t firing but job seekers are having a hard time finding employment. The economy is weak, but there is no downturn. Another sign that the economy is becoming less bad.
The U.S. economy is showing signs of resilience. Real GDP growth historically ranged between 2% and 3% and it remains in that range. Fears of a tariff-induced recession were overblown. Most economic models project negative GDP growth effects of between -0.5% and -1.0%. As one of many examples, the Budget Lab model shows “-0.6% lower from all 2025 tariffs. In the long-run, the U.S. economy is persistently -0.3% smaller”.
The combination of the market panic and subsequent recovery in fundamentals and psychology have resolved in a buying stampede. There are numerous technical signs of breadth thrusts and price surges that have historically resolved bullishly.
Investors have piled into low-quality stocks in a beta chase to play catch-up. The WSJ reported that “Meme Stocks and YOLO Bets Are Back and Fueling the Market’s Rally”. This will not end well, but not until positioning rises from neutral to crowded long readings. At the current rate, I estimate the excessive froth will become a problem in the August–September time frame.
While a rally into August and September is my base-case scenario, much depends on how tariffs affect inflation and operating margins in the coming months. The June FOMC minutes showed a broad agreement that tariff effects will show up in the inflation data but there was disagreement about the magnitude and timing of the effects.
Torsten Slok at Apollo labeled this the MBA vs. Ph.D. disagreement. Top-down Ph.D. forecasters are expecting a growth slowdown, but bottom-up company analysts with MBAs expect continued earnings growth. The bottom-up view is supported by improvements in company Q2 earnings guidance. The first test of my bullish thesis will occur with the onset of Q2 earnings reporting season.
In conclusion, market psychology panicked and became overly concerned about left-tail risk and sold equities in the wake of the “Liberation Day” tariff announcements. Better, or less bad, news emerged and investors rebuilt the positions from a crowded short to a neutral position. Price momentum is dominant and I expect that the rally will continue into the August–September time frame, which is consistent with the 4-year seasonal pattern of the S&P 500.
Tactically, it isn’t unusual for the S&P 500 to either consolidate or pull back after an upper Bollinger Band ride. The consolidation has so far been mild but one test will appear on Monday after Trump threatened a 30% tariff rate on Mexico and the European Union over the weekend. Keep in mind that the stock market has shrugged off such tariff threats before. The S&P 500 rose the next day after Trump’s announcement of a 50% tariff rate on Brazil, and fell a modest -0.3% on the threat of a 35% tariff rate on Canada. The market just doesn’t seem to take Trump’s economic initiatives very seriously anymore, particularly in light of his demand last week that the Fed should cut interest rates in response to economic strength. Will investors a disorderly risk-off stampede next week, or a TACO-mania?
I believe the main risk to my bullish scenario is the timing and magnitude of tariff effects on inflation and margins, and the first test will become evident with the upcoming CPI report and Q2 earnings season.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Investors shouldn’t give up on the gold bull just yet. For U.S. investors, the trend continues to be your friend. Gold is an inflation hedge and my inflation expectation indicator staged an upside breakout in April. It remains above the breakout level and the trend is rising, albeit in a choppy manner. Much of the realization of higher inflation depends on the effects of tariffs. The June FOMC minutes showed a consensus about higher inflation, though a split is appearing about the timing and magnitude of the effects:
In discussing their outlooks for inflation, participants noted that increased tariffs were likely to put upward pressure on prices. There was considerable uncertainty, however, about the timing, size, and duration of these effects…
Outside the U.S., a World Gold Council survey of central banks shows increasing demand for gold in their reserves.
Central bank reserve accumulation has been so strong that, according to the European Central Bank, gold is now the second latest reserve asset when valued at market prices.
At the same time, data from the New York Fed shows that foreign central banks have been shrinking their USD exposure, which poses a headwind for the USD Index.
The trend is your friend.
The trend isn’t over. Estimates of the allocation in investor portfolios is still low by historical standards. Public sentiment has a far way to go before it’s all-in on gold.
Gold is also holding up on its relative breakouts against the S&P 500 and the 60/40 asset mix. The relative breakout against the 60/40 fund is especially significant as it highlights the metal’s importance in diversification effects and the reduced diversification effect of bonds in an environment of rising inflation expectations.
A tactical analysis of gold mining stocks (GDX) shows the group is testing an uptrend, while the 14-day RSI (top panel) approaches the 40 level where these stocks have bounced in the past. The bottom two panels show long-term technical conditions to be overbought, which I interpret as the “good overbought” conditions that accompany a sustained advance.
In summary, gold prices are consolidating after an advance. In the absence of serious technical breaks, I are inclined to give the bull case the benefit of the doubt.
Callum Thomas of Topdown Charts recently suggested that it may be time for investors to diversify into other commodities in light of the relative price performance of gold against other commodities.
I am sympathetic to the long-term case for diversification, but I believe it may be too early from a tactical trading perspective. In order for gold to lag other commodities, the global economy needs to see a cyclical rebound, whose signs are not evident.
Similarly, a review of the performance of selected cyclical industries shows that most cyclical groups are tracing out relative bottoms against the S&P 500. With the possible exception of infrastructure stocks, none are showing signs of sustainable market leadership.
In conclusion, I remain a gold bull. Gold prices are consolidating after strong gains in H1 2025, but the trend is still up. Bullish sentiment isn’t stretched and central bank buying provides long-term demand. I am sympathetic to the suggestion that it’s time to diversify into other commodities, but the idea is only a trade set-up as commodity outperformance of gold requires a cyclical rebound, which is not evident at this time.
That’s where we are. If the current market rally were to follow past momentum examples, a useful template might be the 2011 recovery experience when the S&P 500 went on several upper BB rides after it recovered and broke up through resistance in early 2012. In those cases, the pullbacks after upper BB rides tended to be relatively shallow, which is my base case scenario.
Other historical studies are supportive of the price momentum bull case. Wayne Whaley observed that “the S&P has now advanced 26.0%, doing so in less than a Quarter, 86 calendar day (April8-July3) to be precise…Looking back through post 1950 history, I can only find five prior occasions in which the S&P has advanced 25% in less than a Quarter and none of those five occasions were anywhere near an impending top.
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.
The bank noted that the measure, which is calculated from derivatives metrics, volatility technicals and sentiment signals inferred from options markets, has historically averaged around 7%, but occasionally it peaks above 10% as during the Dotcom era of the late 1990s, and the meme-stock frenzy of 2021. The gauge currently sits around 10.7%, data compiled by Barclays show.
To make a long story short, the odds favour further gains in the next few weeks. For some context, I use RRG charts to tell the story. Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.
The high-octane rally didn’t just appear overnight, factor rotation analysis showed that it had been developing for some time.
Another element that’s supportive of further market strength is evidence of broadening breadth. Market leadership is widening to small-cap stocks. The Russell 2000 staged an upside breakout of an inverse head and shoulders pattern, with a measured objective of about 250. In addition, the bottom panel shows that small caps are on the verge of a relative breakout.
Other market internals are supportive of further gains. My technical dashboard is blinking mostly green.
Risk appetite indicators are confirming the stock market’s strength. Both equity risk appetite, as measured by the ratio of high beta to low volatility stocks, and credit market risk appetite, as measured by the relative price performance of junk bonds to their equivalent-duration Treasuries, are rising in lockstep with the S&P 500.
Option sentiment is not stretched. CBOE put/call ratios are in neutral, indicating a lack of exuberance despite the recent market rally.
Estimates of market positioning are in neutral. If momentum continues to dominate, there is additional buying power for stock prices to run.
Similarly, Goldman’s estimate of CTA global positioning tells the same story of a recovery from a panic low to neutral levels.
The AAII monthly asset allocation survey measures retail sentiment and indicates what respondents actually do with the funds, which is different from its weekly opinion survey of respondents think, shows rising of equity allocation after the recent market panic. However, readings are not excessive and have more room to grow.
It’s impossible to forecast how the far the latest rally can last. I can point to some clues and risks that equity investors bear in the current environment.
The recently passed budget bill also contained hidden elements of a short Trump Call when it raised the debt ceiling by $5 trillion. The increase of the debt ceiling will mean that the U.S. Treasury will start to sell debt to finance the deficit and cease its previous extraordinary measures to avoid reaching the government’s old self-imposed debt limit. In practical terms, the government will reverse the drawdown of the Treasury General Account at the Fed, which supplied liquidity to the financial system, and drain liquidity by selling debt into the market. The withdrawal of liquidity will pose a short-term headwind to equity prices.
It’s time for a breather. The stock market is overbought in the face of growing risks. If stock prices were to wobble because of either of these two conditions in the coming days, I will be monitoring how risk appetite behaves under those conditions. Will the market pull back and correct, or will it shrug off these potential potholes and continue to advance? Stay tuned.
In conclusion, the market is taking on bubbly characteristics. However, momentum is still strong and sentiment is not excessively stretched. The market is due for a short-term pullback or consolidation. I believe traders should buy the anticipated weakness next week and embrace the bubble conditions as the melt-up has further room to run.
There are good reasons to be cautious. The S&P 500 is trading at a forward 12-month P/E ratio of 22. Investors have seen such valuation levels in the last 30 years on only two occasions, the COVID era and the dot-com era.
Street analysts are forecasting a bottom-up aggregated annual S&P 500 growth to be 9% in 2025, 14% in 2026 and 12% in 2027. As they stand today, those figures should translate into healthy stock price returns, as long as the forward P/E multiples hold at current levels.
For the longer-term outlook, investors need to consider how P/E multiples will evolve. The P/E multiple is a function of interest rates and bond yields.
Putting it all together, where does that leave us? Can stock prices advance when the S&P 500 is trading at a historically high forward P/E of 22?
