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It’s that time of year again to offer my readers the highest conviction idea for the coming year. Last year, my bullish call on gold worked out extremely well (see 2025 High Conviction Idea: Gold). Gold prices soared in all currencies and was one of the best-performing asset classes for the year. This […]
Mid-week market update: Coming into the December FOMC decision, I was worried that the market might react negatively on the prospect of a hawkish rate cut. Ahead of the meeting, the Committee was highly divided and the potential for a divided decision was extremely high. As it turns out, the level of hawkishness had […]
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 […]
In 1995, Fed Chair Alan Greenspan made an unconventional bet that the U.S. was undergoing an era of faster productivity growth based on the adoption of technology. The decision enabled a significant shift in monetary policy that resulted in faster non-inflationary growth and increased prosperity. The adoption of easier monetary policy also fueled the Dot-Com […]
Mid-week market update: I noticed on the weekend that there was a lot of excitement over the possibility of a Zweig Breadth Thrust buy signal, probably because of the strong advance last week. The stock market consolidated this week, and while the ZBT window closes Friday, the degree of breadth strength to achieve a ZBT […]
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 Americans recover from their extended Thanksgiving feasts, they were faced with the news of skidding consumer confidence. The Conference Board’s Consumer Confidence Index weakened to levels just above the lows seen during the post-COVID expansion. The University of Michigan’s Index of Consumer Confidence, which was released in early November, was even worse. […]
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 […]
Is it all over for artificial intelligence-related plays? AI market leader NVIDIA reported stronger-than-expected quarterly results, and CEO Jensen Huang characterized demand for its Blackwell chip as “off the charts”. The stock staged a brief reflex rally but the price faded the next day to close in the red. Even as the market adopted a […]
Mid-week market update: I am publishing the mid-week market update early for two reason. I wanted to respond to the recent market turmoil. And I have a dental appointment just after the market close so this will be in your inbox early. The markets have taken a sudden risk-off tone in the last few days. […]
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 […]
There has been increasing concern about the K-shaped economy. Fed Chair Powell specifically addressed this issue at the last post-FOMC press conference: To start with the layoffs, you’re right, you see a significant number of companies either announcing that they are not going to be doing much hiring, or actually doing layoffs, and much of […]
Mid-week market update: My market analysis publication published on the weekend ended with the following: The S&P 500 ended an upper Bollinger Band ride last week and weakened to the 50 dma support level. Past pullbacks in the most recent bull trend have ended when the 5-day RSI became oversold. Next week’s market action […]
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 […]
My former colleague Fred Meissner revealed a disturbing contrarian warning in a recent weekly commentary: “The most concerning story: recently I was on a panel for the CFA Society of San Francisco. All three analysts had the same outlook, which is my base case – a yearend rally followed by problems in the first part […]
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.
Last week, I observed that the stock market was on the verge of a buy signal. I got that signal this week when the VVIX, or the volatility of the VIX Index, dipped below 100 after a spike. This is a signal of reduced market risk appetite anxiety, which sets the stage for a market advance. In the meantime, the S&P 500 has been rising in a well-defined channel.
The S&P 500 and other major U.S. averages reached new highs last week. European averages are at or near fresh highs.
Asian markets are also showing similar signs of price strength.
Commodity prices are a bit of a mixed bag. Headline commodity indices have been trading sideways as they have been weighed down by the weakness in energy prices. However, the equal-weighted commodity indices are trending upwards, indicating broad cyclical strength.
Putting all together, the technical picture is a broadly based momentum-driven bull market. Tactically, the S&P 500 underwent an upper Bollinger Band ride and cooled off late last week. Past instances of upper BB rides have resolved in brief periods of consolidation that were good dip buying opportunities.
In addition, the market is entering a period of positive year-end seasonality. In light of the bullish support provided by the intermediate trend, investors should be positioning for a rally into year-end.
Further discussions with readers prompted us to offer an alternative scenario of a shorter corrective period. Investors may not have to wait 1–2 years before the resumption of a gold bull.
A number of gold bulls have highlighted the constructive price action of the gold mining ETF (GDX). GDX outran its rising channel in late August and peaked in October. It has since retreated and bounced off the top of the channel. The 14-day RSI fell to 40, which is an area where declines have stopped in the past. Similarly, the GDX to gold ratio neared the bottom of its Bollinger Band, and the percentage bullish on point and figure charts also fell to levels where it has bottomed before. Is it time to buy the dip?
While gold and gold miners may stage tactical rallies from current levels, I think it’s too early for a durable bottom.
Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic Department at the Bank for International Settlements (BIS), offered a plausible explanation of the gold rally and its retreat from the perspective of USD investment positioning in a Bloomberg podcast.
Indeed, I pointed out last week that high trading volumes, which can be a sign of a retail frenzy, can be signals of tactical reversals in the price of gold.
Now that the correction is here, what’s next?
Investors are advised to monitor the possible effects of a transition in Fed policy for clues to the future direction of gold prices. The Fed’s Open Market Committee cut its benchmark rate by a quarter-point last week, which was widely anticipated.
Even though there are too many moving parts to accurately forecast the specifics of Fed policy, the global trend in monetary policy is towards easing. If history is any guide, this should be bullish for commodity prices, and gold prices in particular.
In addition, the Fed announced that it would terminate its balance sheet run-off on December 1. The WSJ reported that Jerome Powell “in a rare speech devoted primarily to technical monetary plumbing dynamics, said the central bank could approach the point ‘in coming months’ where it needed to end the three-year-long campaign to shrink its holdings”. That’s because as the Fed began to shrink its balance sheet, otherwise known as quantitative tightening (QT), “most of the Fed’s balance-sheet runoff drained cash not from banks but from a separate deposit facility where money-market funds could park cash”, otherwise known as the overnight reverse repo (ON RRP) facility. Now that ON RRP is almost gone, further balance sheet run-offs will directly impact banking system liquidity. As the accompanying chart shows, banking system liquidity has been falling, which creates a headwind for risk assets like stocks.
The Fed’s focus on repo rates to adjust its money market plumbing procedures opens the door to a “tail wagging the dog” policy of allowing fiscal policy to control the Fed balance sheet. While repo rates are reflective of the level of stress in the banking system, they are determined by supply and demand, not just the level of bank reserves.
In the end, the Fed “decided to conclude the reduction of its aggregate securities holdings on December 1”. Powell acknowledged that the Fed will have to start expanding its balance sheet to accommodate banking system liquidity needs at some point in the future.
Market heavyweights META, MSFT, and GOOGL report results today after the close. AMZN and AAPL report tomorrow.
The preliminary results from Q3 earnings season has been above average. EPS and sales beat rates are above their 5-year averages and forward 12-month EPS estimates continue to rise, which are signals of positive fundamental momentum.
How the market reacts to earnings reports this week as a significant portion of the S&P 500 report results will determine the near-term outlook for stock prices. One key question is the impact of tariffs on margins. Consensus estimates of Q3 margins are flat compared to Q2. Fed Chair Powell also highlighted mentions of the K-shaped recovery in earnings calls of “consumer facing companies”. While the high-end consumer is healthy, lower-end consumers are struggling. Investors should be vigilant for surprises, either to the upside or downside on margin guidance.
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.
Breadth indicators, which had been weak and showing signs of concern, are starting to heal. The S&P 500 and NYSE Advance-Decline Lines had been moving sideways for several months while the S&P 500 slowly advanced. The S&P 500 A-D Line made a fresh all-time high last week and the NYSE A-D Line is not far behind.
I had been concerned about the lagging nature of the small- and mid-cap A-D Lines. Both have begun to improve, with the greatest recovery shown by the mid-cap S&P 400 A-D Line.
Risk appetite indicators may be bottoming. Credit market risk appetite, as measured by the relative price performance of junk bonds to equivalent-duration Treasuries, exhibited a minor negative divergence to the S&P 500, but the divergence is starting consolidate sideways. A similar pattern of consolidation and possible bottom can be seen in the relative performance of consumer discretionary to consumer staples.
I interpret these as constructive signs of a possible tactical bottom.
It may be too early to sound the all-clear signal. The relative performance of the Magnificent Seven and the equal-weighted S&P 500 have been flat for the past month. The improvement in breadth can therefore be explained by the sideways relative performance of the equal-weighted index. The glass half-full explanation is a constructive consolidation in market breadth. The glass half-empty explanation is a market struggling for leadership, and the jury is out on whether the bulls or bears have control of the tape.
I highlighted this chart of the 10 dma of the equity-only put/call ratio as a signal of a pullback. Whenever this indicator reached a bullish extreme, which is contrarian bearish, a reversal had been signals of market weakness. In the past, the correction didn’t end until the ratio reached an upside minimum reading of 0.61. In other words, sentiment hasn’t grown fearful enough, and investors may not have passed the danger zone yet.
In addition, the relative performance of defensive sectors is bottoming, indicating that the bears are trying to take control of the tape. This is an unusual condition consider that the S&P 500 is at or near an all-time high.
While technical conditions are highly constructive and aggressive traders could choose turn bullish now, I would prefer to see the resolution of key event risks before fully turning bullish. The coming week will see a FOMC meeting, an APEC Summit during which trade disputes may either flare or be resolved, and the uncertainty of an ongoing government shutdown that could weigh on consumer sentiment and the economy.
The White House announced that Trump would be meeting Xi on the sidelines of the APEC Summit in South Korea on October 30. Trump has signaled that he is willing to trade a pause on the 100% additional duties on Chinese imports in return for Chinese imports of U.S. soybeans, greater enforcement on fentanyl and fewer restrictions on rare earth exports. Chinese officials reported a constructive tone ahead of the Trump-Xi meeting.
As well, the U.S. government shutdown is continuing with no visible signs of resolution. While the economy has experienced only minor damage during past shutdowns, the prolonged nature of the current episode raises the risk of a loss of consumer confidence and growing pressures on households and small business as government payrolls stall.
Lastly, a substantial portion of the Magnificent Seven report earnings in the coming week. Anything can happen.
