It’s Not Over Until the Iron Lady Sings

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). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

 

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)
• Trading model: Neutral (Last changed from “bullish” on 31-Jul-2025)

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 Trade War Continues

Even as the S&P 500 tests its rising trend line after the sudden trade war-related shock, I believe the risk of further stock price downdrafts isn’t over. The VVIX, or the volatility of the VIX Index, spiked above 100, indicating elevated levels of anxiety. If history is any guide, such conditions have seen market volatility and price pullbacks.
 

By no means is the trade war over. Here are some reasons why.
 

Digging in Their Heels

Much like the U.S. government shutdown that’s dragging on, both sides in the Sino-American trade war are digging their heels in because each side believes it has the upper hand.
 

The WSJ reported that “Beijing thinks it has found America’s Achilles’ heel: President Trump’s fixation on the stock market”. China is therefore holding its position because of this belief. It fired the first round by initiating additional restrictions on exports containing rare earths. When Trump threatened additional tariff levies of 100% on Chinese exports, China sanctioned the U.S. units of South Korean shipping company Hanwha Ocean.
 

Treasury Secretary Scott Bessent responded in a CNBC interview by insisting that a falling stock market won’t deter the U.S. from taking strong action against China.
 

Tensions are rising. Even though both sides are talking, they seem to be talking past each other instead of to each other. Bloomberg reported that when a top Chinese trade official visited Washington, each side had very different accounts of the meeting. While “China spoke of ‘mutual respect’ and ‘peaceful coexistence’”, Bessent “said the negotiator turned up uninvited and acted ‘unhinged’”.
 

The U.S. believes it has negotiating leverage because of its dominance in advanced semiconductors, whose exports to China it is trying to restrict.
 

I believe the Chinese have misread the Americans. My trade war factor, which measures the relative performance of U.S. domestic revenue companies, shows high levels of trade tension. That should lead to high levels of anxiety in Washington, right?
 

Not quite. While the VIX Index spiked in the latest round of trade anxiety, the MOVE Index, which measures bond market volatility, remains tame. In fact, the 10-year Treasury yield fell during the latest episode of trade-related market wipeout. In the past, Treasury Secretary Bessent has said that he is targeting the 10-year yield far more than stock prices. A falling yield is good news, not bad news. That’s why the Trump Administration feels little incentive to give in to Beijing’s demands, in spite of Trump’s comment that 100% tariffs are not sustainable.
 

From China’s perspective, U.S. attempts to isolate China have failed. China’s trade surplus keeps growing, despite America’s best efforts. China has demonstrated that it is too intricately embedded in global manufacturing supply chains to be isolated.
 

In the meantime, Beijing wields a high degree of leverage because of its dominance of rare earth production.
 

The accompanying chart shows the effects on American industries and jobs if rare earth supply is cut off. The solid blue bars show what happens if 10% of the industries that use them are disrupted, and the striped bars show the impact if 25% are hit.
 

While rare earths are actually not that rare, their extraction and processing are dirty processes that harm the environment. China demonstrated that it is willing to bear the environmental costs in order to achieve a near monopoly in the production of these minerals. In many ways, China’s position in rare earths is similar to the U.S. SWIFT dominance of the global banking system. China is betting that it can build an alternative payment network outside of SWIFT before America and the West can build up sufficient rare earth extraction and processing capacity.
 

Earnings Season Pressures

As well, the stock market may encounter pressures from earnings season from the fallout of the trade war. On one hand, the market is approaching Q3 earnings season on a positive note. Forward 12-month EPS estimates are rising and investor optimism is in the air.
 

 

On the other hand, buoyant EPS expectations could collide with margin pressures from tariff implementation. The U.S. government’s tariff revenues are skyrocketing, but who is paying the toll?
 

 

Goldman estimates that businesses absorbed 51% of the tariff impact in August, though most of the increases are expected to be eventually passed on to the consumer. Market expectations are between a rock and a hard place. Either U.S. businesses absorb most of the tariffs, leading to margin compression and earnings disappointment, or the price increase flows through to the consumer, which elevates inflation and delays future Fed rate cuts.
 

 

 

A New Front in the Trade War

Before investors become overly mesmerized by the Sino-American trade conflict, another front could open up in Trump’s trade war.