Celebrate the Season of Saturnalia

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). 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 26-Nov-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 Bulls Throw a Party

Some historians have argued that early Christians adopted the Roman festival of Saturnalia, which was a festival to celebrate the winter solstice. It was a Bacchanalian period of drinking and excess. Today, that period coincides with the Christmas season.
 

It is in the spirit of Saturnalia that the bulls are throwing a party. The accompanying chart shows my risk appetite indicators, which are all tracking the strength of the S&P 500. In particular, the ratio of high beta to low volatility stocks (red line) recently exhibited a bullish divergence by rising to an all-time high.
 

 

The spirit of Bacchus lives this Christmas season and the markets are following the template for a rally into year-end.
 

 

Here Comes the Beta Chase

I am seeing signs of an emerging beta chase and the return of price momentum leadership that’s evident despite last week’s AI-related wipeout.

 

The accompanying chart showed past instances when the percentage of NASDAQ above their 10 dma surging from 20% to over 75% within 10 trading days. If history is any guide, the NASDAQ Composite will be higher 10 out of 11 times within one month, and higher within three months 100% of the time.
 

 

Risk on!
 

Even as AI-related stocks got wiped out late last week, the most constructive sign are indications of internal rotation and improving breadth. Both the S&P 500 and NYSE Advance-Decline Lines made all-time highs. This is not bearish. Moreover, net NYSE 52 week highs-lows remain positive.
 

 

The small-cap Russell 2000 made an all-time high last week. The S&P 600 made a new recovery high. Those are not bearish signs either.
 

 

Another sign of the beta chase is the relative strength of small-cap stocks. The Russell 2000 made a V-shaped recovery against the S&P 500 in November. The small-cap QQQJ similarly bounced early in November and it has maintained its strength. These are all constructive sigsn of broadening breadth.
 

 

In addition, the Dow Jones Transports have been on a tear. Further strength would see it make an  all-time high, which would flash a Dow Theory buy signal, as the Dow Jones Industrials has already made its fresh high.
 

 

 

Making Sense of the AI Wipeout

One development that’s slightly worrisome is the wipeout of AI-related stocks late in the week. The market did not react well to earnings reports from Oracle (ORCL) on Thursday and Broadcom (AVGO) on Friday. Both stocks skidded badly after their respective eeports and led a sell-off in AI-related plays.
 

As a consequence, the tech-heavy NASDAQ 100 broke down below a rising trend line after rallying to regain the trend line. Investors should watch in the coming days the seriousness of the break and whether the index can recover back above the trend line, which would be a bullish sign.
 

 

An analysis of the downside breaks indicate that the damage may not be as serious as feared. Oracle fell to just above gap support and the stock price is holding so far.
 

 

Broadcam is testing an initial support level (dotted line), but gap support is significantly lower and so is the first level of Fibonacci retracement  support.
 

 

I am inclined to monitor the relative performance of speculative growth stocks, as represented by the ARK Investment ETF (ARKK), as an indication of tech risk appetite. ARKK has turned up in lockstep with Bitcoin. Bitcoin can be viewed as a real-time indicator of system liquidity. I would interpret weakness in one or both of these indicators as the tide going out in banking system liquidity, which would signal an end to the bulls’ party.
 

 

In conclusion, the market is exhibiting number signs of a sustainable risk-on tone, which should carry the stock market rally into year-end and possibly into January. Market internals point to the an internal rotation, led by small-caps,  as a source of leadership. Despite the recent AI-related wipeout of technology names, market internals of tech stocks remain  constructive and could see a recovery in the near  future.