The S&P 500 Battle at the 50 dma

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). As this site is shutting down on March 31, 2026, my inner trader is retiring so that there will be no tradings outstanding at the end of the quarter. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 to 16-Jan-2026 is shown below, and the chart will no longer be updated.

 

 

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)

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.

 

 

Alpha Unwind or Beta Faceplant?

The S&P 500 briefly broke down below its 50 dma and bounced. It’s near the bottom of a trading range. It recycled after becoming oversold on the 5-day RSI, but the VVIX, or the volatility of the VIX, is above 100, indicating heightened anxiety.
 

 

I have two interpretations of the market narrative. Recent events such as the silver price crash and the software stock rout could be just indications of healthy internal in an ongoing bull, or these setbacks could be alpha unwinds that are leading to risk manager-induced liquidations that result in a beta faceplant for asset prices.
 

 

The Bull Case

The intermediate bull case is easy to make.
Remember the Dow Theory buy signal? Both the Dow Jones Industrials Average and the Transportation Average recently made all-time highs. This is the classic case of a Dow Theory buy signal, and it is definitely bullish for stock prices.

 

 

The bullish outlook is confirmed by the all-time highs shown by the S&P 500 Advance-Decline Lines and the NYSE Advance-Decline Lines. Bear markets simply don’t behave this way.
 

 

From a valuation perspective, the S&P 500 forward P/E has weakened to 21.5, which is the bottom of a recent range. If this is a pullback in the context of an intermediate bull, this could be a sufficient sign of valuation support for high stock prices.
 

 

The recent episode of weakness just looks like a normal pullback in an uptrend.
 

 

Warning Signs

On the other hand, there are plenty of warnings of a deeper and more sustained correction. In the last few weeks, the relative performance of defensive sectors has been bottoming and some are turning up. This is an indication that the bears have been preparing to take control of the tape.
 

 

Equity risk appetite indicators are turning down and the consumer discretionary to staples ratio is exhibiting a distinct negative divergence.
 

 

Financial system liquidity is falling, which poses a headwind to stock prices. Newly nominated Fed Chair Kevin Warsh is known to favour the Fed’s balance sheet, which could create adverse effects for banking system liquidity.
 

 

Cryptocurrency prices serve as a useful real-time proxy for liquidity. Bitcoin has cratered. As a consequence, the relative return of speculative growth stocks, as measured by the ARK Innovation Fund ETF (ARKK), have also tanked. The market’s animal spirits are in retreat.
 

 

The animal spirit retreat is evident in skidding silver prices, which is testing its 50 dma after an island reversal on high volume.
 

 

Another risk-off sign is the dramatic underperformance of software stocks on AI disruption fears. AI bulls had been focusing on a long semiconductor and short software pair trade, but recent developments saw weakness in semiconductor stocks.
 

 

This kind of market action looks like an unwind of crowded leveraged positions. This could be an indication of either a margin-call driven sell-off for retail investors or a risk-manager-induced book size reduction by trading desks.
 

Putting it all together, this is a bifurcated intermediate bull market, but showing signs of short-term weakness. The momentum trades that were working, such as precious metals and AI-related plays, are turning down.

 

Putting it another way, these is the classic fertile ground for a possible Hindenburg Omen induced bearish setup. As a reminder, Hindenburg Omen signals occur when a market is in a well-defined uptrend becomes bifurcated and shows signs of price weakness. While single-day Omen signals can be safely ignored, clusters of signals can serve as correction warnings. The market flashed five Hindenburg Omens in the last six trading days.
 

 

What about Friday’s dramatic market rebound? The turnaround was constructive, but the ratio of up to down volume was only 5 to 1, which is relatively modest by historical standards. The jury is still out on whether the rally is sustainable. In the absence of a useful bullish or bearish edge, the prudent course of action for traders is to stand aside.
 

 

 

Geopolitical Risk Wildcard

Finally, investors need to be aware of the rising geopolitical risk of a U.S. attack on Iran. When Iranian street protests erupted in January, President Trump supported the protesters on social media and told them “help is on its way”. His remarks put American credibility on the line. At the time, the U.S. didn’t have sufficient military assets to defend regional allies against Iranian retaliation. The subsequent military buildup was designed not only to strike Iran, but to provide a ballistic shield for the region. That’s where we are today.
 

 

Recent discussions and analysis of the U.S.-Iran situation have mainly featured comparisons of the U.S. military build-up to the raid on Venezuela. A more benign geopolitical scenario might be North Korea in 2018 as a model of an off-ramp for Trump. After a summit in which Kim committed to vague promises to denuclearize, Trump declared the nuclear problem solved and took a political victory. Friday’s meeting between U.S. and Iranian negotiators in Oman ended inconclusively. Both sides agreeing to resume negotiations at a future date. The off-ramp is presenting itself to Trump, but will he take it?
 

The latest Polymarket odds of a U.S. strike on Iran by February 28 is 27%, but rises to 50% by June 30, which are largely unchanged from the betting odds before the talks in Oman. An attack increases the odds of a wider regional conflict that spikes oil prices and raises recession risk. If we treat these betting odds as unbiased estimators of a war with Iran, geopolitical risk cannot be treated as a tail-risk but an actual significant risk.
 

The coin flip 50% odds of an attack by June is a good way of thinking about how the situation may resolve itself. On one hand, Trump has put U.S. credibility on the line, and he hates to be publicly humiliated. On the other hand, an air campaign is unlikely to topple the Iranian regime. Iran is about the same size as Turkey and has roughly the same population. The U.S. doesn’t have the ground troops to invade a country that size. A bombing campaign is likely lead to protracted war. It would put upward pressure on oil prices ahead of a midterm election.

 

 

 

Where to Hide?

In summary, the S&P 500 has retreated to test its 50 dma. While I remain intermediate-term bullish, market internals point to a deeper short-term correction. The prudent course of action for traders is to stand aside. However, investors may find better return opportunities in non-U.S. equities.
 

The accompanying chart shows the relative equity returns of different major regions in USD. The U.S. topped out on a relative basis in November. Developed markets such as Europe and Japan began outperforming about the same time. China has been flat on a relative basis, but emerging markets ex-China has been on a tear.
 

 

One warning about emerging markets. Before you become overly excited, the strong returns of EM ex-China is mainly attributable to the weakness of the USD against EM currencies. An exposure to these regions amounts to a bet on continued USD weakness.