As a consequence of software stock weakness, the NASDAQ 100 is deeply oversold, as measured by the percentage of stocks with 14-day RSI below 30. If history is any guide, these conditions have been preludes to price rebounds.
Other wildcards to consider are the upcoming earnings reports from Alphabet after the close today, and from Amazon tomorrow.
Here is the case for caution. Beneath the surface, equity risk appetite indicators look a little shaky. The ratio of consumer discretionary to consumer staple stocks (green line) is exhibiting a negative divergence against the S&P 500. The ratio of high beta to low volaitlity stocks (red line) is tracing out a minor negative divergence.
The relative performance of IPO stocks have similarly cratered as animal spirit risk appetite has suddenly evaporated.
Investors should also be mindful of rising geopolitical tail-risk. The U.S.-Iran talks are expected to take place on Friday in Oman. Preliminary news reports indicate a mixed prognosis at best. Gulf states were supposed to attend as observers, but the latest reports indicate that they may not participate.
Iran wants to restrict the discussion to de-nuclearization. The American objectives of discussions of de-nuclearization, curbs on Iranian missile program, and curbs on support on regional militias seem to maximalist demands that are designed to torpedo the talks. In the meantime, not only have U.S. strike capability been built up in the region, the U.S. has been rushing THAAD and Patriot missile systems into the region, which is designed to defend allies against Iranian counter strikes.
The tail-risk is an all-out war which could only only spike oil prices, but elevate them for a considerable time. While this isn’t my base case scenario, the accompanying chart from John Authers shows the magnitude of an oil shock during the Iraqi invasion of Kuwait in 1990, which would crater global growth and spark an unexpected recession.
The current Polymarket odds of a U.S. attack on Iran by February 28 is 26%, which is significantly high to pay attention to. Keep in mind, however, the John Authers oil price surge scenario is an all-out regional conflict that may not develop even if an attack were to occur.
The Hindenburg Omen signal provides a useful framework for the short-term outlook. A historical analysis of past Omen signals shows weak short-term forward returns, with average drawdowns at the -2% at the one-month horizon. That’s weak, but not catastrophic.
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.
Parabolic Silver
How should investors interpret the parabolic rise in silver prices? The silver ETF has been rising on surging volume. Silver has also outperformed gold handily since mid-November as the silver/gold ratio has also went parabolic. However, Friday’s island reversal pattern is silver (and gold) is concerning for precious metal bulls.
The key question for investors is, “What does this mean for asset returns from an inter-market analytical perspective?”
The Usual Suspects
To interpret the reason behind the surge in silver prices, let’s interrogate the usual suspects normally responsible for the advance in silver. From a trader’s perspective, it can be regarded as a poor man’s gold and, at the extreme, a high beta version of gold.
The first suspect is the inflation hedge trade, also known as the debasement trade. However, inflation expectations indicators, such as the relative performance of TIPs to zero-coupon long Treasuries, the 30-10 year Treasury yield curve and the 30-year Treasury yield, were flat since silver prices started rising strongly in November.
If surging silver prices is a signal of currency debasement fears, investors should see it in a steepening yield curve. While various part of the Treasury yield curve did steepen in November and early December, the silver parabolic period that began in early December saw little changes in the shape of the yield curve.
Could rising silver prices be a reflection of a loss of confidence in America? I analyzed the performance of the “Sell America” trade, as measured by the relative price performance of equivalent duration foreign sovereign bonds to Treasuries, the relative performance of non-U.S. stocks to the S&P 500 and the USD Index. But the silver rally began well before the “Sell America” rally, which is mainly attributable to the global anxiety over President Trump’s Greenland annexation initiative.
Nevertheless, the recent sudden drop in the USD Index is concerning. When the USD plunged last week, its decline was exacerbated by President Trump’s remark that he is not concerned about the currency’s drop. In fact, he characterized the USD as “doing great”.
The hand wringing over the drop in the greenback has to be put into perspective. While it is true that the USD has fallen, the level of the Real Broad Dollar Index during the current Trump 2.0 period is far above the level seen during Trump 1.0. Incidentally, the conclusions are the same regardless of whether the currency is measured on a real inflation-adjusted basis or in nominal terms.
In short, interrogation of the usual suspects finds no obvious fundamental culprit for the recent silver price parabola.
An Overbought Market
From that perspective, I can only attribute the surge in silver prices as an overenthusiastic reaction to the bull move in gold. The silver parabolic is a symptom of precious metals as the “flavour of the month”, which is likely to reverse itself some time in the near future.
Indeed, an analysis of the Gold Miners ETF (GDX) finds the ETF reversed Friday from overbought conditions in virtually all technical internals and testing resistance as defined by a rising trend line. Nevertheless, relative breadth remains strong (bottom panel).
As another sign of an overbought market, the gold to S&P 500 volatility ratio has risen to an all-time high.
From a sentiment perspective, the market is poised for a reversal. We are at the point in the sentiment cycle where even Tether, the crypto stablecoin firm, is buying gold in a scale that surpasses central banks. Tether reported that it added 27 metric tons of gold to its reserves in Q4 2025 after buying roughly 26 metric tons in Q3.
As well, USD sentiment is an off-the-charts bearish extreme, and the USD is inversely correlated to precious metals and commodity prices.
The 5-day RSI of the USD Index recently fell below 10, which is usually a signal for a tactical reversal.
Reversal Ahead
This kind of price action brings up Bob Farrell’s Rule #4: “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.” While it’s impossible to spot the exact top when prices are going parabolic, reversals usually happen when a crisis forces a reversal.
While it’s impossible to guess the catalyst for a price reversal ahead of time, but the nomination of a new Fed Chair was not the most likely candidate in my estimation. While a single day’s price action doesn’t make a trend, the “Sell America” trade showed distinct signs of reversal as U.S. Treasury prices outpaced foreign sovereign bonds, the S&P 500 beat the global stocks, and the USD rallied.
However, investors should view any potential reversal in precious metals and the USD from both short- and long-term perspectives. In the long term, the gold/S&P 500 and gold/60-40 portfolio has staged convincing relative breakouts that signal the start of a market cycle characterized by hard asset leadership. Such changes in leadership have also coincided with changes in the value/growth, market capitalization and U.S./non-U.S. market leadership. Indeed, some of those factors are being seen today.
However, the precious metals rally is highly extended in the short run and can reverse itself at any time. A pullback in gold and silver prices could also coincide with a short-term leadership renewal by U.S. large-cap growth stocks, which have been the main laggards during this episode.
In conclusion, silver has gone parabolic, and even the silver/gold ratio has surged. I can find no satisfactory fundamental reasons beyond rising excessive bullish precious sentiment. Under such conditions, it’s impossible to try to time the blow-off top in precious metals but a reversal may have begun last Friday. Even though gold and silver prices are highly extended, we believe the secular trend of a hard asset leadership cycle is intact, and any weakness is a pullback in an uptrend.
Mid-week market update: The S&P 500 achieved a fresh all-time high yesterday (Tuesday) and it touched 7000 today before retreating. President Trump posted about the event, did he jinx the market?
Probably not. The Fed presented the market with a number of potential surprises. In the end, the Fed decision and the subsequent press conference turned out to be a big yawn. We could have seen political fireworks surrounding the investigation, or the question of whether Powell will remain on the Board after the expiry of his chairmanship, but we didn’t. Nor did we see Trump upstage the FOMC by announcing the selection of a new Fed Chair.
The Fed Catches Up to the Market
The Fed decided to keep rates unchanged. Its assessment of the economy showed improvement from December. Inflation was still elevated, but unemployment seems to be stabilizing and economic growth is recovering.
These conditions are consistent with the relative strength shown by the cyclical industries that I monitor.
The path for stock prices is back to being driven by the economic and earnings outlooks, as interest rates appear to be steady.
Supportive Breadth
An analysis of market breadth is continues to be supportive of the bull case. Net new 52-week highs-lows for the NYSE and NASDAQ are strongly positive. This is a bullish condition.
Similarly, both the S&P 500 and NYSE Advance-Decline Lines made all-time highs. These are also bullish conditions.
These conditions are consistent with the market expectation that the Trump White House will try to keep stimulating the economy well enough to support rising stock prices until the mid-term election. While such a policy stance will eventually resolve in high inflation, which is being discounted by soaring gold and silver prices, that’s mostly a H2 2026 and 2027 investment story.
One warning sign is evidence of elevated sentiment. The II bull-bear spread is at a new cycle high. But sentiment is a warning condition and not an actionable sell signal. The bullish interpretation of such readings is it’s a “good overbought” condition seen during bullish advances.
I interpret sentiment conditions as a warning that the market may be in need of a near-term pullback.
Geopolitical risk (Iran and Venezuela) is rising again. Be prepared to size your trading positions accordingly for possibile volatility.
I will be keeping an eye on possible failures of short-term price momentum as a warning sign, but the intermediate-term trend continues to be bullish.
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.
What Positioning Rinse?
Coming into last weekend when news of Trump’s Greenland annexation demands hit the tape, it appeared that the stock market was poised for a positioning rinse. The BoA Global Manager Survey found that respondents’ cash levels had reached an all-time low, and very few managers had taken out tail-risk hedges. Investors were all bulled up, and the Greenland news was a potential catalyst to spark a correction.
Instead, the bears ended up becoming disappointed. When the market re-opened on Tuesday after the MLK long weekend, the S&P 500 gapped down and closed -2.1% on the day. But you can tell a lot about the nature of market psychology by the way prices react to news. The S&P 500, the NASDAQ Composite, the equal-weighted S&P 500, and the small-cap S&P 600 all rallied quickly to close Tuesday’s opening gap.
The Monday open from the previous weekend saw the news break of a Department of Justice investigation into Fed Chair Jerome Powell. The stock market opened in the red, but closed the day in the green.
This kind of price action is a pattern of underlying strength.
A Sentiment Reset
Instead, what investors saw was a panic on Greenland Tuesday and a sentiment reset. ETF flows saw the worst cross-asset decline since the “Liberation Day” panic in April as money stampeded for the exits.
Mark Hulbert, who monitors investor newsletter sentiment, confirmed the panic in a MarketWatch article: “The average short-term timer that my firm tracks reduced recommended equity exposure on Tuesday by almost 20 percentage points, as judged by the Hulbert Stock Newsletter Sentiment Index. That’s one of the biggest one-day HSNSI drops since 2000, which is how far back data extend.”
Up until now, my base-case scenario had been calling for a short-term market top in late January or February. This sentiment reset opens the door to a rally of longer duration.
Breadth and Cyclical Tailwinds
Notwithstanding the effects of the Greenland scare, market breadth had been steadily improving. The percentage of S&P 500 beating the S&P 500 has reached the second best levels in 50 years.
A review of the relative performance growth and value sectors shows that growth sectors are going nowhere.
By contrast, the relative performance of value sectors, which are cyclically sensitive, are all surging, with the exception of financial stocks.
For the sake of completeness, the accompanying chart shows the relative performance of defensive sectors, which are forming relative bottoming patterns. However, they probably need a period of consolidation before becoming the market leader.
An Extended Rally?
These conditions are consistent with the analysis I presented last week (see A Time to Reap). Early 2026 is a time for U.S. equity investors to reap the benefits of Trump’s 2025 policies. Investors are seeing falling risk premiums from fading policy uncertainty and the stimulative and pro-cyclical elements of the OBBB Act. Moreover, the Greenland panic reset investor sentiment and set up conditions for an extended rally in the coming weeks.
From a global perspective, the percentage of markets reaching 52-week highs reached the highest levels in decades. This is a bullish sign.
The strength in small-cap stocks is another notable bullish sign. A historical study (n=11) where small caps outperformed large caps by over 5% in the month saw strong momentum-driven gains. While investors should be cognizant of the price momentum effects of small-cap relative performance, the momentum effects are mitigated by the presidential cycle effects. Mid-term election years tend to be difficult for stock prices up until the election in November.
That said, I have a concern that the market may have unfinished business to the downside. My Bottom Spotting Model did not fully fire on the day of the Greenland panic. Only the VIX Index spiked above its upper Bollinger Band, while the others did not flash buy signals. Historically, buy signals from two or more components of my model flash buy signals.
The Greenland crisis was defused when President Trump declared he had “formed a framework for a future deal” in consultation with NATO Secretary General Mark Rutte. The specifics of the framework are not known, but they reported including giving the U.S. sovereign claims to pockets of Greenland’s territory to base military forces, much in the manner the British secured bases in Cyprus. The Danish and Greenland prime ministers refuted the detail and asserted that Rutte had no authority to negotiate on the issue of Greenland sovereignty. This story isn’t over, and the crisis may boil over again.
As well, the U.S. appears to be assembling military assets for an Iranian bombing campaign. Trump has also threatened a 100% tariff rate on Canada should it conclude its announced trade deal with China. It remains to be seen how the market reacts to these potential sources of volatility.
When the markets became rattled by the prospect of a Trump threat to annex Greenland over the weekend, I knew that a TACO (Trump Always Chickens Out) walk back was inevitable. I observed in the past that the markets would eventually discipline Trump’s unusual excesses. Indeed, the combination of a spiking 10-year Treasury yield and surging volatility indices pressured the White House to find a face-saving off-ramp.
In addition, I believe the Greenland Gambit along with the Venezuelan Adventure are part of a pattern of foreign policy moves as domestic policy safety valves leading up to the mid-term election. Investors should view possible U.S. foreign policy initiative between today and November within an electoral framework and react accordingly.
The Greenland Gambit
By now, the elements of Trump’s Greenland Gambit are well known. President Trump has always expressed a desire to control Greenland. Trump 1.0 offered to buy Greenland from Denmark but was rebuffed. More recently, he sent a text message to Norwegian Prime Minister Jonas Gahr Støre hinting that because he wasn’t awarded the Nobel Peace Prize, he “no longer feel[s] an obligation to think purely of Peace…and think about what is good and proper for the United States of America”. He concluded, “The World is not secure unless we have Complete and Total Control of Greenland”.
Subsequent to the release of that note, Støre confirmed the authenticity of the message and explained that “the prize is awarded by an independent Nobel Committee and not the Norwegian Government”. He reiterated that “Norway’s position on Greenland is clear. Greenland is a part of the Kingdom of Denmark, and Norway fully supports the Kingdom of Denmark on this matter. We also support that NATO in a responsible way is taking steps to strengthen security and stability in the Arctic.”
The EU reaction to the Greenland Gambit was universally negative, though there is considerable disagreement on how to proceed. Even elements of Europe’s far right have objected to Trump’s tactics, from Alice Weidel of the AfD in Germany, to Nigel Farage of the Reform Party in the U.K. and Jordan Bardella of the RN in France.
When Trump initially threatened a 10% tariff on imports from European countries that rushed troops to Greenland, effective February 1, later rising to 25% on June 1, the most straightforward EU reaction is trade retaliation. The EU could refuse to ratify the so-called Turnberry Agreement, a trade deal signed last summer under which Europe accepted a 15% tariff rate without retaliation.
If it wanted to escalate, Europe could invoke its economic bazooka: the anti-coercion instrument (ACI), which allows the EU to respond with almost any measure. So far, only China has retaliated against the U.S. in its trade war, and the Chinese response exposed a series of U.S. supply chain vulnerabilities, most notably in rare earths and pharmaceutical precursors.
For example, the EU could respond with imposing export duties or controls over pharmaceutical exports from Ireland to the U.S. The vast majority of European exports to the U.S. are concentrated in intellectual property owned by U.S. companies parked in low-tax Ireland. The exports aren’t just restricted to drugs, but IP owned by tech giants like Google, Microsoft and other Magnificent Seven companies.
More directly, Europe could target U.S. hard power by disrupting its military supply chain in the same way that China disrupted supply chains. The accompanying chart shows the suppliers to the F-35 Lighting II fighter jet. Many of its components and IP are produced or owned by European companies.
In addition, most small arms used by the U.S. military are produced by European companies, or their IP is owned by European companies. Artillery systems used by the U.S. military are all made by BAE Systems of the U.K. As well, the guns and fire control systems of the M1 Abrams tank are European. The Stryker armoured fighting vehicle is produced mainly in Canada at a plant in London, Ontario.
I could go on, but you get the idea. Europe could retaliate. While there would be considerable economic cost, the political will was building to strike back.
Domestic Policy Pressures
In the meantime, President Trump and the Republican Party face considerable political pressure ahead of the mid-term November election. The Republicans currently control all three chambers of the government, the White House, the Senate and the House of Representatives. Historically, the party controlling the White House has lost seats in the mid-terms. The current market consensus calls for the Democrats to control the House and the Republicans to retain control of the Senate, but the Democrats nevertheless have a long-shot opportunity to win the Senate in November.
A recent WSJ poll shows that President Trump is polling poorly on virtually all issues.
More worrisome for the Republicans is Trump’s net approval by state. The following states all have Senate elections in 2026: Georgia: -18.6%, Maine: -18.4%, Texas: -17.2%, Michigan:
-15.8%, North Carolina: -13.6%, Ohio: -9.2%, Iowa: -8.7%, Florida: -7.5%, South Carolina:
-7.3%, Mississippi: -6.9%, Alaska: -6.6%, Louisiana: -5.1% and Nebraska: -1.8%. While not all will break for the Democrats, it is nevertheless concerning for Republicans aiming for control of the Senate.
As an indication of a focus on electoral priorities, Trump’s Davos speech spent a lot of time on domestic issues like drug pricing, housing and affordability. Trump won the White House by hammering Biden and the Democrats on the issues of affordability, and recent initiatives, such as the order for Fannie and Freddie to buy mortgages to lower mortgage rates, the proposal to allow people to raid their 401k for down payments and a 10% interest rate cap on credit cards are responses to the affordability crisis.
In particular, the
NY Times reported that the “Education Department has temporarily paused a plan to seize tax refunds and begin garnishing the wages of borrowers who have defaulted on their student loans”, which suspends the Trump initiatives of reversing Biden-era student loan policies, as a sign of political panic on affordability.
When domestic policy is perceived as weak by the electorate, a common tactic is to pivot to seek out foreign policy successes to boost popularity. However, a
CNN report indicated that the net approval for a purchase of Greenland is polling worse than the Epstein file issue.
Future TACOs
As I look ahead between now and the November mid-term elections, I see two obvious candidates of foreign policy chaos based on recent speeches at the Davos World Economic Forum.
One source of Trump ire is likely to be directed at French President Emmanuel Macron (transcript and video
here). Macron has been a hardline advocate of the use of the ACI against the latest round of Greenland-related tariffs. Macron’s speech pointedly pushed back against Trump: “We do prefer respect to bullies… science to plotism [conspiracies], and…rule of law to brutality.” As France is part of the European Union, it would be difficult, though not impossible, for the U.S. to sanction such a slight.
On the other hand, Canadian Prime Minister Mark Carney’s speech was lauded in many quarters as an unexpected source of global leadership against U.S. unilateralism, which is likely to rankle Trump. Carney’s speech (transcript and video
here) began with a version of the “Emperor new clothes” story by referring to an essay by Czech dissident Václav Havel, later president, The Power of the Powerless. Havel told the story of the greengrocer:
Every morning, this shopkeeper places a sign in his window: “Workers of the world, unite!” He does not believe it. No one believes it. But he places the sign anyway – to avoid trouble, to signal compliance, to get along. And because every shopkeeper on every street does the same, the system persists.
Not through violence alone, but through the participation of ordinary people in rituals they privately know to be false.
Havel called this “living within a lie.” The system’s power comes not from its truth but from everyone’s willingness to perform as if it were true. And its fragility comes from the same source: when even one person stops performing – when the greengrocer removes his sign – the illusion begins to crack.
Friends, it is time for companies and countries to take their signs down.
Carney concluded that it’s time for middle powers like Canada to take their signs down: “Let me be direct: we are in the midst of a rupture, not a transition.” He called for an approach of “values-based realism” by aiming “to be principled and pragmatic”. Carney believes in “building the coalitions that work, issue by issue, with partners who share enough common ground to act together”. In other words, Canada has no choice but to create new alliances.
Specifically addressing the issue of U.S. unilateralism and hegemony: “It means reducing the leverage that enables coercion. Building a strong domestic economy should always be every government’s priority. Diversification internationally is not just economic prudence; it is the material foundation for honest foreign policy. Countries earn the right to principled stands by reducing their vulnerability to retaliation.” Already, Canada concluded a trade agreement to drop the 100% tariff rate on Chinese electric vehicles, which was imposed in tandem with the U.S. in 2024, applicable to an import quota of 49,000 cars, rising to 70,000 in three years, in return for the promise of Chinese investment in EV production in Canada and agricultural and seafood exports to China. The agreement was billed as a form of trade diversification.
In response to Carney’s Davos speech, Trump responded, “Canada lives because of the United States. Remember that, Mark, the next time you make your statements.” These circumstances set up the conditions for a foreign policy collision in the coming weeks and months.
The resolution of the Greenland Gambit has taught Europeans with an important lesson on how to handle Trump. Don’t beg, don’t bluster, but use the leverage you have to impose costs for his behaviour. Push comes to shove, Canadian Prime Minister Carney likely learned the pressure points Canada can apply to the U.S., though they would be at severe cost to the Canadian economy.
Here are two examples of nuclear options available to Canada in case of a dispute. Ontario Hydro and Quebec Hydro are major suppliers of electrical power to the U.S. northeast, and a cut-off or the imposition of export tariffs would cause considerable dislocation to the U.S. economy. As well, Saskatchewan provides virtually all of global production of potash fertilizer. A cut-off or export restriction would bring U.S. agriculture to an immediate griding halt.
In conclusion, investors need to learn to take this and other possible Trump tantrums in stride. Regardless of the apparent chaos and volatility of Trump’s initiatives, his actions are constrained by market spikes in volatility, which can crater stock prices and spike Treasury yields. As well, the Trump White House and Republicans are highly sensitive to the electoral popularity of specific issues. Most recently, the extreme unpopularity of a Greenland purchase and military intervention forced a face-saving retreat.
It is in that context that investors are advised to buy sudden risk-off downdrafts between now and the November election as ways to position to potentially profit from a probable TACO response.
To be sure, some geopolitical risks that lurk in the background are not subject to buy-the-dip TACO positioning. Venezuela could descend into a guerilla conflict, with the U.S. military tied up in a counter-insurgency war right on America’s doorstep. As well, the U.S. is assembling naval and air assets in preparation for a strike on Iran. The Iranian regime may not collapse, which leaves a messy outcome that could potentially destabilize the Middle East.
Mid-week market update: Investors have seen this movie before in the recent past. A market moving event breaks over the weekend. The market freaks out at the open. The market calms soon after and life goes on.
The last time this happened, the news was an investigation of Fed Chair Powell. This time, it’s the possible annexation of Greenland. Even though the S&P 500 remains in a trading range, but the equal-weighted S&P 500, the Russell 2000, and the MSCI All-Country World Ex-US Index have regained most if not all of their losses from the fright over Greenland.
What’s Greenlandic for TACO?
I have been of the opinion that the only thing that restrains Trump is the market response. The U.S. president had been emboldened by the Venezuelan adventure. The markets were calm, as measured by the VIX and MOVE Indices. It was time to try his luck with Greenland.
The blowback from allies and Republican members of Congress was considerable. Moreover, volatility spiked, and the 10-year yield soared, though it was partly influenced by the surge in Japanesse yields.
How do Greenladers say TACO (Trump Always Chickens Out)? As it turns out, a face-saving compromise solution with unknown details has been found, and the TACO trade has reappeared. Moreover, the market responded with the Sell America trade. Non-U.S. sovereign bonds are outperforming the 10-year Treasury in USD, the USD is weakening, and non-U.S. stocks are outperforming the S&P 500.
How long the Sell America trade persists is another question. It has reverted in the past once risk perceptions have diminished.
Carry On and Rally
In the meantime, market breadth continues to broaden. The Mag 7 has violated a relative support zone and become the Lag 7. The equal-weighed S&P 500 is in a well-defined relative uptrend.
The rotation into cyclical stocks continue. More importantly, cyclicals have staged a relative breakout against the equal-weighed S&P 500, which is less influenced by the megacap technology stocks (bottom panel).
The pre-Greenland market trends are continuing. Carry on and rally.
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.
Relentless Momentum
The price momentum that I highlighted last week has been relentless. Even as the S&P 500 tests resistance at its all-time high, the equal-weighted S&P 500, the small-cap Russell 2000 and the MSCI All-Country World Index Ex-U.S. all surged to fresh highs.
There is nothing more bullish than a new high.
Supportive Breadth
Breadth indicators are supportive of the bull case. Both the S&P 500 and NYSE Advance-Decline Lines rose to all-time highs, which is intermediate-term bullish.
Breadth has also been broadening out, which is another constructive sign of a healthy advance. The Magnificent Seven has weakened to test a relative support zone, while the equal-weighted S&P 500 is outperforming the cap-weighted index.
The Animal Spirits Come Alive
The market’s animal spirits are coming alive. One of my favourite animal spirit indicators is the relative performance of IPOs, which is turning up in relative terms, but readings are not showing signs of froth.
Similarly, the relative performance of small caps are surging.
At this phase of the rally, I would tactically favour small caps. The Russell 2000 has beaten the S&P 500 for 10 straight days. Historical studies of such events saw the Russell 200 consolidate for about a week before resuming their outperformance.
The recent episode of bullish price momentum can be partly attributable to a positive banking system liquidity backdrop.
Another real-time indicator of liquidity is the price of Bitcoin, which has been correlated to the relative performance of the speculative growth ETF, the ARK Innovation ETF (ARKK). Speculative traders who want to embrace the tide of rising liquidity could take a ride on ARKK.
Don’t Overstay the Party
In conclusion, the stock market is exhibiting strong price momentum, supported by improving breadth and rising liquidity. Investors should tactically embrace the latest episode of price momentum with exposure to high-beta small-cap and speculative names. But don’t overstay the party, as outperforming small-cap stocks are exhibiting a negative breadth divergence, which is a warning that the risk-on rally is at risk of stalling in the coming weeks.
As is the case with short-term momentum-based moves, risk control is important for traders who adopt a tactical risk-on posture. Maintain a trailing stop and monitor the NYSE McClellan Oscillator (NYMO) for signs of an overbought condition as a signal to reduce long exposure. At the current pace of advance, I expect the rally to start stalling in late January or early February.
Addendum: Trump announced over the weekend that he is imposing an escalating tariff rate on European countries that are deploying troops to Greenland, which should come as a negative shock to risk appetite. This will be another test for the bulls. The market hiccuped last weekend when it was revealed that the Trump Administration had opened an investigation into Fed Chair Jerome Powell, and Powell pushed back with a strongly worded statement Sunday night. The stock market opened up down on Monday but ended the day in the green. This will be another test.
I know that I have been negative on many Trump policies in these pages, but to everything there is a season. For U.S. equity investors, early 2026 is a time to reap the benefits of Trump’s 2025 policies. Last year was tumultuous for policy, but policy uncertainty is fading, and the stimulative and pro-cyclical elements of the OBBB Act are becoming evident in early 2026. In addition, the Economic Surprise Index, which measures whether economic releases are beating or missing consensus expectations, has been steadily positive since mid-2025.
This macro backdrop forms the basis of a bullish environment for growth expectations and bullish tailwinds for risk assets in early 2026.
A Less Dire Outlook
Trump 2.0 in 2025 was marked by spikes in economic policy uncertainty. The U.S. Economic Policy Uncertainty Index spiked to an all-time high in the wake of the “Liberation Day” tariff announcements, but uncertainty has since faded. Markets adopted a risk-off tone as uncertainty rose and risk appetite reached a nadir in April.
Companies responded to heightened trade war uncertainty by putting expansion plans on hold, and hiring plummeted. In addition, the Trump Administration’s deportation policy reduced the size of the workforce, which resulted in a moribund no-hire-no-fire jobs market in 2025.
Since “Liberation Day”, the U.S. concluded a series of trade agreements with trading partners that reduced import duties to levels that are less dire than the initial “Liberation Day” proposals. Except for China, trading partners have not retaliated by erecting their own tariff walls, which alleviated market fears of a repeat of the Smoot-Hawley trade war-induced slowdown. Moreover, companies have learned to adapt to the heightened tariffs. The damage appears to be manageable and contained.
A 2026 Growth Boost
As the world entered 2026, uncertainty faded and the growth outlook improved.
The average tax refund from the passage of the OBBB Act is expected to see a significant jump, particularly in the top two or three quintiles of the income distribution. This K-shaped recovery should boost consumer spending in the early part of 2026.
The preliminary indications from Q4 earnings season were mostly upbeat. The remarks from the Bank of America’s CEO were typical of the positive view of the U.S. consumer: “With consumers and businesses proving resilient, as well as the regulatory environment and tax and trade policies coming into sharper focus, we expect further economic growth in the year ahead. While any number of risks continue, we are bullish on the U.S. economy in 2026.”
The Delta Air Lines earnings report underlined the nature of the K-shaped recovery. Delta’s Q4 premium cabin (business and first class) revenue exceeded all of its main cabin revenue, and its premium cabin revenue was positive in 2025 even as its main cabin revenue fell.
As a consequence, forward 12-month EPS estimates are rising strongly, which constitutes bullish fundamental momentum that should be supportive of rising stock prices.
The bonus is signs of stabilization and improvement in the employment market. The NFIB small business survey reported a tightening in the jobs market, which could point to job growth acceleration in early 2026. At a minimum, this is a constructive sign that the labour market is stabilizing.
Combined with a neutral to slightly easy bias to monetary policy, this combination points to a bullish backdrop for stock prices in early 2026.
Q2 and Q3 Challenges
As the mid-term elections approach, the Trump White House is trying to activate stimulus measures in the form of credit, fiscal and monetary stimulus. While some of those measures will undoubtedly boost the economy, the costs of those programs will become evident in Q2 and Q3.
On the credit front, CNBC reported that Trump “instructed his representative to buy $200 billion in mortgage paper”. As is the case with many Trump announcements, the details are unclear. Even though Fannie Mae and Freddie Mac are flush with cash, it’s unclear who the President’s instructions are directed at, and by what authority.
Morgan Stanley modeled the effects of $200 billion in mortgage purchases and found that the effects on growth and employment are relatively minor. A 1% decline in mortgage rates increases GDP by 0.1–0.15% and reduces the unemployment rate by 0.05%. The purchase of $200 billion in mortgages will narrow the mortgage to Treasury yield spread, though temporarily and the effects are likely to fade by late Q2 or Q3.
In addition, Trump’s announced attempt to cap credit card interest rates at 10% could resolve in a sudden consumer credit contraction, which resolves in a recession.
I have already discussed fiscal measures and the effects of the OBBB Act. The risk is an overly stimulative fiscal boost revives inflationary pressures, which could become evident by mid-2026. Already, inflation expectations have shown a flat to slightly up trend since October.
On the monetary front, Fed Chair Jerome Powell’s term ends in May and a replacement has not been named yet. The NY Times reported that federal prosecutors had opened a criminal inquiry into Powell over the Fed’s renovations of its Washington headquarters. Powell responded with a strongly worded statement that “the threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President”. The statement is a deviation from his previous position that the Fed does not factor political considerations into its rate decisions.
The blowback in Washington was immediate. While a number of Republicans came out in support of Fed independence, the most notable voice was Senator Thom Tillis, who is a member of the Senate Banking Committee that confirms the next Fed Chair. Tillis said, “I will oppose the confirmation of any nominee for the Fed — including the upcoming Fed Chair vacancy — until this legal matter is fully resolved.” The Republicans hold a 13–11 majority on the Senate Banking Committee. If the vote to advance the nomination of the next Fed Chair is along party lines and Tillis votes not to confirm, the vote will be tied and the nomination will not make it out of the Committee.
In addition, this incident raises the odds that Powell will stay on the Fed’s Board of Governors when his term ends in January 2028. This would complicate Trump’s efforts to sway the FOMC to his wishes. Under such circumstances, the only board seat available to the new Chair would be Stephan Miran’s, whose term ends in January, which doesn’t provide Trump with sufficient votes on the FOMC to decisively sway rate decisions.
Finally, the remainder of the year is littered with sudden bursts of geopolitical risk. Iran, Greenland and Venezuela are just some of the more obvious hotspots. In case you missed it, the
U.S. Embassy issued a “do not travel” warning to Venezuela last week, citing “reports of groups of armed militias, known as colectivos, setting up roadblocks and searching vehicles for evidence of U.S. citizenship or support for the United States”. It’s the unstable political environment like this, along with unfavourable return profiles, that prompted Exxon to proclaim Venezuela to be “uninvestable”. Investor excitement over the flow of Venezuelan oil is likely to be met with disappointment in the coming months.
In conclusion, to everything there is a season, and early 2026 is a time for U.S. equity investors to reap the benefits of Trump’s 2025 policies. Investors are seeing falling risk premiums from fading policy uncertainty and the stimulative and pro-cyclical elements of the OBBB Act. However, the cost of the stimulative policies will begin to appear in late Q2 or early Q3, when geopolitical risk premiums may rise and become a headwind for risk assets.
Mid-week market update: The S&P 500 is pulling back to test its rising trend line and the VVIX, or the volatility of the VIX Index, spikes above the key 100 level, which indicates rising market anxiety. However, an analysis of market internals reveal a remarkable level of bullish resilience in the face of recent unsettling headlines over Jerome Powell, Greenland, Iran, and Venezuela.
Breadth Support
Much of the weakness has been concentrated in the megacaps. The equal-weighted S&P 500, the small-cap Russell 2000, and non-U.S. stocks, as measured by the MSCI All-Country World Index ex-U.S., are are in uptrends. Blink and you would have missed the S&P 500 pullback as all these indices are green today.
In particular, the Russell 2000 has outperformed the S&P 500 this year, which is consistent with turn-of-year seasonal patterns. If history is any guide, stock prices are likely to consolidate sideways for about a week before resuming their upward grind, with small-caps leading the way for the remainder of Jnauary.
A Recovery on the Horizon
Watch for a Trump pivot to a more stock market friendly posture in the future. Risk indicators like the VIX and MOVE are rising into the neutral zone. Further disruptive announcements could easily push risk indicators into the TACO (Trump Always Chickens Out) Zone.
Despite the recent risk-off episode, I am encouraged by the recovery in Bitcoin, which functions as a quick-and-dirty real-time indicator of liquidity. Rising liquidity should be bullish for the price of risk assets.
My base case continues to call for higher stock prices by late January and early February after a brief period of choppiness and consolidation.
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.
A Dow Theory Buy Signal
It is said that there is nothing more bullish than a fresh high. The U.S. stock market achieved the rare feat of printing all-time highs in both the Dow Jones Industrials and Transportation Averages at the same time. In case you didn’t fully understand the implications, that’s a Dow Theory buy signal.
Simultaneous all-time highs are rare in the Dow Industrials and Transports. In the past century, the market has been higher nine months later 100% of the time (n=12).
Global markets are also supportive of an intermediate bullish impulse. The accompanying chart shows the MSCI All-Country World Index (ACWI) and the MSCI All-Country World Index Ex-U.S. (ACWX) shown in USD. Both recently reached all-time highs. ACWX has been stronger than ACWI, indicating relative outperformance by non-U.S. stocks. This is what global momentum looks like.
The U.S. market is exhibiting signs of short-term price momentum; 25% of the S&P 500 exceeded their upper Bollinger Bands. A historical study shows that such episodes have resolved in gains over a 3–4-week time frame.
More Room to Run
I believe the bulls have more tactical room to run. Sentiment readings are in neutral territory and not stretched.
Market internals like the NYSE McClellan Oscillator (NYMO) are not overbought.
Macro Tailwinds
The equity bull case is enjoying a macro tailwind. Global monetary policy is undergoing an easing cycle, which is supportive a cyclical rebound.
In addition, G3 fiscal policy is expansionary, which should be supportive of higher stock prices.
Key Risks
The risk to the intermediate-term bullish outlook is investor disappointment. Jurrien Timmer at Fidelity observed, “The consensus going into 2026 seems to be that the US will run it hot, from a combination of fiscal policy and a dovish Fed. The output gap (actual GDP vs potential GDP) is now the highest in 25 years.” Elevated growth expectations is a set-up for market disappointment.
Investors will see the first test of growth expectations when Q4 earnings season begins next week. So far, forward 12-month EPS estimates are rising strongly.
Keep in mind, however, that mid-term election years are notorious for equity drawdowns. The S&P 500 has seen an average drawdown of -18.2% in the 12 months before the mid-term elections.
In conclusion, evidence of strong price momentum is intermediate-term bullish for equities. My technical outlook is further supported by twin macro tailwinds of easy monetary and fiscal policy. However, growth expectations are high and the market is vulnerable to disappointment and the propensity for large drawdowns during mid-term election years.
Emerging market shocks follow a familiar pattern in quantitative investing. When the event occurs, quantitative factor responses in stock selection get thrown out the window. As the smoke clears, top-down strategists map out the direction and magnitude of the shock, and technical analysis factors like price momentum and reversals start to work. As the magnitude of the shock becomes known, company analysts revise their earnings estimates, and estimate revision and earnings surprise factors begin to work. Finally, as the investment environment stabilizes, conventional value and growth factors gain traction.
The same thing is happening when U.S. forces seized Venezuelan President Maduro and his wife in a weekend raid. The smoke is starting to clear, both metaphorically and literally, and invest0ors can see the direction of the shock.
The raid made some sense from a Trumpian geopolitical viewpoint. Bloomberg opinion columnist
Javier Blas characterized the move as Trump building his own Oil Empire. The Donroe Doctrine countries in the Western hemisphere, the U.S., Canada, Venezuela and the rest of the Americas, control roughly 40% of global oil production and this allows the White House much greater control over oil prices and production to avoid energy shocks in the future.
It all sounds good in theory. But as the recent history during the 21st Century shows, this is the third time the U.S. has attempted regime change in oil-producing countries. Bush tried it in Iraq, Obama tried it in Libya and now Trump is trying it in Venezuela. None worked out according to their pre-war textbooks. Here’s what this latest geopolitical adventure means for investors.
Winning the Peace
U.S. military interventions in the 21st Century have followed similar patterns. They were mostly effective at the tactical and operational levels. The Pentagon has shown that it can win wars, but the military is not organizationally structured to win the peace.
This shouldn’t be a surprise to the Trump White House. The
NY Times reported that Trump 1.0 ran war games on what would happen if Maduro was ousted, and the most likely outcome is the country descends into factional chaos.
As an example, Retired Lt. General Mark Hertling, writing in
the Bulwark, recounted his “regime change” experience in Iraq.
One reason regime change is so easily discussed is that it is so rarely defined. Does it mean removing a single leader? Dismantling an entire governing apparatus? Installing a new political order? Each of those implies a radically different level of responsibility, risk, and duration. Removing a leader does not necessarily replace a regime. And even dismantling an entire regime does not, by itself, confer legitimacy on whoever and whatever comes after it.
Who governs the day after the old system collapses? Who provides security when police forces, militaries, and internal security services fracture, disappear, or form an insurgency? Who pays to stabilize the economy, restore basic services, and rebuild institutions when key members of the old regime’s bureaucracy flee? And for how long does the intervening power remain responsible for outcomes it can influence, but not fully control? The United States has repeatedly demonstrated an extraordinary ability to plan for the defeat of enemy forces, but what it has failed to do—and appears to be doing again—is plan with equal seriousness for the political, social, and economic vacuum that will inevitably follow.
President Trump has asserted that the U.S. will “run” Venezuela until the U.S. can carry out what a “safe, proper and judicious transition”. CNN reported that Trump isn’t insisting on regime change, and the Delcy Rodríguez government can stay as long as she “does what we want”. That plan is already disintegrating before our very eyes.
Venezuelan Vice President Delcy Rodríguez has been sworn into power as interim president. Any notion that she would act as a willing puppet of Washington is evaporating. As the existing power structure weakens, other players have rushed into the political vacuum.
Venezuela’s militias, specifically the Bolivarian Militia and the urban paramilitary networks known as colectivos, have taken the role as the primary agents of a potentially dangerous resistance. These paramilitaries are the most visible armed presence in the Venezuelan capital. And I haven’t even discussed the possible disruptive role of the Cuban advisors in Venezuela who were supporting the Maduro regime.
If the local resistance can reframe the conflict from “defending the Maduro regime” to “a war against American colonialism”, the Pentagon war game outcome of factional chaos will be the likely outcome.
Recall the experience of Obama’s intervention in Libya, where the U.S. only provided air cover to local allies. The country became divided and remains divided today, and it has become a jumping off point for migrants and refugees from the rest of Africa into Europe.
The Illusory Oil Prize
The economic prize in Venezuela is its oil reserves. But much of the potential gains may be illusory.
After the invasion of Iraq in 2003, the consensus western analyst production expectation for Iraq’s largest oil field, West Qurna, was about 2.5 mbpd in phase I and 1.8 mbpd in phase II. In reality, production never exceeded 0.6 mbpd and 0.5 mbpd, respectively.
An
NPR news report of a Trump press conference makes it evident that the incursion is all about Venezuela’s oil. He explicitly stated “we’re going to be taking out a tremendous amount of wealth out of the ground” and that this wealth would “go to the United States of America in the form of reimbursement for the damages caused us by that country”.
Here are the problems with oil extraction in Venezuela. The oil infrastructure is aging, neglected and needs vast amounts of investment. In addition, the oil is heavy and sour, and trades at a discount to light sweet crude. Here are some back-of-the-envelope calculations from Brad Setser:
Venezuela’s 2024 production was 0.9 mbpd. Excluding domestic consumption, assume that it can export 0.75 mbpd at a generous $50, that comes to $14 billion a year in export revenue. Industry experts think the upper bound on how much additional production could be generated if the international oil service giants came in to revitalize the fields is an extra 1 million barrels, or $18 billion. That’s the revenue side.
Now consider the cost side. Estimates of investment in the oil fields, pipelines and export facilities start at $100 billion and the time frame could be a decade or more. What board member of oil major would approve such vast sums in a politically unstable region? Also consider the huge stock of existing debt of government bonds, bonds of the national oil company PDVSA and Chinese claims, plus supplier claims and outstanding interest. Estimates by Cooper and Walker, two lawyers with sovereign debt experience, outlined in a
2019 paper are at least $100 billion, and current estimates amount to $150 billion or more.
With total debts of about $150 billion and about $10 billion in exports, Setser concluded that “there isn’t a near-term oil revenue stream big enough to pay for current imports (which will go up if the U.S. wants stability), past claims (expropriation compensation, unpaid debt) and the new investment needed to raise production substantially”.
Moreover, the Trump Administration’s dual objectives of $50 oil and Venezuelan cash flows are contradictory. Venezuela’s oil fields need $80 oil to become economic and to ramp up production. You can’t have both.
In response, the Trump White House floated the trial balloon that it may subsidize investments into Venezuela. Already, the gains from the oil prize are looking illusory.In addition, China was caught off-guard by the American Maduro raid, as it had a delegation in Venezuela that weekend. Its initial reaction was to assert that “Chinese interest in Venezuela will be protected by law”. In other words, it isn’t threatening military action, though it could take steps to arm anti-American militias. It instead signaled that it was going to contest the regime change efforts in the courts. China will pursue international arbitration, invoke bilateral investment treaties and take its case to every court from New York to The Hague. In effect, Beijing plans to raise the cost of capital for foreign investors into Venezuela to such prohibitive levels that Trump and future U.S. administrations will think twice about regime change adventures.
The legal challenges may begin sooner than later. President Trump announced on social media that sanctioned Venezuelan oil will be seized, sold and the “money will be controlled by me…to benefit…Venezuela and the United States”. A Department of Energy factsheet formalized this initiative by stating that the “United States government has begun marketing Venezuelan crude oil in the global marketplace for the benefit of the United States, Venezuela and our allies” and the “funds will be disbursed for the benefit of the American people and the Venezuelan people at the discretion of the U.S. government”.
It is unclear under what legal authority the seizure would be conducted. Even the courts deem the diversion of oil sales to be legal, any funds “disbursed for the benefit of the American people“ should flow to the U.S. Treasury and spending needs to be authorized by Congress. As a reminder, the Reagan Administration’s efforts to create a private revenue source for the White House and spending it in a fashion that avoids Congressional oversight was the basis for the Iran-Contra Affair.
Companies investing in Venezuela will need ironclad assurances before spending a penny. The
Financial Times reported that one private equity energy investor said, “No one wants to go in there when a random %&$! tweet can change the entire foreign policy of the country”.
Investment Implications
In summary, investors are starting to map out the direction, but not the magnitude, of the Venezuela shock. The situation remains fluid, and there are too many unanswered questions to pinpoint the full investment implications of this geopolitical pivot.
Based on a reading of past history, it is becoming clear that the U.S. will have to devote considerable fiscal resources, in the form of additional military spending, possible subsidies for oil development, and administrative resources to a Venezuela Project with uncertain and nebulous payoffs. Indeed, President Trump has called for an increase in military spending from $1 trillion to $1.5 trillion for fiscal 2027. These initiatives will exacerbate several trends that are already in place.
I expect higher fiscal deficits to put upward pressure on inflationary expectations, which are already rising. As inflationary expectations rise, yield curves will steepen. The Venezuelan Adventure is unfriendly to the bond market.
The only source of tactical restraint will be the financial market as the Trump Administration turns its eyes to other potential foreign adventures, such as Greenland. Right now, both the VIX and MOVE Indices are tame and within the “Assertive Trump” zone. Watch for upward pressure on the 10-year Treasury yield and spikes in implied VIX and MOVE volatility for Trump to pivot to a TACO (Trump Always Chickens Out) change in policy.
In conclusion, Trump’s Venezuelan adventure is following the script of past U.S. interventions by Bush in Iraq and Obama in Libya. Initial plans to stabilize the country and exploit its resources will prove messier than expected. As a consequence, investors should expect higher fiscal deficits from the cost of intervention, rising inflationary expectations and a bond unfriendly environment.
Mid-week market update: The S&P 500 ended the seasonally positive Santa Claus rally window down -0.1% this year. According to Wall Street lore, this foreshadows a weak year for stock prices.
But did investors really miss Santa Claus this year? The Dow, the equal-weighted S&P 500, the NYSE Composite were all positive during the SCR window. Moreover, the S&P 500 made an all-time high the day after the window closed.
I have always been uncomfortable with the SCR as a predictor of the remainder of the year. While price momentum might work in the short run, it’s hard to believe that the returns of a few days at the end of the year and the new year foreshadows stock returns for the rest of the year. If so, why would the returns of these short windows not forecast future returns in other parts of the year? Why the turn of year effect?
Mark Hulbert demonstrated in a study that debunked the Santa rally effect.
Instead, here is what I am watching.
Broadening Breadth
The most constructive development of the past few weeks has been the growing evidence of broadening breadth. The equal-weighted S&P 500 is starting to perform better against the cap-weighted S&P 500, indicating breadth improvement.
Breadth has improved to such an extent that 12.5% of stocks recently reached 52-week highs. A historical study with a small sample size (n=7) saw strong short-term returns that peak in about a month, which is consistent with the expected effects of price momentum.
I remain constructive on stock prices. My base case scenario calls for a short-term peak at the end of January or early February. I will be watching for excesses in sentiment and signs of an overbought market.
Key risks: Looking ahead, investors will face several sources of short-term volatility. Investors will see the December NFP report Friday, and there are hints that the Supreme Court will announce its ruling on the challenges to the IEEPA tariffs Friday at 10 ET. From a geopolitical perspective, widespread protests in Iran and the Venezuela situation continue to simmer in the background.
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.
If Santa Should Fail to Call…
The seasaonlly positive Santa Claus rally spans the last five days of the year and the first two days of the new year, and the window opened on December 25. So far, the S&P 500 is trading slightly below the closing price on December 23.
The Wall Street adage was first coined by Yale Hirch, “If Santa should fail to call, bears may come to Broad and Wall”. Can the market rally on Monday, the last day of the Santa rally window, to rescue the bullish narrative?
While the historical record of failed Santa rallies is sobering, it’s difficult to believe that a few days at the turn of the year can have a significant price momentum effect for the rest of the year.
Sentiment Warnings
Nevertheless, the market is encountering a number of warnings of excessively bullish sentiment. Bear in mind, however, that crowded long sentiment radings are condition indicators and not actionable trading signals.
Consider, for example, that the ratio of leveraged long to leveraged short ETF assets are at a record high. If history is any guide, the S&P 500 has stalled when readings have reached these levels and corrected soon afterwards.
Similarly, the BoA Bull & Bear Indicator recently reached a crowded long level and flashed a sell signal.
But the history of such sell signals have been spotty.
The headline from the latest BoA Global Fund Manager Survey reported that manager cash levels are at a record low, which should be contrarian bearish. On the other hand, the same survey shows that manager risk levels are elevated but can’t be characterized as a crowded long.
Momentum and Pullback
On the other hand, the stock market is exhibiting strong signs of price momentum. A historical study of price momentum by Nautilus Research shows strong short-term bullish outcomes.
The -0.7% decline of the S&P 500 on the last day of the year was a breadth wipeout and left only 20 stocks in the index up on the day. This has only happened five times in the last three years. If history is any guide, stock prices should recover in the next few days.
Technical analyst Tom McClellan also observed that only one stock in the NASDAQ 100 rose on December 31. A similar historical study of the last 30 occasions when this has happened yielded bullish outcomes.
The December 31 drop saw the equity-only put/call ratio spike to 0.92 in thin year-end trading, indicating panic and liquidation. This reading is consistent with short-term market bottoms.
A Breadth Dilemma
I assess the bull and bear as a tension between megacap tech and market breadth. Magnificent Seven leadership is starting to falter, while the equal-weighted S&P 500 leadership is broadening out, which is constructive. However, the heavy weight of technology and AI-related names within the S&P 500 will prove to be a significant drag should their prices falter.
I view signs of broadening breadth to be constructive for stock prices. Both the S&P 500 and NYSE Advance-Decline Lines recently made all-time highs. These are not signs of an impending bear market.
I believe that while concerns about an AI-related investment bust is a rising concern, the fundamentals aren’t showing signs of an imminent collapse. A survey of GPU prices of all vintages are rising, reflecting continued demand for AI-related computing demand.
As well, NASDAQ 100 insiders are buying their own stock at above average rates. I therefore interpret current market concerns about an AI-related bust to be a temporary hiccup. NASDAQ leadership should resume after a brief correction.
In conclusion, a possible failure of the Santa Claus rally is introducing jitters about the strength of the bull in 2026. While excessive bullish sentiment readings are a concern, the combination of positive price momentum and broadening breadth should put a floor on stock prices. My base case scenario calls for a choppy upward path for stock prices in January.
The accompanying chart from Jeffrey Hirsch of Almanac Trader shows the expected seasonal price pattern for the S&P 500. As with any seasonality analysis, direction is more important than the magnitude of the move. If history is any guide, expect a volatile year until October, followed by a rally into year-end.
I agree with the broad strokes of the seasonality analysis, and the pattern forms the base case of my S&P 500 market expectations for 2026.
But I still have questions for the market, and here are the opportunities and challenges for investors in the new year.
The K-Shaped Recovery Question
Coming into the new year, investors may be in for an upside economic surprise from the consumer because of a tax refund-driven spending surge from the stimulus effects of the OBBB Act.
The deficits from the OBBB Act are all front-loaded and their effects will begin to be seen in 2026. The tax cut provisions of the OBBB Act is designed to make capex great again and raise household disposable income in the middle and high income groups.
From a hopeful perspective, the December Dallas Fed Manufacturing Survey is showing signs of a turnaround in business conditions. Here are some sample comments among reports of gloom:
- This past quarter we have experienced 20 percent growth over last year.
- Hope has arrived….we’re actually [experiencing] increasing gross revenue and improving margins for the first time in a very long time.
On the other hand, the restart in student loan payments, cuts in SNAP, Medicaid and the likely expiry of ACA health insurance subsidies will pressure households, especially in the lower income groups. These provisions will exacerbate the effects of the K-shaped expansion, but unleash a wave of capital and consumer spending, among the middle and high-end consumers.
The question for investors is whether the market will focus on the positive effects of the tax refunds on the upper-end consumer, but the income drag effects on the balance sheet of middle and low-end households.
Fed Policy and the Bond Market
What about Fed policy? Coming into 2026, the market expects the Fed to cut rates to about the 3% level, though the minutes of the December FOMC meeting indicate that the Fed could be on hold for some time. With inflation running at between 2% and 3%, that makes for a highly stimulative monetary policy.
Notwithstanding any expectations of political interference at the Fed, the December Summary of Economic Projections (SEP) shows the upper end of unemployment expectations at 4.4%. With the job market already showing signs of weakness and the somewhat flawed November unemployment rate at 4.6%, the bar for cutting rates is very low. I therefore expect a dovish tilt to Fed policy in early 2026.
The bond market is already reacting to the dovish scenario by steepening the yield curve.
How will the stock market react? The knee-jerk bearish scenario is a bear steepening that pushes up the 10-year Treasury yield and rattles stock prices. The bullish narrative is the Fed runs a hot economy that grows above potential, short rates are low and the U.S. Treasury has already signaled that its issuance will be tilted toward T-Bills instead of coupon instruments. This policy combination leads to a virtuous cycle of strong growth and lower-than-expected deficits, which sparks a bond market rally.
The Valuation Question
In addition, equity valuations aren’t cheap. The S&P 500 is trading at a forward P/E of 22. Excluding Big Tech, it’s trading at a forward P/E of 20, which isn’t exactly cheap. Looking globally, regional forward P/E valuations are also extended relative to their own history.
While P/E ratios matter little in the short run, the accompanying chart shows the history of the S&P 500 at elevated forward P/E valuations.
Elevated P/E ratios means that for stock prices to advance, rising earnings will have to do most of the heavy lifting and investors can’t depend on P/E expansion as a source of returns. Setting aside the debate about whether AI stocks are in a bubble, analysis from BCA Research showed non-TMT (Tech/Media/Telecom) sales growth was flat in Q3, but EBITDA rose 5% in Q3 despite tariff headwinds. Translation: margin expansion.
The key question for investors is whether margin expansion will continue.
War and Peace
Peering into 2026, investors will also have to consider the geopolitical wildcards of the breakouts in war and peace.
First, there is a significant possibility that peace, or at least a ceasefire and frozen conflict, may emerge out of the Russo-Ukraine War. Under such a scenario, Russian oil exports would no longer be sanctioned, which would depress oil prices. Lower oil prices would also interfere with Treasury Bessent’s 3-3-3 economic plan of 3% GDP growth, a budget deficit of 3% of GDP and an increase in domestic oil production of 3 million barrels per day.
Much of the macro outcome depends on the terms of any peace or ceasefire agreement. The cessation of hostilities could open the door to an enormous reconstruction effort in Ukraine. It would be a seismic shift in equity, credit and foreign exchange markets that could dwarf the effects of German reunification, depending on how reconstruction is financed.
On the other hand, the war drums are beating as U.S. forces threaten Venezuela. If the U.S. were to invade, there is also a significant possibility that its military becomes bogged down in a guerilla war quagmire right on America’s doorstep. Venezuelan oil production would fall or be curtailed and put upward pressure on oil prices and inflation.
Similarly, open war with Venezuela would depend on how it’s resolved and whether the U.S. can win the peace. Take two examples. The U.S. won the war with its Iraqi invasion but lost the peace as the region remains unstable. On the other hand, America lost the war in Vietnam but ultimately won the peace, as Americans and American businesses are welcomed with open arms today.
Pick your poison.
A Bullish Trend
Notwithstanding the geopolitical risks, my models are bullish, therefore I am bullish on equities going into 2026.
Global breadth is strong. It is said that there is nothing more bullish than a new high, and the S&P 500 recently made a fresh all-time high, and so did European markets. As well, commodity prices are showing signs of strength, which is a sign of a cyclical rebound.
That said, the macro backdrop of easy monetary and fiscal policy argues for a rotation into cyclical stocks.
I am also seeing evidence of a rotation from growth to value across the board. Value stocks are leading the way across all market cap bands and internationally. As well, the decision by Time Magazine to name the Person of the Year as the Architects of AI is a classic case of a contrarian magazine cover indicator that the best times are over for U.S. megacap growth stocks.
In conclusion, U.S. equity investors face key challenges posed by fiscal and monetary policy, as well as valuation headwinds. However, global equity breadth remains supportive of the bull case. I favour cyclicals and value stocks as sources of outperformance in 2026.
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.
A Lifetime Paradigm Shift
The year is almost over, and it’s time to reflect on the tumultous time investors have experienced. In particular, Trump’s trade war has caused an unexpected response and volatility. The markets were initially rattled by his “Liberation Day” announcements. Calm set in once it became apparent that major trading partners didn’t retaliate, except for China and stocks turned risk-on and bond yields fell.
The trade war was only the beginning. When I announced in March that I was shutting down, I didn’t expect the financial markets were going to experience a paradigm shift of a lifetime. The White House release of the
National Security Strategy (NSS) is just another manifestation of the paradigm shift that not only affects U.S. foreign policy, but basic assumptions about investing that I am not sure I know how to analyze anymore.
The investing game is changing. It’s time for me to leave.
Make Money, Not War
The
WSJ described Trump’s approach to peace for Ukraine as “Make Money, Not War”. The greatest reaction to the NSS came from Europe. But before discussing the implications of an American withdrawal from European security, I want to first focus on Asia and how the “Make Money, Not War” narrative is affecting global geopolitics.
Japanese Prime Minister Sanae Takaichi recently said in parliament that a Chinese use of force against Taiwan was potentially a “survival-threatening situation” under Japan’s 2015 security legislation, which permits the use of force in collective self-defense even if Japan itself is not directly attacked. It was a strongly worded statement that signaled Japan would defend Taiwan if China were to attack.
Soon afterwards on November 24, Xi placed a telephone call to Trump, which was unusual because the American side had always initiated calls in the past. Another unusual aspect of the interchange is the contrasting nature of the readout of the call. You have to wonder if each side was part of the same conversation.
Here is Trump’s readout of the call, as he posted on social media. The main focus of the discussion was trade, the strength of the Sino-American relationship, and a schedule for mutual state visits.
By contrast, the Chinese readout of the call had an entirely different tone. For China, the principal reason for the call was Japanese belligerence on the Taiwan issue. China’s official media Xinhua reported:
Xi Jinping clarified China’s principled position on the Taiwan issue and emphasized that Taiwan’s return to China is an important part of the post-war international order. China and the United States once fought against fascism and militarism side by side, and now they should jointly maintain the achievements of the victory in World War II.Trump said that President Xi Jinping is a great leader. I had a very pleasant meeting with President Xi Jinping in Busan, and I completely agree with you on the relationship between the two countries. The two sides are fully implementing the important consensus reached at the Busan meeting. China played an important role in the victory of World War II, and the United States understood the importance of the Taiwan issue to China.
In case you missed the subtlety of the language, Xi emphasized how China and the U.S. were allies and they “once fought against fascism and militarism side by side, and now they should jointly maintain the achievements of the victory in World War II”. There was no discussion of the recent trade friction, peaceful co-existence, and so on. In other words, China was rattled by Sanae Takaichi’s pronouncements on the Taiwan issue and wanted to enlist America’s aid to stabilize relations.
Since then, the
Financial Times reported that the U.S. halted plans to sanction China’s MSS spy agency over massive SaltTyphoon cyber espionage hacking campaign that
that has successfully penetrated the communications of top American officials in order to maintain the peace achieved at Busan, South Korea.
In the meantime, China’s top diplomat, Wang Yi, was in Moscow at the same time as when U.S. envoys Steve Witkoff and Jared Kushner met with Vladimir Putin. Wang was meeting wtih Security Council Secretary Shoigu and Foreign Minister Lavrov for talks on “strategic security and military cooperation”. The joint statement revealed that China and Russia agreed to “consolidate strategic mutual trust”, “expand mutually beneficial cooperation”, and “jointly respond to the endless new threats and challenges.” This is a clear indication of a growing China-Russia alliance.
One side is focused on making money while the other side is preparing for war. Two recent incidents are signals the geopolitical temperature is rising in Asia. On December 7, Chinese J-15 fighters taking off from the carrier Liaoning twice locked onto Japanese F-15s with their fire control radar just south of Okinawa. This is the military equivalent signal of pointing a gun at someone and taking off the safety lock.
In a separate incident on December 12, Chinese fighters and Russian aircraft, which included long-range bombers, entered South Korea’s Air Defense Identification Zone (KADIZ) in multiple directions over the Sea of Japan. South Korean fighters scrambled to intercept, and the intruding aircraft turned away, This was the first joint incursion since November 2024 and it’s a probable probe of allied response readiness, as well as a signal of a joint China-Russia alliance. The U.S. and Japan responded by flying B-52s with Japanese fighter planes over the Sea of Japan in an exercise as a display of force.
Trump-Monroe Doctrine in the Americas
Meanwhile, the Trump Administration wants to turn the Western Hemisphere into its exclusive sphere of influence consisting of vassal and tributary states. In a Truth Social post, Trump is implicitly treating Venezuela as a vassal state and threatening to invade.
The first problem is the U.S. ever “owned” any Venezuelan oil. An invasion could be a possible military disaster. Open Source Intel analyst
David D. pointed that the any potential U.S. potential invasion force lacks sufficient manpower to complete its mission. It only has about 600 ground troops deployed in theatre, which is sufficient to seize a port or airfield, but lacks the follow-on force to take over the country. Moreover, it has no allies to provide basing facilities or intelligence support. American troops are not current trained for jungle combat. In addition, Venezuela’s political opposition had the opportunity to form a popular uprising but didn’t, which calls into question the degree of political support for any invasion and raises the risk of a Vietnam-like quagmire near America’s shores.
Make money, not war.
The Business Plan in Europe
The NSS statements about Europe were, on the whole, not a big surprise inasmuch it reiterated Vice President’s J.D. Vance’s remarks at the Munich Security Conference. Vance spoke about the threat to European civilization came from “woke” ideology and excess (non-white) immigration. He continued by supporting far-right parties such as the AfD in Germany, the National Rally in France, Reform in the Uk, and so on. The NSS characterized Europe as facing the “stark prospect of civilizational erasure” and the U.S. would support European parties to prevent a future where “certain NATO members will become majority non-European.”
The NSS is a very enunciation of what America First means to the Trump Administration: “the affairs of other countries are our concern only if their activities directly threaten our interests”. and the “days of the United States propping up the entire world order like Atlas are over”. The document went on to characterized the Russo-Ukraine War as “a core interest of the United States to negotiate an expeditious cessation of hostilities in Ukraine, in order to stabilize European economies…and reestablish strategic stability with Russia”. There was no discussion of aggression, the roots of the conflict, or whether Ukraine is part of Europe, just “reestablish strategic stability with Russia”. Further the document did not address European fears, which were also voiced by the top leadership of the U.S. military, that Russia wouldn’t stop at Ukraine if it won the war.
In concert with the release of the NSS, the Pentagon announced that it was withdrawing some a brigade of troops from Romania. The press release stated:
This is not an American withdrawal from Europe or a signal of lessened commitment to NATO and Article 5. Rather this is a positive sign of increased European capability and responsibility. Our NATO allies are meeting President Trump’s call to take primary responsibility for the conventional defense of Europe. This force posture adjustment will not change the security environment in Europe.
The days of a large U.S. ground force contingent in Europe to face the Soviet 3rd Shock Army from pouring through the Fulda Gap are over. The main American commitment in Europe consists of one squadron of F-16s in Germany, two small battalions of troops for deployment elsewhere. The rest of the ground forces are present for force protection for facilities such as Ramstein AFB, which is a transportation hub to support operations in the Middle East and Africa.
In addition, the WSJ reported that the U.S. plan for peace included an “appendix [which] offers America’s broad-strokes vision for bringing Russia’s economy in from the cold, with U.S. companies investing in strategic sectors from rare-earth extraction to drilling for oil in the Arctic, and helping to restore Russian energy flows to Western Europe and the
rest of the world.”
This is not a defense strategy. It’s a business plan.
Bring the Legions Home
Whether it’s intentional or not, the NSS is a “bring the legions home” strategy. Here is why this matters.
Retired general Mark Hertling, who served as the Commanding General of United States Army Europe voiced support of an
X/Twitter thread and revealed that he argued in 2011 in so many words that America is running an empire, and empires need global military support to maintain order.
THE U.S. DOES NOT SUBSIDIZE EUROPEAN DEFENCE.
You are not running a charity, you are running an empire. And empires are costly.Your forward deployments, your bases, your carrier groups, etc. – they are the pillars of a global security architecture that mainly serves you: to protect your trade routes, your currency, your corporate supply chains, your ability to project force anywhere on the planet in hours and days, not months.
Your prosperity rests on your ability to project power -military, financial, informational.Your ports are not overflowing with cheap goods and energy because the world thinks you’re cute or because U.S. Treasuries are sacred. You sit at the center of the system because you guarantee that system with force: sea lanes, chokepoints, sanctions, no-fly zones when it suits you.
No one forced the U.S. into that role. Washington chose it because the benefits – geopolitical leverage, economic primacy, dollar hegemony – are enormous. Stop pretending it’s some unreciprocated act of kindness toward Europe.
Europe is the logistical backbone that lets you wage war and conduct operations across Africa, the Middle East, and parts of Asia without having to move everything across the ocean every time.Ramstein and the rest of the European network are not there to “protect Germany. They are there because from European soil you can:
– Fly troops and cargo to Iraq, Syria, the Gulf, the Sahel, Afghanistan and back with minimal time loss.
– Run command-and-control, ISR, and drone operations into multiple theatres.
– Treat wounded and rotate forces efficiently because the entire infrastructure is already in place.
You could try to rebuild that from scratch inside CONUS or in less stable regions. It would cost you billions, take years, and give you worse geography. Forward basing in allied countries is, in many analyses, cheaper than constantly rotating equivalent forces from the U.S. and trying to replicate those hubs at home.
So no, you’re not “paying to defend Europe.” You’re paying for real estate that underwrites your global reach.
Another inconvenient fact: NATO’s standards and interoperability heavily bias procurement toward U.S. systems – especially in high-end kit like fighters, air defence, and long-range precision weapons.Result? Europe has become one of the largest markets for U.S. arms exports, with a growing share of America’s weapons sales now going to European allies.
European NATO members have doubled their arms imports in recent years; well over half of that comes from the U.S.
That money flows into U.S. defence contractors, U.S. R&D, U.S. jobs – very often in the same red states whose politicians rant the loudest about “subsidizing Europe.”
So ask yourself: who is subsidizing whom?
And here’s what nobody else tells you: the moment Europeans actually “take defence seriously” and rebuild their own industrial base – joint procurement, local ammo and missile production – that dependence on U.S. defense hardware starts to shrink.
European host nations:- Provide rent-free land for bases.
– Waive or reduce taxes, customs duties, and fees that would otherwise fall on U.S. forces.
– Co-fund infrastructure, housing, roads, utilities, and training ranges.
– Contribute billions collectively in Host Nation Support and NATO common funding.
When you add in the in-kind subsidies – land, tax breaks, waived fees – the picture is very different.
In many cases, keeping a brigade forward-stationed in an allied country is less expensive (and can be cheaper) than constantly rotating it from the U.S. and building all the infrastructure yourself.
Again: this is not a one-way subsidy. It’s a business arrangement that suits both sides.
Bringing the legions home is the mark of an empire in decline. Trump’s belief is the U.S. is an enormous market and trade partners have to pay for access, but without control of the sea lanes and all the bases that support trade, the empire eventually collapses.
Casey Michel argued in a
WSJ editorial that a bad Ukraine deal would encourage nuclear proliferation. French President Macron has made a proposal of extending the French nuclear umbrella over Europe. Other allies in Europe and Asia would be tempted to go nuclear themselves if they are unsure of U.S. support. Such a scenario is a recipe for geopolitical instability. That’s the world we are headed towards.
Breaking Norms
In summary, Trump 2.0 has been the story of breaking norms of the U.S. government established over decades and centuries. I have focused mainly on foreign policy, but a recent Trump social media post celebrating the strong GDP print that concluded with “anyone that disagrees with me will never be the Fed Chairman” is another example.
Investment Implications
As an investor, this analysis of the NSS is a review of the changes in a paradigm shift in geopolitical norms that was constructed after World War II. America became the dominant power, and so did the USD, and the recognition that U.S. Treasury paper as the risk-free asset.
Fast forward to 2025, the implementation of a “bring the legions home” strategy is most sensible approach to the management of a collapsing empire. In that case, don’t depend on the USD and USTs to be the risk-free asset in the long run. For the time being, my monitor of the “Sell America” trade isn’t showing signs of excess stress.
A review of year-end forecasts shows a variety of alarmist and constructive geopolitical scenarios, but no signs of imminent crisis.
That said, I am glad to be leaving, because the many basic principles of investing that I learned during my career are on the verge of being outdated. I am about to be an old fuddy duddy who is about to become irrelevant. The WSJ documented how the Trump family prospered in a variety of fields like crypto, communications, financial products, as well as its bread-and-butter real estate businesses. Even if Trumpism were to disappear in 2028, it would take decades for new Administrations to repair the damage.
It’s time to leave while I’m still on top, and have a chance to go.
The Week Ahead
Looking to the week ahead, the stock market is in the middle of the Santa Claus rally period, which began on December 24 and ends two days in the new year. The S&P 500 made an all-time high this week, and so did the S&P 500 and NYSE Advance-Decline Lines, which are constructive signs for the bull case.
Historically, the S&P 500 has shown an average gain of 1.4% in January and 10.4% for the remainder of the year when the Santa Claus rally was positive. By contrast, average returns were -0.1% and 6.1% respectively when the Santa rally fizzled. While I can believe that price momentum can carry over to January, it’s difficult to see how such a level of momentum can last for an entire year.
I conclude that the equity outlook will likely be bullish, at least in the short run.
