Page 4 – Humble Student of the Markets

The Trade War is dead! Long Live the Trade War!

Posted by Cam Hui - July 19, 2025

The market is hiding a secret in plain sight. Ever since the “Liberation Day” reciprocal tariff panic, trade war tensions have been in retreat, and the S&P 500 has regained all of its losses and achieved fresh all-time highs. This has happened against a backdrop of continuing uncertainty over tariff levels imposed by the U.S. on its trading partners. The question is why.

That’s because despite all of the dire headlines about the imposition of a 25% tariff rate on Canada and 30% on Mexico and the European Union, the only trade war that matters is effectively over. China has won, and the stock market is rallying in relief.

U.S. Trade Overview

Consider the nature of U.S. trade in context. By country, the lion’s share of U.S. imports comes from the North American trade bloc at 29%, followed by China at 14% and Europe at 24%.

The accompanying chart shows the U.S. goods trade balance by country. Keep in mind that the U.S. runs a trade surplus in services, such as from technology platforms, that is not shown in the chart, and the reported trade deficits are accounted for by specific circumstances. The U.S. would have a trade surplus with Canada if oil and gas imports were stripped out, and much of the trade deficit with Ireland, and the EU by extension, is attributable to pharmaceutical intellectual property rights parked there owing to its low-tax regime.

Much of the U.S. trade deficit is attributable to trade with China. Trade balance in the Americas is roughly in balance. If we were to exclude Canada and Mexico, which is part of a free trade zone, the U.S. runs a substantial trade surplus with South America. Much of the EU trade deficit is attributable to pharmaceuticals exported from Ireland by U.S. pharmaceutical companies. The remainder of the trade deficit is attributable to China and trade diversion and transhipments through Asian countries.

The Sino-American trade war began under Trump 1.0, which reduced trade with China, but found that imports were being diverted through other countries. Biden attempted to isolate China on key technologies through the CHIPS Act. Trump 2.0 further tried to address the trade diversion issue by launching a global trade war to isolate China.

The height of the trade war was marked by a 145% U.S. tariff on Chinese goods and a 125% Chinese tariff on American goods in the wake of the “Liberation Day” reciprocal tariff announcements. Trade tensions were defused after an American team led by Treasury Secretary Bessent met with Chinese counterparts in Geneva and achieved a handshake agreement to suspend a substantial amount of the tariffs.

The Isolation Strategy Failed

Even though a trade truce was achieved, the U.S. objective to isolate China on trade failed. The recent release of China’s H1 2025 trade shows a surging trade surplus. More importantly, China is posting a $115-billion monthly trade surplus even in the face of 40% U.S. tariffs.

The latest round of the trade war revealed the key supply chain chokepoints that China controlled, such as its prominent position in the production of certain rare earths.

As another window into Chinese dominance in supply chains, David Schild, of the Printed Circuit Board Association of America, testified before the U.S.-China Economic and Security Review Commission. Here are his main points:

The U.S. once made nearly 30% of the world’s printed circuit boards (PCBs), now it’s 4%. Most of the production has migrated to Asia, and China in particular, due to lower labour costs and decades of local government subsidies.
Asia now produces 90% of the world’s PCBs, and over 50% comes from China.
“Congress included guidance in the FY 2022 National Defense Authorization Act Section 851 that requires the Department of Defense to have a plan by 2027 to remove from the defense supply chain all dual-use components originating in China, Russia, Iran and North Korea. What is missing are restrictions on Chinese components that live in our critical infrastructure: air traffic control, medical systems, banking, telecommunications, the electric grid, and others.”
“U.S. PCB manufacturers companies serving the trusted and secure PCBs for the defense industry are operating at record capacity consumption levels and would be unable to scale up in a time of crisis.”
Schild offered solutions such as “China plus one”, which is sourcing PCBs from China and one other friendly source, friendshoring or nearshoring, sourcing from another source other than China, such as Mexico.
Tariffs are not the solution. “Many inputs required to produce PCBs are only available from the very countries subject to tariffs. Overall costs for U.S. PCB manufacturers absolutely increase in this scenario.”

You get the idea. China cannot be isolated. Be prepared for Trump to engineer a face-saving deal where he can declare victory. Don’t be surprised at further positive developments but no strategic breakthroughs that erode China’s competitive position in the upcoming Trump-Xi meeting.

Trump’s efforts to reverse the gains from globalization are failing. As a reminder, the winners of the globalization were the emerging market economies and the very rich, who engineered globalization. The losers were mainly the middle class of the developed economies. Trump’s America First policy to return manufacturing to the U.S. is failing on a number of fronts.

China’s manufacturing workforce is over 100 million, compared to about 13 million in the U.S. In effect, Trump’s industrial policy is to replace high value-added industry employment such as artificial intelligence and biotechnology with low value-added jobs such as making sneakers and apparel.

In addition, the launch of a global trade war in an effort to isolate China has painted the U.S. into a corner. Instead, it is isolating the U.S. instead of China. The global trade war has won America no friends. The latest development calls for U.S. tariffs with trading partners will rise substantially on August 1 in the absence of trade deals. Trump suspended to “Liberation Day” reciprocal tariffs in April for 90 days and promised 90 deals in 90 days. Instead, it made one trade deal with the U.K., and outlines of deals with Vietnam and Indonesia.For Trump, tariffs are the answer. The new tax bill locks the U.S. into a protectionist regime as it depends on tariffs to offset the substantial projected fiscal deficit. Moreover, his view is that America should be charging other countries a fee to access such a large and substantial consumer market. If Trump is steadfast in that view, the risk is a backfire of the “isolate China” policy. Instead, the rest of the world isolates America on trade.

Trump’s America First policies are likely to erode U.S. competitiveness and productivity in the long run. David Brooks compared in a NY Times op-ed the U.S. response to the competition with the Soviet Union under Cold War 1.0 and the competition with China under Cold War 2.0.

In the 1950s, American intelligence suggested that the Soviet Union was leapfrogging U.S. capabilities across a range of military technologies. Then on Oct. 4, 1957, the Soviet Union launched the first satellite, Sputnik, into space.

Americans were shocked but responded with confidence. Within a year the United States had created NASA and A.R.P.A. (later DARPA), the research agency that among other things helped create the internet. In 1958, Dwight Eisenhower signed the National Defense Education Act, one of the most important education reforms of the 20th century, which improved training, especially in math, science and foreign languages. The National Science Foundation budget tripled. The Department of Defense vastly increased spending on research and development. Within a few years total research and development spending across many agencies zoomed up to nearly 12 percent of the entire federal budget. (It’s about 3 percent today.)

Brooks argues that the emergence of DeepSeek is the new Sputnik moment for the U.S. in the artificial intelligence race. Here is the U.S. response:

Today’s leaders don’t seem to understand what the Chinese clearly understand — that the future will be dominated by the country that makes the most of its talent. On his blog, Tabarrok gets it about right: “The DeepSeek Moment has been met not with resolve and competition but with anxiety and retreat.”

Populists are anti-intellectual. President Trump isn’t pumping research money into the universities; he’s draining it out. The administration is not tripling the National Science Foundation’s budget; it’s trying to gut it. The administration is trying to cut all federal basic research funding by a third, according to the American Association for the Advancement of Science. A survey by the journal Nature of 1,600 scientists in the United States found that three-quarters of them have considered leaving the country.

The response to the Sputnik threat was to go outward and compete. Trump’s response to the Chinese threat generally is to build walls, to erect trade barriers and to turn inward. A normal country would be strengthening friendships with all nations not named China, but the United States is burning bridges in all directions. A normal country would be trying to restore America’s shipbuilding industry by making it the best in the world. We’re trying to save it through protectionism. The thinking seems to be: We can protect our mediocre industries by walling ourselves off from the world. That’s a recipe for national decline.

Investment Implications

For investors, the reduction in trade tensions has two investment implications.

In the short run, economic policy uncertainty is receding but it’s not fully normalized. It’s time to adopt a risk-on posture.

Tactically, U.S. equities lagged the most during the trade war panic, and they are recovering and should be the leadership in the short term. Emerging Markets ex-China outperformed as the USD weakened, but the USD appears to be stabilizing and the outperformance of this region may not continue. The other regions, Europe, Japan and China, are likely to lag during the recovery phase.

In the long run, Trump’s America First policies of continuing trade wars and efforts to reshore low value-added industries are likely to erode U.S. productivity and competitiveness. The S&P 500 is already trading at a highly elevated forward P/E of 22.2. Equity investors should not expect U.S. equities to continue to outperform global stocks in the next expansion cycle.

A Resilient Stock Market

Posted by Cam Hui - July 16, 2025

Mid-week market update: It’s remarkable how resilient the stock market has been in light of the challenges it’s facing. The S&P 500 ended an upper Bollinger Band ride last week and it’s been consolidating sideways. The newsflow has been mostly negative, and stock prices have been given lots of opportunity to retreat but the index remains in a narrow trading range, all while the percentage of S&P 500 above their 20 dma has retreated from overbought levels to neutral.

FOMO stampede continues

I am reiterate my bullish view that asset managers and hedge funds have missed this rally and now they are forced into a FOMO chase for equity exposure. as evidenced by this analysis from J.C. Parets.

The BoA Global Fund Manager Survey tells the same story. Risk positioning is normalizing, but readings aren’t excessive.

Remarkably, reported equity exposure is barely overweight despite the recent buying stampede.

In the absence of significant and unexpected shocks, the path of least resistance for stock prices is up.

Bond Market Risk

That said, the biggest risk to the equity bull is the bond market. Two recent developments have pushed up my inflation expectations factor. More importantly, the 30-year Treasury yield is now above the psychologically important 5% level and the USD is in a downtrend.

Inflation expectations were boosted yesterday with the release of the June CPI report. Even though CPI came in softer than consensus, the market was rattled by the increasing evidence of tariff pass-through. Bloomberg U.S. chief economist Anna Wong reported that her estimate of the tariff pass-through coefficient had risen from 0.20 to 0.26. Ernie Tedeschi of the Budget Lab observed that prices of tariff-sensitive consumer goods were rising strongly. As a consequence, the market adopted a risk-off tone as it awaited the next inflation shoe to drop.

Today, reports circulated that Trump was about to fire Fed Chair Powell for cause based on cost overruns of the renovations of the Federal Reserve building. Trump later denied that he was planning to dismiss Powell. I interpret these threats as a red herring as a way of putting pressure on the Fed to cut rates. The relevant excerpt from the Federal Reserve Act states [emphasis added]:

The Board of Governors of the Federal Reserve System shall have power to levy semiannually upon the Federal reserve banks…an assessment sufficient to pay its estimated expenses and the salaries of its members and employees…and such assessments may include amounts sufficient to provide for the acquisition by the Board in its own name of such site or building in the District of Columbia as in its judgment alone shall be necessary for the purpose of providing suitable and adequate quarters for the performance of its functions. After September 1, 2000, the Board may also use such assessments to acquire, in its own name, a site or building (in addition to the facilities existing on such date) to provide for the performance of the functions of the Board…The Board may maintain, enlarge, or remodel any building or buildings so acquired or constructed and shall have sole control of such building or buildings and space therein.

The Trump Collar

In conclusion, I regard the recent market action as the Trump Collar in action. High market anxiety creates the market discipline to active a Trump Put, otherwise known as the TACO trade. As markets calm and Trump gains political capital from the passage of his tax bill, his natural tendency is to assert his authority to disrupt markets. Even though the market is at edge of the Tariff Man zone, what’s remarkable is its tendency for stock prices to rise. At the current rate, my base case for the next short-term top is the August-September time frame.

My inner trader remains long the S&P 500 in anticipation of higher prices. The usual disclaimers apply to my trading positions:

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

Disclosure: Long SPXL

The Bullish Elephant in the Room

Posted by Cam Hui - July 13, 2025

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: Bullish (Last changed from “neutral” on 10-Jul-2025)

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

Bullish Tripwires

I’ve been fairly cautious on equities in the past few weeks, but that’s changing. There is a bullish elephant in the room that is becoming evident and can’t be ignored.

Two weeks ago, I outlined the bull case for stocks, which was characterized as having the odds of one in three or four (see Buy the Cannons: Exploring the Bull Case). At the time, I set out three bullish tripwires, all of which have been triggered.

The small-cap Russell 2000 was tracing out an inverse head and shoulders pattern and it was unclear at the time whether it would stage a breakout above the neckline. The Russell 2000 has decisively broken out.

My long-term timing model was on the verge of a buy signal based on the MACD crossover of the NYSE Composite from negative to positive. That signal was triggered and it has extensively discussed in these pages.

The final trigger was a broad improvement in breadth. The S&P 500 and the NYSE Advance-Decline lines had broken out to all-time highs, but net 52-week highs-lows hadn’t made a new 2025 high. Fast forward to today, that indicator (bottom panel) made a 2025 high last week, and the mid-cap S&P 400 A-D Line also broke out to a new high. The only shoe left to drop is the small-cap S&P 600 A-D Line, which is lagging and yet to make an all-time high. At this rate, that’s only a matter of time.

The “Liberation Day” Panic

Here is how the bear market turned into a bull market.

Market participants were panicked and liquidated their equity positions in the wake of the “Liberation Day” announcements. The decline was exacerbated by the discipline of risk managers who forced trading desks and hedge funds to reduce their leverage and position sizes and led to a panic V-shaped bottom. Market psychology turned cautious and it had become overly concerned about the left-tail of the risk distribution without paying attention to the right (positive) side of the distribution.

Since the panic, numerous surveys have shown that investors have slowly rebuilt their equity positions. Readings are at about neutral levels, but nowhere near crowded long levels that would raise red flags.

Public confidence was similarly shaken. Consumer sentiment had fallen to levels consistent with major market lows and represented buying opportunities.

A “Less Bad” Economy

In the meantime, the right side of the risk distribution began to assert itself. Things started to go right, at least less bad.

The Economic Surprise Index, which measures whether economic releases were beating or missing expectations, rebounded from modestly negative levels to neutral.

The latest NFIB optimism survey shows that hard data (dark line) ticked up, though the soft expectations data (light line) modestly fell. The NFIB survey is useful as small businesses have little bargaining power and they are sensitive barometers of the economy. This is the picture of an economy that’s less bad.

Household finances were becoming less bad. Credit card delinquencies appear to be peaking.

Trump’s tax bill passed and became law. An analysis of the spending shows that the deficits were front loaded while the projected tax savings were back loaded. While the deficits were disconcerting to the bond market, higher near-term deficits translated into fiscal stimulus in the first few years, which is growth positive and welcome news to the stock market.

Over in the jobs market, initial jobless claims are declining (blue line) but continuing jobless claims (red line) are steadily rising, which is a picture of employers who aren’t firing but job seekers are having a hard time finding employment. The economy is weak, but there is no downturn. Another sign that the economy is becoming less bad.

The U.S. economy is showing signs of resilience. Real GDP growth historically ranged between 2% and 3% and it remains in that range. Fears of a tariff-induced recession were overblown. Most economic models project negative GDP growth effects of between -0.5% and -1.0%. As one of many examples, the Budget Lab model shows “-0.6% lower from all 2025 tariffs. In the long-run, the U.S. economy is persistently -0.3% smaller”.

A Buying Stampede

The combination of the market panic and subsequent recovery in fundamentals and psychology have resolved in a buying stampede. There are numerous technical signs of breadth thrusts and price surges that have historically resolved bullishly.

Investors have piled into low-quality stocks in a beta chase to play catch-up. The WSJ reported that “Meme Stocks and YOLO Bets Are Back and Fueling the Market’s Rally”. This will not end well, but not until positioning rises from neutral to crowded long readings. At the current rate, I estimate the excessive froth will become a problem in the August–September time frame.

Waiting for Tariff Godot

While a rally into August and September is my base-case scenario, much depends on how tariffs affect inflation and operating margins in the coming months. The June FOMC minutes showed a broad agreement that tariff effects will show up in the inflation data but there was disagreement about the magnitude and timing of the effects.

An analysis of import prices, which exclude tariffs, shows that they are rising. That’s a signal that foreign exporters are not in aggregate reducing their margins to accommodate U.S. importers to offset tariff effects. Tariff effects will appear at some point in the future, and they will have a negative effect on inflation and growth. The timing and magnitude of the effects are just unclear. There has been little economic cost to the tariffs, but investors will view the June CPI report next week as another key indicator of the tariff’s effects on inflation. However, the economic effects of tariffs are delayed because collection implementation applies to new ship loads and the CBP can delay payments up to 50 days.

Torsten Slok at Apollo labeled this the MBA vs. Ph.D. disagreement. Top-down Ph.D. forecasters are expecting a growth slowdown, but bottom-up company analysts with MBAs expect continued earnings growth. The bottom-up view is supported by improvements in company Q2 earnings guidance. The first test of my bullish thesis will occur with the onset of Q2 earnings reporting season.

In conclusion, market psychology panicked and became overly concerned about left-tail risk and sold equities in the wake of the “Liberation Day” tariff announcements. Better, or less bad, news emerged and investors rebuilt the positions from a crowded short to a neutral position. Price momentum is dominant and I expect that the rally will continue into the August–September time frame, which is consistent with the 4-year seasonal pattern of the S&P 500.

Tactically, it isn’t unusual for the S&P 500 to either consolidate or pull back after an upper Bollinger Band ride. The consolidation has so far been mild but one test will appear on Monday after Trump threatened a 30% tariff rate on Mexico and the European Union over the weekend. Keep in mind that the stock market has shrugged off such tariff threats before. The S&P 500 rose the next day after Trump’s announcement of a 50% tariff rate on Brazil, and fell a modest -0.3% on the threat of a 35% tariff rate on Canada. The market just doesn’t seem to take Trump’s economic initiatives very seriously anymore, particularly in light of his demand last week that the Fed should cut interest rates in response to economic strength. Will investors a disorderly risk-off stampede next week, or a TACO-mania?

I believe the main risk to my bullish scenario is the timing and magnitude of tariff effects on inflation and margins, and the first test will become evident with the upcoming CPI report and Q2 earnings season.

Subscribers received a trading alert last week that my inner trader had begun to accumulate a long position. It’s impossible to spot the exact bottom in light of the current headline-driven environment, but the odds favour an upward bias in stock prices in the coming weeks. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

Disclosure: Long SPXL

An Update on Gold: Time for a Pause?

Posted by Cam Hui - July 12, 2025

I have been bullish on gold for several months (see 2025 High Conviction Idea: Gold). Since that report was published, gold prices have risen over 25% in USD. More recently, it violated its rising trend line in all major currencies except the Japanese yen, which may be a technical warning of a tiring bull. Is it time to take profits in the gold bull trade?

The Trend Is Your Friend

Investors shouldn’t give up on the gold bull just yet. For U.S. investors, the trend continues to be your friend. Gold is an inflation hedge and my inflation expectation indicator staged an upside breakout in April. It remains above the breakout level and the trend is rising, albeit in a choppy manner. Much of the realization of higher inflation depends on the effects of tariffs. The June FOMC minutes showed a consensus about higher inflation, though a split is appearing about the timing and magnitude of the effects:

In discussing their outlooks for inflation, participants noted that increased tariffs were likely to put upward pressure on prices. There was considerable uncertainty, however, about the timing, size, and duration of these effects…

In addition, the weakness of the USD also boosts imported inflation and creates a tailwind for gold prices.

Outside the U.S., a World Gold Council survey of central banks shows increasing demand for gold in their reserves.

Central bank reserve accumulation has been so strong that, according to the European Central Bank, gold is now the second latest reserve asset when valued at market prices.

At the same time, data from the New York Fed shows that foreign central banks have been shrinking their USD exposure, which poses a headwind for the USD Index.

The trend is your friend.

The Trend Isn’t Over

The trend isn’t over. Estimates of the allocation in investor portfolios is still low by historical standards. Public sentiment has a far way to go before it’s all-in on gold.

Gold is also holding up on its relative breakouts against the S&P 500 and the 60/40 asset mix. The relative breakout against the 60/40 fund is especially significant as it highlights the metal’s importance in diversification effects and the reduced diversification effect of bonds in an environment of rising inflation expectations.

A tactical analysis of gold mining stocks (GDX) shows the group is testing an uptrend, while the 14-day RSI (top panel) approaches the 40 level where these stocks have bounced in the past. The bottom two panels show long-term technical conditions to be overbought, which I interpret as the “good overbought” conditions that accompany a sustained advance.

In summary, gold prices are consolidating after an advance. In the absence of serious technical breaks, I are inclined to give the bull case the benefit of the doubt.

Time for Diversification?

Callum Thomas of Topdown Charts recently suggested that it may be time for investors to diversify into other commodities in light of the relative price performance of gold against other commodities.

I am sympathetic to the long-term case for diversification, but I believe it may be too early from a tactical trading perspective. In order for gold to lag other commodities, the global economy needs to see a cyclical rebound, whose signs are not evident.

As the accompanying chart shows, commodity prices are trending up and holding above their 50 and 200 dma. The bottom panel shows the cyclically sensitive copper/gold and base metals/gold ratio. The spike in the copper/gold ratio is distorted by Trump’s announcement of copper tariffs, but the more diversified base metals/gold ratio is showing little signs of life.

Similarly, a review of the performance of selected cyclical industries shows that most cyclical groups are tracing out relative bottoms against the S&P 500. With the possible exception of infrastructure stocks, none are showing signs of sustainable market leadership.

In conclusion, I remain a gold bull. Gold prices are consolidating after strong gains in H1 2025, but the trend is still up. Bullish sentiment isn’t stretched and central bank buying provides long-term demand. I am sympathetic to the suggestion that it’s time to diversify into other commodities, but the idea is only a trade set-up as commodity outperformance of gold requires a cyclical rebound, which is not evident at this time.

Tariff Man Returns

Posted by Cam Hui - July 9, 2025

Mid-week market update: Investors have seen this movie before, which I described as a Trump collar. As the accompanying chart of the trade war factor, Trump shown a pain point at which the market anxiety, as measured by the VIX and MOVE Index, rises enough that he moderates his course on tariff belligerence. As market anxiety cools down, and he makes some gains to score political capital, the Tariff Man emerges and he asserts his “Art of the Deal” persona. In the wake of the trade deal with Vietnam and the passage of the tax bill, we are back in the Tariff Man zone.

In effect, he is financing the Trump TACO Put with the sale of a Trump Tariff Man Call option on risk assets. It’s therefore not a surprise that the market is pausing its gains this week.

What’s Next?

What’s next? Market history offers investors two views. On one hand, the stock market tends to pull back after the S&P 500 comes off a ride on the upper Bollinger Band. However, there are some minor exceptions when the market has consolidated sideways after the upper BB ride.

Momentum Support

On the other hand, the rally off the April panic bottom was extraordinary inasmuch as it was a snapback of capitulation selling, characterized by strong price momentum during the recovery phase.This historical analysis of similar snapback rallies has shown strong sustainable gains over a 2-12 month time horizon. Based on this analysis, we are in week 2 of the rally. Despite the positive average returns shown in weeks 1 and 2, the % positive success rate in the first two weeks of the rally was weak. The success rate and average return improves at the one-month horizon, but risks remain.

That’s where we are. If the current market rally were to follow past momentum examples, a useful template might be the 2011 recovery experience when the S&P 500 went on several upper BB rides after it recovered and broke up through resistance in early 2012. In those cases, the pullbacks after upper BB rides tended to be relatively shallow, which is my base case scenario.

Other historical studies are supportive of the price momentum bull case. Wayne Whaley observed that “the S&P has now advanced 26.0%, doing so in less than a Quarter, 86 calendar day (April8-July3) to be precise…Looking back through post 1950 history, I can only find five prior occasions in which the S&P has advanced 25% in less than a Quarter and none of those five occasions were anywhere near an impending top.

In addition, sentiment is not stretched, which gives the bulls more room to run. Fred Meissner of the Fred Report observed that Investors Intelligence “looks more like an intermediate bottom than a top”. The percentage of bears haven’t capitulated yet, indicating there is a lot more underlying buying power for equities in the coming weeks, especially if stock prices were to continue rising and traders chase the S&P 500 upwards.

In conclusion, the path of least resistance for stock prices over the next few months is up. While it’s impossible to accurately pinpoint how far the S&P 500 pull back after the latest upper BB ride, traders should be accumulating long positions this week and next week in anticipation of more highs in the coming days.

Should You Embrace the Melt-up?

Posted by Cam Hui - July 6, 2025

Preface: Explaining our market timing models

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 14-Apr-2025)

Subscribers can access the latest signal in real time here.

The Return of Irrational Exuberance

I pointed out last week that animal spirits were returning to the market. Perhaps too much. A recent Bloomberg article, “‘Irrational Exuberance’ Stock Gauge Sparks Fresh Bubble Worries”, tells the story of extremely greedy sentiment creeping into the markets. The Barclays Equity Euphoria Indicator has reached dangerous levels of froth:

The bank noted that the measure, which is calculated from derivatives metrics, volatility technicals and sentiment signals inferred from options markets, has historically averaged around 7%, but occasionally it peaks above 10% as during the Dotcom era of the late 1990s, and the meme-stock frenzy of 2021. The gauge currently sits around 10.7%, data compiled by Barclays show.

Market conditions are becoming bubbly and melting up.

At the moment, the S&P 500 is a little extended while grinding out new highs and it’s on an upper Bollinger Band ride. Should traders embrace or fade the melt-up?

A Sustainable Advance

To make a long story short, the odds favour further gains in the next few weeks. For some context, I use RRG charts to tell the story. Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership in different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.

The RRG chart of U.S. factor returns shows the technical underpinnings of the latest bout of market strength. In the leading quadrant investors can find the high beta and high-octane factors, such as speculative growth, large-cap growth, high beta and price momentum. Not far behind in the improving quadrant is the small-cap Russell 2000. By contrast, the lagging quadrant contained value and defensive groups such as large-cap value, low volatility, high quality and dividend aristocrats.

The high-octane rally didn’t just appear overnight, factor rotation analysis showed that it had been developing for some time.

Another element that’s supportive of further market strength is evidence of broadening breadth. Market leadership is widening to small-cap stocks. The Russell 2000 staged an upside breakout of an inverse head and shoulders pattern, with a measured objective of about 250. In addition, the bottom panel shows that small caps are on the verge of a relative breakout.

All Systems Go

Other market internals are supportive of further gains. My technical dashboard is blinking mostly green.
Risk appetite indicators are confirming the stock market’s strength. Both equity risk appetite, as measured by the ratio of high beta to low volatility stocks, and credit market risk appetite, as measured by the relative price performance of junk bonds to their equivalent-duration Treasuries, are rising in lockstep with the S&P 500.

Option sentiment is not stretched. CBOE put/call ratios are in neutral, indicating a lack of exuberance despite the recent market rally.

Neutral Positioning

Estimates of market positioning are in neutral. If momentum continues to dominate, there is additional buying power for stock prices to run.

Deutsche’s estimate of aggregate equity positioning shows exposure recovering from a “Liberation Day” panic low, but readings are neutral and not excessively high.

Similarly, Goldman’s estimate of CTA global positioning tells the same story of a recovery from a panic low to neutral levels.

The AAII monthly asset allocation survey measures retail sentiment and indicates what respondents actually do with the funds, which is different from its weekly opinion survey of respondents think, shows rising of equity allocation after the recent market panic. However, readings are not excessive and have more room to grow.

Time for a Breather?

It’s impossible to forecast how the far the latest rally can last. I can point to some clues and risks that equity investors bear in the current environment.

One key risk is the Trump collar. The stock and bond markets have discovered Trump’s pain threshold at which he executes a policy pivot. The most recent pivot occurred in the wake of the “Liberation Day” panic when he moderated his stance on trade. That’s the strike price of the Trump Put. On the other hand, the market also needs to be aware of the Trump Call, when the markets are riding high and he feels more comfortable about displaying his dominance. Conceptually, it could be said that the market is financing the protection of a Trump Put with the sale of a Trump Call, which is known as a collar among option traders.

Recently, Trump has scored two big wins. The first was the passage of his tax bill, and the second was evidence of some progress in trade agreements, such as with the UK and Vietnam. The current setting may be ripe for the markets to recognize that it’s short a Trump Call.

U.S. market leadership has recently shifted from NASDAQ 100 stocks to smaller and more speculative names. While this may be a warning of unsustainable froth, I would point out that the relative performance of small caps has been correlated with my trade war factor since the November election. While correlation doesn’t represent causation, the relationship makes sense as smaller firms tend to be more sensitive to swings in economic outlook, including trade.

Trade war anxiety fell last week when the Trump Administration announced a trade deal with Vietnam and it was close to a deal with India, but can the easing of trade tensions last? A crack in the relative performance of small-cap stocks could be an initial warning of a possible stall in the market advance.
Already, the Trump Administration announced that it would be sending out letters in the next few days to countries detailing their tariff rates that range from 10% to 70% after the 90-day pause on the “Liberation Day” tariff rates expire. Equity futures and the USD weakened after the news hit the tape, but trading was thin during the holiday hours and the market reaction next week will be a test of risk appetite.

The recently passed budget bill also contained hidden elements of a short Trump Call when it raised the debt ceiling by $5 trillion. The increase of the debt ceiling will mean that the U.S. Treasury will start to sell debt to finance the deficit and cease its previous extraordinary measures to avoid reaching the government’s old self-imposed debt limit. In practical terms, the government will reverse the drawdown of the Treasury General Account at the Fed, which supplied liquidity to the financial system, and drain liquidity by selling debt into the market. The withdrawal of liquidity will pose a short-term headwind to equity prices.

It’s time for a breather. The stock market is overbought in the face of growing risks. If stock prices were to wobble because of either of these two conditions in the coming days, I will be monitoring how risk appetite behaves under those conditions. Will the market pull back and correct, or will it shrug off these potential potholes and continue to advance? Stay tuned.

In conclusion, the market is taking on bubbly characteristics. However, momentum is still strong and sentiment is not excessively stretched. The market is due for a short-term pullback or consolidation. I believe traders should buy the anticipated weakness next week and embrace the bubble conditions as the melt-up has further room to run.

Can a New Bull Begin at a Forward P/E of 22?

Posted by Cam Hui - July 5, 2025

It’s official, my long-term market timing model has confirmed a buy signal at the end of June. It first flashed a sell signal in late January when the 14-month RSI of the NYSE Composite exhibited a negative divergence when the market made a new high, but RSI didn’t. Now it flashed a buy signal at the end of June when MACD recycled from negative to positive (bottom panel), though you have to squint to see when it went negative in May.

This model has shown a strong track record over the years. If you had sold in late January and bought back in when the S&P 500 made a new high last week, you would have missed the tariff drama drawdowns of the last few months.

In my discussions with investors, one key question keeps coming up. The S&P 500 is trading at a forward P/E of 22. Can a new bull truly begin at such elevated valuations?

Reasons for Caution

There are good reasons to be cautious. The S&P 500 is trading at a forward 12-month P/E ratio of 22. Investors have seen such valuation levels in the last 30 years on only two occasions, the COVID era and the dot-com era.

Can stock prices advance from here? The answer is a qualified yes, though there are reasons to be cautious.

The last time the S&P 500 reached a forward P/E level of 22 was in 2020 during the COVID era. Then the E in the P/E ratio was falling dramatically, which elevated the forward P/E ratio. Earnings estimates recovered soon after, and stock prices advanced because the E in the P/E did most of the heavy lifting.
Fast forward to 2025. Earnings estimates saw a minor setback during the latest trade war tantrum and began to recover. Though the drop in earnings was less dramatic than 2020, the market’s forward P/E is nevertheless lofty by historical standards.

There are two ways stock prices can rise. Either the E in the P/E rises or the P/E ratio rises further.

Strong Momentum

Street analysts are forecasting a bottom-up aggregated annual S&P 500 growth to be 9% in 2025, 14% in 2026 and 12% in 2027. As they stand today, those figures should translate into healthy stock price returns, as long as the forward P/E multiples hold at current levels.

In the short run, the market is seeing signs of strong momentum. FactSet reported that the rate of forward EPS guidance for the coming quarter has been rising and levels are well above their historical averages. That’s a sign of strong positive fundamental momentum, which should be supportive of stock prices.

The P/E Outlook

For the longer-term outlook, investors need to consider how P/E multiples will evolve. The P/E multiple is a function of interest rates and bond yields.

Let’s begin with the outlook for short-dated rates. Fed Chair Powell admitted at the ECB forum in Sintra last week that, were it not for Trump’s tariffs, the Fed would be easing rates. Labour markets are showing signs of some softness. The stronger-than-expected June Payroll Report paints an apparent picture of a resilient jobs market. However, weaker-than-expected average hourly earnings, average weekly hours and a decline in the participation rate tempered the headline strength of the report.

The stronger-than-expected June Payroll Report moved the needle on market expectations in a hawkish direction but likely didn’t move the needle on Fed policy outlook. The June Summary of Economic Projections (SEP) shows that Fed officials raised their unemployment rate projections for 2025. The June unemployment rate of 4.1% was stronger than expectations, though the decline in unemployment can be explained by an unwelcome retreat in the participation rate.

The internals of the report came in on the weak side. Most of the job gains were attributable to increases in healthcare and government jobs. The diffusion rate of job gains was below 50, which indicates a negative breadth in employment increase. Take together, this is consistent with the SEP projection of a gradual weakening in the jobs market.

In addition, the Fed is hesitant about cutting rates because it doesn’t know the full effects of the tariffs. Will tariff-induced price increases be a one-time shock or will the Trump Administration continue to rachet them up over time? The current environment raises stagflation risks of weakening growth and rising inflation.

While Powell has described current monetary conditions as moderately restrictive, monetary policy can’t be described as overly tight. The Cleveland Fed’s estimate of the Fed Funds rate using a variety of rules and assumptions shows that the current median estimate is equal to the current Fed Funds target of 4.25–4.50%.

Consider how market expectations have evolved in the last year, from the Fed’s perspective. The 2-year Treasury yield, which measures the market’s expectations of the long run Fed Funds rate, fell after the tariff wars began in late January after Trump took office and it’s been in a narrow range since early March. By contrast, the 10-year Treasury yield has been range-bound since Trump’s Inauguration. The 2s10s yield curve rose sharply after the “Liberation Day” announcements and it’s been relatively steady since, which is a signal of elevated inflation expectations.

Having addressed the issues surrounding the Fed Funds outlook, investors also have to consider how the 10-year rate will evolve, which is a function of White House policy on the budget and the trade war.

One wildcard is the budget bill that’s making its way through Congress. The non-partisan Congressional Budget Office estimates the Senate version of the bill passed last week will add $3.3 trillion to the U.S. deficit over 10 years, compared to the House version, which would only raise the deficit by $2.8 trillion over the same period. The bill that eventually passed in the House on July 3 was the higher-deficit Senate version.

The one piece of good news is Section 899, the so-called “revenge tax” that penalizes foreign investors domiciled in countries judged to have unfair tax regimes, was eliminated from the final version the bill.

In the meantime, global markets have become increasingly nervous. While the 10-year Treasury yield has fallen in absolute terms, a basket of foreign sovereign bonds is outperforming Treasuries on a USD and equivalent-duration basis. As well, the USD Index is weakening. While the reduction in 10-year yield represents good news for the P/E ratio as lower yields represent less competition for stocks, worsening relative bond performance and USD weakness are concerns for the relative competitiveness of U.S. stocks compared to global equities.

Interpreting the Buy Signal

Putting it all together, where does that leave us? Can stock prices advance when the S&P 500 is trading at a historically high forward P/E of 22?

I interpret the buy signal two ways. First, it’s taking the odds of a significant bear market off the table. On the other hand, an elevated P/E of 22 will limit the upside of U.S. equities, but not global equities. U.S. stocks have handily beaten the rest of the world since the GFC that a generation of investors have conditioned themselves to think of the global stock market outlook as being driven mainly by the U.S. A review of the relative performance of regional markets shows that the S&P 500 and NASDAQ 100 are underperforming global markets on a YRD basis, but they have recovered since the April “Liberation Day” bottom. The recent recovery can be seen in U.S. stocks and EM ex-China, whose markets are supported by a weak USD. The relative losers in the latest recovery are Europe, Japan and China.

While U.S. equities are expensive by historical standards, the valuation of other regional markets is far more reasonable.

Macro conditions may be setting up for a cycle of superior non-U.S. equity outperformance. Investors are already seeing preliminary signs of the “Sell America” trade by the bond and currency markets. If history is any guide, persistent USD weakness has led to non-U.S. stock outperformance.

In conclusion, I interpret the buy signal from my long-term market timing model as a buy signal for global equities, and not just the U.S. market. While the U.S. stock market faces a number of macro and valuation challenges, non-U.S. stocks enjoy cheaper valuations and more earnings growth tailwinds compared to the S&P 500.

Broadening Breadth?

Posted by Cam Hui - July 2, 2025

Mid-week market update: I suggested on the weekend that the animal spirits were back. Indeed, the market may be undergoing a broadening in breadth and leadership. NASDAQ 100 stocks are coming off the boil, and med- and small-cap stocks are showing signs of life. That’s a welcome short-term sign that this rally may have more room to run.

A Risk-on Stampede

Analysis from Goldman Sachs shows that global equity flows are now at a risk-on extreme, which is indicative of a buying stampede

The buying stampede doesn’t look like it’s over just yet. The BoA Bull & Bear Indicator has risen sharply, but readings are still neutral.

Deutsche’s estimates of aggregate equity positioning tells a similar story of a recovery off a panic bottom, but readings are in neutral territory.

More Room to Rally

Putting it all together, I am seeing signs of a momentum-style breadth thrust that has the potential to take stock prices higher. However, investors should be prepared for a tactical pause in the days ahead.

Seasonal analysis from Jeffrey Hirsch of Almanac Trader suggests a bullish tailwinds before the 4th of July and bearish headwinds next week. That calendar is consistent with uncertainty over the “Liberation Day” 90-day negotiation extension which expires July 9. Trump recently threatened Japan with a 30% tariff rate, which is higher than the 24% “Liberation Day” rate, and indicated that he won’t extend the deadline

A “rally now and correct later” scenario is consistent with what happens when the S&P 500 undergoing an upper Bollinger Band ride, as it is doing now. In the past, the market has either consolidated or staged minor pullbacks once the upper BB ride is over.

The Animal Spirits are Back in Charge!

Posted by Cam Hui - June 29, 2025

Preface: Explaining our market timing models

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 “neutral” on 27-Jun-2025)
Trading model: Neutral (Last changed from “bullish” on 14-Apr-2025)

Subscribers can access the latest signal in real time here.

A Speculative Breakout

It is said that there is nothing more bullish than a new high, but how should investors interpret the latest round of upside breakouts?

The S&P 500 made a fresh high Friday. Even before Friday’s upside breakout, the high-octane and speculative parts of the stock market have already staged upside breakouts to all-time highs. The NASDAQ 100 and the ARK Innovation ETF (ARKK), which represents speculative growth stocks, have already broken out. By contrast, the equal-weighted S&P 500, which measures the average stock in the index, is well below its highs.

The animal spirits are back and the market is becoming frothy.

Animal Spirits Take Control

I am seeing numerous signs of speculative fever that’s supporting high stock prices. The Goldman Sachs “retail favourite” basket recently reached a fresh high since 2021. The title of a recent Bloomberg op-ed speaks for itself: “SPACs Are Back. What Could Go Wrong This Time?”

MarketWatch reported that the JPMorgan strategy team unveiled a model to determine the probability of stock market direction. The model is based on a combination of volume, value, positioning, flows, economic momentum and price momentum relative to their own history. The model concluded that there is a 96% chance that stock prices will rise in the next six months.

Ed Clissold at Ned Davis Research found that low-quality stock rebounds are not unusual after 15-20% bull corrections. What is unusual is the magnitude of the low-quality recovery.

I highlighted last week several bullish tripwires. My long-term market timing model based on the monthly NYSE Composite is on the verge of a buy signal. This model presciently flashed a sell signal at the end of January when the 14-month RSI exhibited a negative divergence. Now it’s on the verge of a buy signal as its monthly MACD will turn positive for June, barring a major market downdraft on Monday.

A Trend Model Upgrade

I am upgrading my Trend Asset Allocation Model signal from neutral to bullish. As a reminder, the Trend Model employs trend-following techniques on global stock markets and commodities to form a composite score.

The strength of the model’s signal is attributable to strength in European markets and emerging markets, which has been supported by a weak USD.

In the U.S., stock price strength is supported by improving fundamentals. FactSet reported that the number of S&P 500 companies issuing positive EPS guidance has been rising and readings are above average.

Key Risks

Investors should be warned that this is no textbook buy signal. Ideally, a Trend Model buy signal would be accompanied by commodity strength, which would be a sign of a global cyclical upturn. However, noise from an energy price spike attributable to geopolitical tensions masked the commodity price signal. In addition, cyclically sensitive copper/gold and base metal/gold ratios are not giving signs of a cyclical rebound. I would be more comfortable with a bullish thesis if I was seeing market signals of a global cyclical recovery.

As well, the technical behaviour of gold mining stocks is also signaling bullish caution. If the S&P 500 is breaking out to fresh highs, why are gold miners in an uptrend, and why is the relative performance of these stocks to the S&P 500 trading sideways since April? Relative breadth of the gold miners (bottom two panels) is still positive, which is a signal of consolidation. Gold mining stocks are regarded as safe-haven risk-off assets, and they should be exhibiting greater weakness during an equity bull phase.

A review of leadership of the top five sectors which comprise over 75% of S&P 500 weight shows that the advance has entirely been driven by technology stocks. Narrow leadership and signs of market froth should be interpreted as a warning, but not a sell signal. Just don’t overstay the party.

In conclusion, the market’s animal spirits have taken control of the tape and U.S. equity prices appear to be headed for further highs. Medium- and long-term indicators have improved sufficiently that I am upgrading my Trend Asset Allocation Model from neutral to bullish. However, investors should monitor non-confirmation patterns from commodity prices that may be signs of signal reversal in the coming weeks.

I would summarize the risk and reward of owning stocks this way. Global bond and foreign exchange markets are exhibiting skepticism over U.S. fiscal and monetary policy, as evidenced by the outperformance of foreign sovereign bonds against Treasuries and USD weakness (top two panels). However, growth and speculative-oriented equity investors are piling into U.S. stocks for their growth characteristics. As long as the animal spirits prevail and U.S. relative performance is flat (bottom panel), equity prices should continue to rise.

Putting it another way, Societe Generale found that the three-month trailing fund flows are higher for non-U.S. than U.S. equities. As long as U.S. equity fund flows remain positive, the U.S. bull should stay intact.

The Surprise Victor of the Israel-Iran War

Posted by Cam Hui - June 28, 2025

So far, the Middle East truce is holding and oil prices have begun to normalize. An Economist article featured analysis from the Ceasefire Group that studied ceasefires between 1989 and 2020 and found about half were successful, one-third collapsed and the outcome of the remainder were inconclusive. Of Middle East ceasefires, about half failed.

I assess the current situation in the Israel-Iran conflict and its implications for investors.

The Iranian Nuclear Program

A Geopolitics Decanted podcast with Dr. Jeffrey Lewis, professor at Middlebury Institute and a nuclear non-proliferation expert, outlined the issues surrounding the Iranian nuclear program, assessed the possible damage of the bombing campaign and the steps Iran can take to reconstitute its program.

Let’s start with the basics. To make an atomic bomb, you need uranium. Mined uranium is milled and turned into a yellow powder called yellow cake, which is relatively harmless. Less than 1% of yellow cake is fissile material. To make a bomb, you need to enrich the fissile material by converting it into uranium hexafluoride, which is a gas, at a 90% concentration by using a system of centrifuges.

The IAEA reported that Iran has enriched its uranium to the 60% level and it has 400 kilograms of material before the bombing campaign began. Had it wanted to enrich the uranium to the 90% weapons grade level, it would only have to tweak the configuration of its centrifuges. The uranium hexafluoride is then turned into a metal, which is shaped into a sphere suitable for bomb making. Bomb designs used by North Korea and Pakistan date from the 1950s and 1960s are relatively well known.

Iran’s nuclear program is dispersed at several locations. All of the above-ground fuel enrichment plants were destroyed during the initial phases of the Israeli bombing campaign. There were two large underground enrichment halls that were relatively shallow, but it’s difficult to assess their battle damage.

At a minimum, the bombing campaign knocked out all the power. The IAEA believes there was considerable damage to the shallow underground centrifuge facilities.

There were also deep underground facilities at Fordow and Isfahan, which were hit by massive American bunker buster bombs. At this point, it’s impossible to assess the damage at those facilities. The 60%-enriched uranium was stored deep underground at Fordow, which was hit by U.S. bunker buster bombs.

However, satellite imagery shows lines of trucks at Fordow before the bombing and the material may have been dispersed. The IAEA reports that Iran had over 600 kilograms of enriched uranium in unknown locations before the bombs started falling. U.S. officials concede they simply don’t know the current location of 400 kilograms of 60%-enriched uranium, which is enough for 10 bombs.

Another centrifuge manufacturing facility is located deep underground at Natanz, and it’s deeper than Fordow. Lewis stated that the American bunker buster bombs can’t reach the underground complex at Natanz and only a nuclear warhead could destroy that facility.

If the Iranian leadership wanted to race to a bomb today, here’s what it needs to do. Assuming that it still possesses the 400 kilograms of 60%-enriched uranium, which is a big if, it would need to enrich it to 90% at the very deep underground Natanz facility. Much depends on whether it still has the centrifuges available, but Lewis claims that even a small facility could enrich it to 90% within one or two months. On the other hand, if Iran had to start from scratch with 5% uranium, the timeline could stretch to a few years. The next step in bomb making is turning the uranium hexafluoride into a metal, but that above-ground plant has been destroyed.

That’s where we are today. Iran has lost key infrastructure, commanders and scientists. Both sides have declared victory. But Iran’s missile, nuclear and proxy potential still stands and the world is in the dark about the country’s capabilities and intentions. Iran Parliament’s National Security Commission approved a bill on suspension of the co-operation with the IAEA, which is the first step to withdrawal from the nuclear non-proliferation treaty. Amidst the differing claims from intelligence agencies and the White House, it’s unclear how much Iran’s nuclear bomb program has been set back.

The Israeli and U.S. Perspective

From the Israeli and U.S. perspective, the conflict isn’t without cost. The WSJ reported that “Israel’s War on Iran Is Costing Hundreds of Millions of Dollars a Day”:

The biggest single cost are the interceptors needed to blow up incoming Iranian missiles, which alone can amount to between tens of millions to $200 million a day, experts say. Ammunition and aircraft also add to the price tag of the war, as does the unprecedented damage to buildings. Some estimates so far say that rebuilding or repairing damage could cost Israel at least $400 million.

The mounting costs add up to pressure on Israel to wrap up the war quickly.

The U.S. experienced a similar alarming drain in munitions when the Navy tried to wrest maritime control of the Red Sea from the Houthi rebels. According to the Military Times, Acting Chief of Naval Operations Admiral James Kilby acknowledged in testimony before the House Appropriations Committee that the operation has “highlighted the strain on our munitions industrial base”:

“Precision-guided, long-range munitions like Tomahawk, Long Range Anti-Ship Missile, the heavyweight torpedo, all those ammunitions we need to increase production on,” he said. “But I’m also of the mind that we need to look at other vendors. They may not be able to produce the same exact specifications, but they might be able to produce a missile that’s effective, which is more effective than no missile.”

U.S. forces launched over 1,000 strikes from March to May 2025 at the Houthi rebels, who used missiles and low-cost drones to interdict the sea lanes, using an estimated $1 billion in weapons. If the U.S. expends munitions at such a prodigious rate against the lightly armed Houthis, it raises the question of how quickly it would run short in a war with China over Taiwan.

Standard & Poor’s recently warned that an extended war could put Israel’s credit rating at risk of a downgrade: “Developments in the Israel-Iran conflict are testing S&P Global Ratings’ previous assumptions by increasing downside risk including due to the prospect of further escalation. Israel says its stated aim of destroying Iran’s nuclear capability could take at least two weeks, possibly longer… this points to a more protracted campaign than the 2024 retaliatory strikes.”

In other words, the surprise victor of the conflict is the bond market, which is forcing a fiscal discipline framework on the combatants to reduce hostilities. War is expensive, and countries will have to pay if they want to go to war.

While the Iranian bond market isn’t easily observable, a Bloomberg podcast with Maciej Wojtal, of AmtelonCapital, an Amsterdam-based fund that specializes in Iranian stocks provides some perspective. Wojtal revealed that Iran is roughly the same size as Turkey in geography and population, but the size of its economy is about one-fifth the size. While the stock market was closed during the period the attacks, he pointed out that market signals were nevertheless available by observing the exchange rate against cryptocurrency stablecoins. Before the attack, one Iranian rial was trading at about 830,000 to the USD. It shot up about 15% to 950,000 after the attack, and returned to 850,000 as the ceasefire took hold.

One key unknown is the length of the conflict. It’s unclear what the U.S. policy toward Iran is. On one hand, President Trump has hinted at regime change in his social media posts. On the other hand, he gave the green light to China to buy oil from Iran, which translates into lifting sanctions and helps the regime. He sent out a social media post last Friday suspending plans for sanctions relief after Ayatollah Ali Khamenei issued a defiant message that downplayed the success of the bombing campaign.

Trump’s desire for regime change in Iran is a difficult proposition. The Iranian opposition is poorly organized and fragmented, and any effort to bring about regime change will result in a protracted conflict. As an example, protests erupted over women’s rights in Iran in 2022, but the authorities clamped down and the protests, which could have been the basis of an anti-government movement, fizzled.

What happens next to U.S. policy? If Trump opts for a containment policy, the diversion of military resources to the Middle East from Asia will weaken the deterrence of a Chinese attack on Taiwan. Moreover, it will bloat the budget – and the bond market vigilantes will rebel. Arguably, the market is already signaling its unease with the Treasury market. Foreign sovereign bonds are outperforming Treasuries on a USD-denominated duration-equivalent basis, and the USD is in a downtrend and broke a key support level.

Investment Implications

The length of the war, even if hostilities were to subside and the level of conflict simmers, matters to the markets. The bombing campaign has set back Iranian efforts to acquire a nuclear device for an unknown period, but the regime is still in place and it’s unclear whether the Tehran leadership will try to reconstitute the program in the near future.

This translates into uncertainty, and markets will put a risk premium on uncertainty.

A timely paper, “Costs of Rising Uncertainty”, by Fed researchers Juan M. Londono, Sai Ma, and Beth Anne Wilson tried to quantify how shocks affect risk premiums. The Fed researchers divided shocks into different categories of uncertainty.

For trade policy uncertainty (TPU) and geopolitical risk (GPR), the drop is sharp but short and smaller, which may reflect the fact that these shocks usually hit smaller segments of the economy and, in the past, may have been resolved more quickly. For economic policy uncertainty (EPU) and financial uncertainty (VIX), the drag on investment is more sizable and longer lasting, possibly reflecting the broader nature of the uncertainty and more sustained caution given shocks to financial markets. The largest and most prolonged effects on investment come from shocks to the predictability of the economy (REU), particularly inflation (Inflation U). These shocks may hit broader portions of the economy, and it may take more time for confidence in the predictability of the economy to return for all economic agents.

The accompanying chart shows how the markets have responded to different shocks in the last five years, measured on the y-axis as standard deviations above the historical mean. As the chart shows, the maximum effect of the shocks tend to peak out within 3–6 months.

What happens if the markets are subject to a rolling series of shocks? I have argued before that Trump’s chaotic decision process has shown itself to raise the level of uncertainty. The VIX Index rose to elevated levels after the trade wars began under Trump 1.0. I expect a similar pattern to hold under Trump 2.0, which will raise the risk premium on financial assets.

In conclusion, the surprise victor in the Israel-Iran conflict may be the bond market, which will exact a cost by imposing a fiscal discipline on the combatants. Foreign policy objectives are likely to lead to a protracted and simmering conflict that raises an uncertainty premium on asset prices. The markets experienced elevated levels of uncertainty and volatility under Trump 1.0, and I expect a similar environment under Trump 2.0.

In the near term, U.S. investors face a long list of uncertainty:

Geopolitical uncertainty
Uncertainty of the economic effects of the trade war
Uncertainty of the budget bill
Uncertainty over Fed policy direction from tariff inflation effects and the appointment of a new Fed Chair

Investors are advised to hold a diversified portfolio of global assets as a way of reducing U.S.-specific risk.

A Forthy Breakout

Posted by Cam Hui - June 25, 2025

Mid-week market update: One of the bullish tripwires I outlined on the weekend has triggered (see Buy the Cannons: Exploring the Bull Case). The small cap Russell 2000 ETF staged an upside breakout through the neckline of an inverse head and shoulders pattern, with a measured upside objective of ~250, which represents a potential upside of roughly 18%.

The breakout was accompanied by a frothy revival of the market’s animal spirits.

Return of the Animal Spirits

George Pearkes at Bespoke observed that risk appetite was returning to the market.

Indeed, the advance was led by the high beta and high octane stocks. Both the NASDAQ 100 and the ARK Innovation ETF (ARKK) made all-time highs.

My own risk appetite indicators are confirming the advance.

Key Risks

My inner trader would normally turn bullish, but he remains cautious. While he is short-term bullish, the market is subject to a high degree of event risk that makes the conviction of the bullish low.

In the coming weeks, the market is faced with differing sources of volatility with high degrees of binary risk. First, there is event risk from the Israel-Iran conflict. Investors will also see the June Payroll Report next week, followed by the end of the 90-day extension of the “Liberation Day” tariff deadline on July 9. As well, the market will have to contend with the uncertainty of the budget making its way through the Senate.

In conclusion, the stock market is undergoing a frothy advance. The animal spirits are back. While they can take prices higher, event risk is higher than usual. Recent bullish and bearish setups in the current climate of uncertainty have seen reversals. If you want to be bullish, keep your commitments light.

Buy the Cannons: Exploring the Bull Case

Posted by Cam Hui - June 22, 2025

Preface: Explaining our market timing models

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: Neutral (Last changed from “bearish” on 16-May-2025)
Trading model: Neutral (Last changed from “bullish” on 14-Apr-2025)

Subscribers can access the latest signal in real time here.

The Minority Report

As I write these words, the U.S. has chosen to enter the war against Iran. The extremely thin contract-for-difference trading for the Dow is down about -1%. Is this a time to embrace the contrarian adage of “buy on the cannons, sell on the trumpets”?

I have been fairly cautious about the U.S. equity market, but like all good investors, I would like to consider the bull case. While my base case still calls for a trading range for the S&P 500 for the remainder of the year, and the index is still flashing a negative RSI divergence warning, I am open to the possibility that stock prices could break out to all-time highs. I estimate the odds of that bullish as one-in-three or four.

Here are my reasons to be bullish.

The Zweig Breadth Thrust

The market flashed an extremely rare Zweig Breadth Thrust buy signal, which is a sign of extremely strong bullish momentum, on April 24. ZBT buy signals are rare. There have only been nine out-of-sample signals since Marty Zweig outlined his technique in 1986. The market has advanced 6 and 12 months later every time. The breadth thrust fizzled on three occasions, when stocks failed to rise immediately after the buy signal. In each of those occasions, the Fed was raising rates, which is not the case this time.

A Liquidity Tailwind

Stock prices are also enjoying a liquidity tailwind. The latest Congressional Budget Office review estimates the X-date, or the date the U.S. Treasury runs out of money, to be between mid-August and the end of September: “CBO now estimates that if the debt limit remains unchanged, the government’s ability to borrow using extraordinary measures would probably be exhausted between mid-August and the end of September 2025. That estimated range begins about two weeks later than the agency estimated in March 2025.”

Investors are already seeing evidence that the U.S. Treasury is taking extraordinary measures to keep the government solvent by drawing down the balance of the Treasury General Account, or the account that Treasury holds at the Fed. As long as Treasury keeps on spending, this will inject liquidity into the banking system. While the correlation isn’t 100% perfect, higher liquidity has historically boosted stock prices.

Fading Recession Fears

In addition, the latest BoA Global Fund Manager Survey shows that recession fears are fading. This reduces the left-tail risk of a catastrophic recession bear market and boost expected returns. Combined with light to neutral institutional positioning, the higher expected return should boost risk appetite and equity allocation.

We can see a similar effect by analyzing the evolution of forward 12-month EPS estimates. Earnings estimates are rising again after a brief pause, and the increase provides some degree of valuation support to equity prices.

Semiconductor Leadership

From a technical perspective, semiconductor stocks, which have been the leadership in much of the latest bull phase, are flashing a buy signal. Not only did the Semiconductor Index stage an upside breakout, it staged relative breakouts against the S&P 500 (middle panel) and Utilities (bottom panel). The semiconductors to utilities ratio is a useful indicator of risk appetite, and its upside relative breakout is supportive of the bull case.

Positive Seasonality

Another tail-wind for stocks is seasonality. The S&P 500 was up an average of 3.6% in July in the last 16 years.

Bullish Triggers

Here is what I am watching as triggers for a bullish revival and an upside breakout to new all-time highs.

The S&P 500 and NYSE Advance-Decline Lines have already staged upside breakouts to all-time highs, which are bullish signals. I am watching to see new 52-week highs-lows breakout above their 2025 highs, which would be a sign of bullish momentum.

The Russell 2000 is tracing out an invested head and shoulders pattern, but the breakout above the neckline failed. The relative strength chart (bottom panel) is showing a constructive saucer-shaped bottoming pattern. Should the small-cap Russell 2000 convincingly strengthen above neckline resistance, it would be a signal that the bulls have taken control of the tape.

Finally, my long-term timing model flashed a sell signal in late January when the 14-month RSI of the NYSE Composite flashed a negative divergence. This model will turn bullish once the monthly MACD turns positive, which it did earlier in June on an intra-month basis, indicating that this model is on the verge of a buy signal. Should the market strengthen sufficiently for MACD to turn positive, it would be a sign to sound the all-clear for long-term equity investors.

In conclusion, while my base case still calls for a trading range for the S&P 500 for the remainder of the year, and the index is still flashing a negative RSI divergence warning, I am open to the possibility that stock prices could break out to all-time highs. I estimate the odds of that bullish as one-in-three or four. I have outlined the bullish factors that should put a floor on stock prices if they weaken. Investors should monitor my bullish triggers for signs that the bulls have taken control of the tape.

Forecasting Fed Policy: Hints From Hard Data

Posted by Cam Hui - June 21, 2025

As expected, the Federal Reserve left interest rates unchanged. The Fed Chair acknowledged a high degree of uncertainty about the effects of tariffs: “Ultimately the cost of the tariff has to be paid, and some of it will fall on the end consumer. We know that’s coming, and we just want to see a little bit of that before we make judgments prematurely.”

The “dot plot” took a surprising hawkish turn. Seven FOMC members expect no rate cuts in 2025, compared to four in March, and two expect a single quarter-point cut, compared to four in June. But the hawkish pivot occurred against a backdrop of uncertainty as Powell admitted that the projected policy path is only a guess. The Fed’s forecast of inflation and growth has become clouded in the face of the unknown effects of tariffs: “We haven’t been through a situation like this, and I think we have to be humble about our ability to forecast it.”

It is not surprising that Fed policy makers have adopted a wait-and-see attitude as they watch for clues from the hard economic data.

Hints from Hard Data

Now that we have had a decent interval since the “Liberation Day” announcement, investors are starting to see hints of how the economy is evolving from the hard data. Generally speaking, the economy is experiencing some softness. The Economic Surprise Index, which measures whether economic data is beating or missing expectations, is falling.

Let’s start with the weakest and most cyclical part of the economy: housing. The housing sector has been extremely weak, according to New Deal democrat:

Permits (gold) declined -29,000 annualized to 1.393 million, the lowest number since June 2020. Single family permits (red) also declined, by 25,000 annualized, to 898,000, the lowest in 2 years. Starts (light blue) declined -136,000 annualized to 1.256 million, the lowest since May 2020.

Employment is also showing signs of stalling. Initial jobless claims (blue line) rose sharply recently, though levels are still holding within a historical range. Continuing claims (red line) has increased to a new cycle high, indicating that job seekers are finding it increasingly difficult to get jobs.

Real-time indicators of employment are also weakening, as evidenced by a decline in individual income tax withholding.

On the other hand, the American consumer is showing no signs of weakness. Numerous credit card surveys attest to the resiliency of consumer spending. The Redbook Index of same-store sales of U.S. general merchandise continues to grow steadily.

To be sure, some of the consumer spending could be attributed to households front-running tariff increases. The negative surprise in the May retail sales report is an indication that any front running is over.

New Deal democrat’s analysis of the retail sales report had two main takeaways. He reiterates his belief that “consumption leads employment”, and “the consumer front-running of tariffs has ended, and payback (of unknown duration and strength) has begun.”

Investors are about to find out how the economy is progressing now that the tariff-related noise has passed. The hard data in the coming months will tell the story.

The Stagflation Question

In summary, investors are starting to see preliminary signs of economic weakness. However, there is no need to panic because, as the FOMC statement correctly states, “economic activity has continued to expand at a solid pace”. In the absence of the tariff-related price increases, the economy could be described as undergoing a soft landing and it would be entirely appropriate for the Fed to cut rates.

The risk is inflation. Inflation is declining and nearing the Fed’s 2% target, but Fed policy makers have to be mindful of the price stability part of the organization’s mandate. What happens to inflation and inflation expectations in the coming months?

Analysis by former Fed economist Claudia Sahm highlighted some possible good news on tariff pass-through price increases. She pointed out that the apparel CPI, which is a category that’s highly sensitive to tariffs, saw a decline of -0.4% in April.

She attributes the decline to a combination of factors. One is price reductions by the foreign manufacturer as the “longer production cycles may have given US apparel importers more leverage than importers in other industries”. Another is the phased implementation of tariff collection, which hasn’t fully affected prices yet. Importers could also choose to absorb some of the price increase, which is reflected in the most recent compression between CPI and PPI.

With the caveat that the apparel price data is highly preliminary, Sahm concluded:

The declines in apparel consumer prices in recent months also suggest greater demand sensitivity and some tariff cost sharing by foreign producers. That would imply a smaller boost to inflation from tariffs, as opposed to simply a delay in the boost.

That’s the good news. The bad news is the U.S. may be on the verge of becoming drawn into a Middle East war. Wars are like roach motels. It’s easy to get into, getting out and winning a stable peace is another matter.

The main risk for financial markets is that the effects of the war become highly prolonged and begin to affect inflation by boosting commodity prices. Consider how the Fed and the global economy reacted when Russia invaded Ukraine in February 2022. While history doesn’t repeat itself but rhymes, the market reaction gives investors clues to the risks of a major war with Iran.

As the accompanying chart shows, oil prices rose sharply as Europe experienced a sudden catastrophic shortage of natural gas. The prolonged nature of the conflict boosted the relative performance of energy stocks (top panel, dotted red line). Food prices, as proxied by agricultural commodities, also rose. As a reminder, the increase in food inflation was a key issue in the last U.S. election. The Fed had started to raise rates and move off ZIRP when the invasion began. The 2-year Treasury yield, which is a proxy for the terminal Fed Funds rate, increased steadily.

Today, the markets reacted when oil prices rose, but agricultural commodity prices remain tame. One key difference between 2022 and today is the weakness in global cyclical indicators such as the copper/gold and base metal/gold ratios. Global central banks are easing today compared to the tightening bias of 2022.

If the war were to be prolonged, or if Iran undergoes a chaotic regime change, what happens to commodity prices? Rising oil and food prices will eventually feed into inflation and inflation expectations. The Fed and other central banks would be faced with the problem of stagflation: weak growth and rising inflation.

In conclusion, the Fed is on hold and waiting the data to guide its monetary policy. Preliminary data shows that the economy is slowing, but not in an alarming recessionary fashion. Early indications from apparel CPI point to modest tariff pass-through effects on inflation, which is positive news. The key risk is that a prolonged Middle East conflict could boost commodity prices and raise the odds of a stagflation scenario of weak growth and rising inflation. From that perspective, investors should assign a high level of uncertainty to the market expectations of two quarter-point rate cuts in 2025.

The Three Most Important Words in Investing

Posted by Cam Hui - June 18, 2025

Mid-week market update: As expected, the Fed stayed on hold today and took a wait-and-see attitude on the timing of rate cuts. While economic data has softened recently, as evidenced by the decline in the U.S. Economic Surprise Index, the Fed is still waiting for clarity on the effects of tariffs on inflation to make monetary policy decision. Even the dot plot represents nothing more than guesses that are subject to change.

In other words, the Fed has uttered the three most important words in investing: “I don’t know.”

Indeed, investors are facing uncertainty and binary event risk relating to the trade war, monetary policy, and the Israeli-Iran conflict. How can mere mortals like us pretend to forecast the future?

In circumstances like these, it’s better to say, “I don’t know.”

Technical Confusion

From a technical perspective, the picture is confusing.

In the short-term, Seth Golden pointed out that SPY has a very high level of call options outstanding that expires Friday at 600: “Implication is unwinding of long positions associated w/those calls represents risk to bulls if SPY below 600 into Friday expiry.” On the other hand, a price above 600 will force market makers to delta hedge and buy the index. SPY closed today at 597.25. Short-term direction is on a knife edge.

Market cap leadership isn’t providing any definitive clues on direction. NASDAQ 100 stocks are still the leadership, but momentum is waning. While the relative of mid- and small-caps are starting to bottom and turn up, evidence of transition isn’t definitive.

The relative performance of defensive sectors look like they are trying to bottom, which has bearish implications for stock prices. In the absence of upward breaks in the relative returns of these sectors, it’s too early to become overly cautious.

Small trader sentiment looks frothy. Goldman’s Social Media Index levels are in the stratosphere.

The S&P 500 is rising against a backdrop of a negative 5-day RSI divergence, which is a bearish warning. On the other hand, the VIX Index is near the upper band of its Bollinger Band, which is a signal of high anxiety consistent with elevated geopolitical risk that contrarian analysis would call a buy signal.

Wars Are Roach Motels

In the meantime, the market is beset by event risk. Israel and Iran are trading bombs and missiles. Mohamed El-Erian recently outlined the issues facing investors in a way that’s beyond the headlines of the latest salvos:

Slower Global Growth as mounting geopolitical uncertainty dampens business investment and consumer confidence.
Inflationary Pressures in the context of uncertainty about shipping lanes and, more broadly, global supply chain vulnerabilities.
Reduced Policy Flexibility for some countries, including the UK, as central banks face harder choices between fighting inflation and supporting growth, and fiscal space tightens.
Further Gradual Erosion of the Global Order, including America’s role at the core of the trade and payments systems.

From a geopolitical perspective, wars are like roach motels. They are easy to get into, but hard to get out of. While a country’s leadership may make the military calculation that it can win the war, but winning the peace may be another matter. (As an example, the U.S. lost the Vietnam war but eventually won the peace, as the U.S. is one of Vietnam’s best friends on the geopolitical stage.)

In the short run, much depends on Trump’s decision on whether to enter the war on the side of Israel, which would spike the geopolitical risk premium in global financial markets. The Economist recently outlined Trump’s aversion to war, and his aversion to forcing regime change, in particular:

There are two pillars to Mr Trump’s dislike of regime change, suggests Elliott Abrams, a veteran of several Republican administrations who served as special envoy to Venezuela and Iran during the first Trump presidency. First, Mr Trump is responding to policy failures in Afghanistan and Iraq. Second, Mr Abrams believes that Mr Trump is influenced by Henry Kissinger and other cold war practitioners of realpolitik. According to that school of statecraft: “all of these countries, Iran, Russia, China, North Korea, are black boxes and they have a person at the top, and you must negotiate with that person.” Mr Abrams calls this a “club of leaders” view, which attaches little significance to ordinary citizens’ wishes. In this worldview: “We deal with people who’ve risen to the top of the greasy pole no matter how they got there: by winning elections, by murdering people. It doesn’t matter.”

A NY Times article describe how he had a change of heart in supporting Israeli attacks on Iran based on an argument from the Israelis: “If you want diplomacy to succeed you have to prepare for a strike, so there is real force behind the negotiations.”

U.S. participation in Israeli attacks would split the Republican Party. The BBC reported that MAGA “America First” Republicans, like Tucker Carlson, Marjorie Taylor Greene, and Steve Bannon openly criticized any decision to get involved in a Mideast war. That said, there was broad support for supplying weapons to Israeli: “The survey by Gray House found that 79% of respondents would back the US providing offensive weapons for Israel to strike Iranian military targets. Some 89% were concerned about Iran obtaining atomic bombs.”

On the other hand, there is broad opposition on direct American military involvement.

What Trump decides will affect the short-term outlook. A Reuters report revealed while Trump called for Iran’s unconditional surrender, his honest desire is for “a ‘real end’ to the nuclear dispute with Iran and indicated he may send senior American officials to meet with the Islamic Republic”.

Trade War Risks

In case you forgot, the trade war is still lurking in the background. My monitor of the trade war factor shows tariff anxiety rising again.

Fed Uncertainty

Turning to Fed policy, the updated dot plot shows higher dots in 2025. Nick Timiraos of the WSJ asked Powell the rationale behind the divergence within the committee. Powell, in a fairly lengthy answer, revealed that the divergence within the committee is attributable to difference in forecasts rather than differences in the perception of reaction functions: “No one holds these views with high conviction.”

In other words, everyone is guessing. No one knows anything.

In conclusion, the market is facing a high degree of uncertainty. While technical analysis can be helpful, they cannot forecast event risk that can have binary outcomes. While I am inclined to lean slightly bearish based on the belief that the S&P 500 is near the top of its trading range, my view isn’t held with high conviction. Under such circumstances, it would be prudent for traders to step aside and say, “I don’t know”.

How to Capitalize on Narrative Volatility

Posted by Cam Hui - June 15, 2025

Preface: Explaining our market timing models

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: Neutral (Last changed from “bearish” on 16-May-2025)
Trading model: Neutral (Last changed from “bullish” on 14-Apr-2025)

Subscribers can access the latest signal in real time here.

Waiting for the Next Shoe to Drop

Michael Kantro at Piper Sandler recently highlighted the unusual elevated levels of narrative volatility in AAII sentiment. As a consequence, the volatility has created “a lot of false-start leadership moments for rate-sensitives and small caps”.

Kantro’s observation is consistent with our own analysis of an elevated VIX Index during the trade war phase of Trump 1.0. Here are several set-ups of sources of volatility or upcoming reversals in the near term that could rattle traders. The suggested trades are the combination of identifiable underlying trends and technical breaks as signals for short-term profit.

In other words, when does the next shoe drop and how can traders capitalize on the break?

An Iranian TACO?

The headline of the week is the Israeli attack on Iran. Undoubtedly, there will be more strikes and counter-strikes in the days ahead. Energy and gold prices have already spiked and altered the global economic outlook in different ways. A BBC article succinctly summarized the worst-case scenarios of this conflict:

America gets dragged in
Gulf nations get dragged in
Israel fails to destroy Iran’s nuclear capability
There’s a global economic shock
Iran’s regime falls, leaving a vacuum

While the attacks were conducted without U.S. participation, they could have been done without American acquiesce. It is known that Trump doesn’t like war and would prefer to conduct business deals instead. Even his social media threats offer the exit ramp of an agreement. How long before the TACO (Trump Always Chickens Out) trade manifests itself and he orchestrates a truce or peace deal?

Here is how I would position myself. Energy stocks have been depressed and become a value play. Geopolitical tensions have provided a bullish catalyst to the sector and the conflict is likely to be extended, which will put a bid on energy prices for several months. The sector has staged an upside breakout through resistance and relative strength is improving.

By contrast, gold stocks appear extended and due for a pause as short-term geopolitical tail-risk fades. While the timing of the TACO trade is fraught with risk and I am a long-term bull on gold, market internals are signaling a frothy group ready for a breather. The new highs in the GDXJ to GDX ratio, which measures the performance of junior to senior golds, already looks frothy. Relative breadth indicators (bottom pane) are already rolling over.

Traders should watch for signs of overbought conditions, such as a 14-day RSI reading of over 70, or the gold miner to gold ratio above its upper Bollinger Band to either lighten positions or go short.

From Growth to Value

Another possible source of narrative volatility could be a rotation from growth to value stocks. Growth stocks have outperformed value stocks since the “Liberation Day” panic bottom, but that seems to be mainly restricted to the U.S. Outside the U.S., value and growth have been choppy but flat during the same period. Catalysts like the Israeli attack could spark a leadership rotation from growth to value.

Even before the attack, investors already saw incipient weakness in the price momentum factor, which is mostly dominated by growth stocks.

The Sell America Equity Trade

I am also reiterating my Sell America trade of avoiding U.S. equities in favour of non-U.S. markets. The Sell America equity trade has been successful since Moody’s downgraded U.S. debt in bonds, when non-U.S. sovereigns have outperformed duration-equivalent Treasuries in USD, and in USD weakness. The relative performance of the S&P 500 against MSCI EAFE has been flat over the same period. I expect non-U.S. equities to exhibit superior performance in the future, especially if U.S. growth stocks weaken against value stocks, as much of S&P 500 leadership was provided by large-cap growth names.

The weakness in the USD Index is especially disconcerting for two reasons. First, it has decoupled from the 10-year Treasury yield. As well, it usually rallies during periods of global stress, but it was only roughly flat from the time news of U.S. Mideast evacuations hit the tape. These are all signs of a loss of confidence in the greenback.

The thesis for the Sell America equity trade is also supported by the behaviour of the trade war factor, which is trading flat but exhibited minor strength in the wake of the London handshake agreement between U.S. and Chinese negotiators. This is a signal of rising trade tensions, which is likely to be more bearish on U.S. stocks than non-U.S. stocks. Trump’s efforts to isolate China has failed. Instead, his trade war with the entire world has isolated America on trade instead.

Cautious on S&P 500

Finally, I would be cautious on the S&P 500 and a reversal of its recent bullish trend could be another source of narrative volatility. The S&P 500 advance was accompanied by a negative RSI divergence and a failure by the equal-weighed S&P 500 to stage an upside breakout.

In addition, a spike in the 5-day correlation of the S&P 500 and VVIX, or the volatility of the VIX Index, has been a warning of a bearish reversal.

As well, keep an eye on small cap stocks for bearish confirmation. The Russell 200 staged an upside breakout from an inverse head and shoulders pattern with bullish implications last week but it retreated below the neckline. Continuing weakness would be an indication that the bears have taken control of the tape. There is nothing worse than a failed breakout.

In conclusion, the current market environment is characterized by high market volatility, which has manifested itself as narrative volatility. I offer four ways to capitalize on the short-term volatility for traders. The suggested trades are the combination of identifiable underlying trends and a technical breaks as signals for short-term profit.

Iranian TACO: Long energy, cautious on gold.
Rotate from growth to value.
Sell America: Rotate from U.S. to non-U.S. equity exposure.
Cautious on S&P 500

Disclosure: Long GDX

A Preview of the Trump Fed

Posted by Cam Hui - June 14, 2025

In the wake of the tame May CPI report, the Trump Administration publicly pressured the Fed to cut rates on social media. CNBC reported that Trump called Powell a “numbskull” and he “may have to force something” if Powell doesn’t act.

No serious economist takes Trump’s desire to cut rates by 1% seriously. However, as Jerome Powell’s term as Fed Chair nears its end, it is useful to consider how a Trump-dominated Federal Reserve might affect future policy in the future.

The Fed’s Dilemma

The Fed’s policy dilemma can be summarized by the accompanying chart. In the past, recessions have followed whenever the annual change in nonfarm payroll employment has fallen below 1.2% (blue line). On the other hand, the term premium on a 10-year Treasury (red line) has been slowly rising, which reflects growing bond market unease. The rising term premium can be attributed to a combination of rising inflation expectations and falling confidence in the U.S. fiscal picture.

A weakening employment picture focuses the Fed’s attention on its full employment mandate and argues for monetary easing. On the other hand, rising term premium focuses attention on the Fed’s price stability mandate, as well as the problem of fiscal dominance, or the uncomfortable situation where a government’s high debt starts to dictate monetary policy.

Signs of Weak Employment

Turning to the Fed’s full employment mandate, the latest NFIB monthly survey summarizes the situation. The NFIB survey is valuable because small businesses have little bargaining power and therefore they are sensitive barometers of the economy. First, the NFIB survey sample leans small-c conservative and Republican, and its responses need to be viewed in that context. Here are the main takeaways:

Opinion-based soft optimism rebounded, but hard data optimism did not.
Uncertainty remains elevated: “It’s hard to steer a ship in the fog”.
The job market is soft: “Labor market is softening, including compensation pressures”.

George Pearkes at Bespoke took a closer look at the NFIB survey and found a trend of labour market weakness, while capital expenditure indicators moved sideways.

The latest release of continuing jobless claims rose to another cycle high. On the other hand, initial claims rose, but levels are not excessively alarming. The combination of anecdotal evidence of management caution of expansion paints a picture of growing weakness in hiring, but not layoffs.

Signs of Tame Inflation

Turning to the Fed’s price stability mandate, the market received welcome news when both the May CPI and PPI came in below expectations.

The May data was the first full month showing the full effects of the new tariffs. However, inventory front running ahead of the tariff announcement and discounting efforts intended to boost cash flows may have mitigated some of the initial boost to inflation.

More ominously for equity investors, the CPI-PPI gap continued to fall, which is a sign of margin compression.

Even though CPI was tame, different surveys revealed the extent of tariff pass-through to end-users. A New York Fed survey found that roughly three-quarters of firms passed through tariff increases to some degree.

The RSM U.S. Middle Market Business Index, which measures the business confidence of middle market firms, fell sharply in Q2, though readings remain in expansion territory. This survey is important because “unlike large multinational businesses, small and medium-sized enterprises simply do not have the financial depth to absorb the increase in costs”. Middle market firms are therefore more sensitive barometer of o economic and financial stress. As a reminder, tariff price pressures didn’t rise sharply under four months after the tariffs were implemented under Trump 1.0.

Despite the history of delayed inflationary pressures, the RSM survey found that “smaller firms, as a result, are passing along their higher costs downstream, as reflected in the 57% of executives who said they had raised prices in the current quarter and the 63% who intend to do so over the next six months.”
In summary, middle market firms are struggling with the Trump tariffs, as “executives reported declines across a range of categories, with 20% reporting lower capital expenditures, 24% citing reduced gross revenues and 26% reporting lower net earnings”.

The inflation bears and bond market bulls shouldn’t celebrate just yet. The Cleveland Fed’s trimmed-mean CPI, which excludes outlying components, (blue line) edged up in May, and the Atlanta Fed’s sticky price core CPI (red line) has been falling very slowly.

An Atlanta Fed post in the wake of the soft inflation figures threw cold water on the notion of any urgency to cut rates, though it cannot be interpreted as a statement of official Fed policy. This argues for a continued go-slow and wait-and-see approach to monetary policy.

The market will be watching closely to see how the Fed’s staff forecast has changed in the wake of the upcoming FOMC meeting, as well as the evolution of the dot-plots.

Trade War Wildcard

The greatest unknown that the Fed is struggling with is the effects of Trump’s trade war.

The latest handshake deal reached in London between U.S. and China negotiators leaves the U.S. tariffs on imports on China at 55%, which is a historically high level. Surveys from the New York Fed and RSM have already outlined how businesses are being damaged by these high tariff levels. While the reduction of export controls will create a climate of détente, the economic damage is done.

If the intent of the trade war was to isolate China, he did not succeed. While China’s exports to the U.S. fell, exports to other countries were largely unchanged.

By launching trade wars with all countries, Trump may have succeeded in isolating the U.S. on trade instead of isolating China.

Investors will have to weigh President Trump’s next move. My trade war factor has traded sideways in the last month and actually rose in reaction to the London accord, indicating renewed trade tensions.

The Fed will have to struggle with the prospect of stagflation as the already high tariff rates put upward pressure on prices while reducing growth potential. Further escalation in the trade war will exacerbate stagflation effects.

The Future of Fed Policy

In summary, the Fed is in wait-and-see mode to observe how the price effects of tariffs flow through to inflation and inflation expectations before cutting rates. Global monetary policy is already stimulative. All else being equal, the Fed is behind other central banks in its easing path. The key question for investors is how quickly the Fed will cut rates in 2025 and 2026.

The market is discounting two quarter-point rate cuts in 2025 and a more aggressive rate cut path compared to other central banks in 2026. I find it difficult to square the circle between rate cut expectations and the realities of trade war. The U.S. is a large importer and trade deficit country while most other countries are net exporters and trade surplus countries. If tariffs are inflationary for the U.S., they will conversely be disinflationary for the exporters. How can the Fed cut so aggressively in 2026?

The only answer is Trump’s choice of Fed Chair to replace Jerome Powell, whose term ends in May 2026. The market is discounting the appointment of an uber-dove to the Chairmanship. Such an outcome would erode Fed credibility and put downward pressure on the USD.

My monitor of the Sell America trade shows that while foreign stocks have been roughly flat against the S&P 500 since Moody’s downgraded U.S. debt, foreign sovereign bonds (in USD) have beaten Treasuries and the USD has fallen. Most notably, the USD weakened in response to the news that the U.S. was evacuating U.S. military dependents and selected diplomatic personnel in the Middle East, North Africa and parts of Europe in response to heightened tensions with Iran. Moreover, the USD Index barely budged after news of the Israeli attack on Iran hit the tape. The USD decline is surprising as it functioned as a haven asset during past periods of rising geopolitical risk, which reflects reduced confidence in the greenback.

In conclusion, the Fed remains on hold and in wait-and-see mode as it assesses the inflationary tariffs against the backdrop of a weakening labour market. The market is discounting two quarter-point rate cuts in 2025 and a rapid pace of cuts in 2026. Future Fed policy will depend on how the market perceives the new Fed Chair’s affects the Fed’s inflation fighting credibility.

I want to believe

Posted by Cam Hui - June 11, 2025

Mid-week market update: One of the running themes of the TV show, the X-Files, is a poster on the wall of FBI agent Mulder with the caption “I want to believe”.

As the S&P 500 breaks out at the 6000 resistance level and Street strategists scramble to their index targets, I also want to believe in that stocks can go higher, but I have my doubts.

The Bull Case

Here is the bull case.

An analysis from Deutsche Bank shows that institutions sold into the “Liberation Day” panic. While equity weights have recovered, they are still lightly positioned in equities.

As well, a MarketWatch article revealed that Datatrek analysis shows that institutions are piling back into equities. This leaves the potential for more momentum-driven buying.

The S&P 500 and the NYSE Advance-Decline Lines are staged upside breakouts to all-time highs, which is bullish. However, the lagging nature of the mid-cap S&P 400 and S&P 600 A-D Lines does serve as a warning that not breadth indicators are participating in the rally.

The macro backdrop has also improved. The U.S.-China handshake deal announced will relieve some of the rare earth supply chain pressures on semiconductors. The Semiconductor Index has staged an upside breakout on an absolute basis. More importantly, it has staged a relative breakout against the S&P 500, and against utilities, which is a bullish risk appetite signal.

Both the Russell 2000 and S&P 600 also staged upside breakouts, which are positive signs of small cap strength.

The pain trade increasingly looks like a rising equity market, based on the combination of light institutional positioning, recovering risk appetite, and positive macro news.

Nagging Doubts

Nevertheless, I have nagging doubts.

While positive equity flows from institutions is a bullish sign, short-term institutional investment time frames is measured in quarters, not hours and days. As a consequence, they need to depend on valuation to guide their asset allocation. The latest analysis from Pimco shows the equity risk premium at zero, which is extremely low by historical standards. Based on that analysis, U.S. equities will experience significant subpar returns, which will limit their flow.

Michael Howell of Crossborder Capital, who keeps an eye on global liquidity, observed in his newsletter a positive liquidity backdrop in the short-term, but potential struggle in Q3.

Global liquidity edged higher last week to US$176.6tr, according to measures derived from the weekly balance sheets of the major Central Banks and collateral values. Still, the slowdown in global liquidity growth continues. Central Banks – particularly the Fed – need to step up to avoid a liquidity shortfall in Q3 when the debt refinancing season comes around. If the current slowing trend continues through June, risk assets and liquidity-sensitive cryptocurrencies will struggle in Q3.

From a technical perspective, the S&P 500 upside breakout leaves nagging doubts. Even as the S&P 500 breached the 6000 level, why is the equal-weighted S&P 500 struggling below resistance? Why is the 14-day RSI flashing a negative divergence signal? Why are gold miners, which is regarded as a safe haven asset, performing so well? The bottom panel shows that gold miners have performed roughly in-line with the S&P 500 during the rally off the April bottom.

U.S. Trade Overview

The Isolation Strategy Failed

Investment Implications

FOMO stampede continues

Bond Market Risk

The Trump Collar

Bullish Tripwires

The “Liberation Day” Panic

A “Less Bad” Economy

A Buying Stampede

Waiting for Tariff Godot

The Trend Is Your Friend

The Trend Isn’t Over

Time for Diversification?

What’s Next?

Momentum Support

The Return of Irrational Exuberance

A Sustainable Advance

All Systems Go

Neutral Positioning

Time for a Breather?

Reasons for Caution

Strong Momentum

The P/E Outlook

Interpreting the Buy Signal

A Risk-on Stampede

More Room to Rally

A Speculative Breakout

Animal Spirits Take Control

A Trend Model Upgrade

Key Risks

The Iranian Nuclear Program

The Israeli and U.S. Perspective

Investment Implications

Return of the Animal Spirits

Key Risks

The Minority Report

The Zweig Breadth Thrust

A Liquidity Tailwind

Fading Recession Fears

Semiconductor Leadership

Positive Seasonality

Bullish Triggers

Hints from Hard Data

The Stagflation Question

Technical Confusion

Wars Are Roach Motels

Trade War Risks

Fed Uncertainty

Waiting for the Next Shoe to Drop

An Iranian TACO?

From Growth to Value

The Sell America Equity Trade

Cautious on S&P 500

The Fed’s Dilemma

Signs of Weak Employment

Signs of Tame Inflation

Trade War Wildcard

The Future of Fed Policy

The Bull Case

Nagging Doubts

Do You Want to Believe?

Weak Breadth and Narrow Leadership

Growing Valuation Risk

Challenging Trade Negotiations

A Softer Jobs Market

Signs of Froth

Reasons to Should Sell America

Better Non-U.S. Equity Bargains

U.S. Technology Leadership

A Rising Tide Lifts All Boats

A valuation roof

Narrow leadership