Bond vigilantes and trade tensions derail the momentum bull

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

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

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

Subscribers can access the latest signal in real time here.

A Wide Trading Range

I warned you. Last week, I warned that the stock market was undergoing a wide trading range because of policy uncertainty (see What the Trade Détente Means for Investors): “The news out of the meeting in Geneva underlines an important point about the latest market tantrum and recovery. It was all attributable to U.S. policy that depends on the whims of one man, whose opinions can be unpredictable.”

I also argued that it was time for the stock market to take a breather. Since then, the S&P 500 began to pull back. The catalysts came in the form of a credit downgrade to U.S. debt and a poor 20-year Treasury auction, followed by President Trump’s threat to put a 50% tariff on the EU and a 25% tariff on Apple products not assembled in the U.S.

 

Let’s start with the fallout from the debt downgrade and bond market tantrum. While the sample size is extremely small (n=2), the experience from past credit downgrades has shown sloppy S&P 500 returns on a short-term horizon and positive on a 6–12-month time horizon. At a minimum, stock prices need some time to digest their gains after the rebound off the April low.

 

The full post can be found here.

 

 

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