What if the Magnificent Seven are done?

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 “bullish” on 26-Jul-2024)*
• Trading model: Bearish (Last changed from “neutral” on 06-Sep-2024)*

* 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. 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 Hindenburg warning

What if the Magnificent Seven are done with their bull phase? As megacap growth stocks comprise roughly 40% of S&P 500 index weight, the math becomes increasingly challenging. The rest of the market will have to do the heavy lifting in order for the S&P 500 to advance.

The odds of that scenario becoming reality is rising. The market just flashed a Hindenburg Omen warning. In plain English, the ominously named Hindenburg Omen occurs when a highly bifurcated market loses momentum and starts to turn down. While one Hindenburg signal can be safely ignored, a cluster should make investors sit up and take notice. In the last 10 years, there have been 13 such clusters. Nine (pink bars) have resolved bearishly, while four (grey bars) were benign. As the accompanying chart shows, the market has flashed another cluster of Hindenburg Omen signals for five consecutive weeks.

 

 

The odds aren’t in the bulls’ favour, particularly when the bifurcation is evident between megcap growth, which comprise about 40% of S&P 500 weight, and the rest of the index. Even if the S&P 493 is strong, it’s difficult to make the math work if the Magnificent Seven significantly weakens.

The full post can be found here.