Waiting for the gaps to fill

Mid-week market update: I know that I expected market volatility, but I didn't expect the immediate source of volatility to be anxiety over DeepSeek. I should have known better when my physiotherapist, who didn't know I worked in finance, started to talk about NVIDIA this week.

You can tell a lot about the character of a market by how it responds to sudden price gaps. The DeepSeek sell-off left a gap in NVDIA's stock price. Now that the dust is starting to settle out over the news, the strength of the AI and semiconductor investment themes will depend on whether the gap gets filled.

 

The full post can be found here.

Tips on navigating the post-inauguration rally

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

 

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 
 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Neutral (Last changed from “bullish” on 15-Nov-2024)*
• Trading model: Neutral (Last changed from “bullish” on 17-Jan-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.

Time for a pause?

January is almost over, and the S&P 500 staged an upside breakout to an all-time high last week, which Jeffrey Hirsch found is consistent with market seasonality. If the seasonal patterns found by Almanac Trader were to continue, stock prices are likely to be flat to down in February.

The full post can be found here.

Two key risks to the bull that no one is talking about

The S&P 500 has been in a steady uptrend for over two years and it just staged an upside breakout to an all-time high. It may seem counterintuitive to be discussing the risks of a major market top, but I am seeing some early warnings that few analysts are paying attention to.

 The full post can be found here.

The Trump Put lives!

Mid-week market update: Trump promised a flurry of executive orders to implement his campaign promises on the first day he took office. Amidst the flurry, the market breathed a sigh of relief as there were no major risk-off catalysts. The market is apolitical and it doesn't care about the reversal of DEI policies, or whether a mountain in Alaska is named Denali or McKinley. Although there were threats of 25% tariffs on Canada and Mexico, and a 10% tariff on China, both to be put in place on February 1st, there were no instant tariffs that would have rattled markets.

Trump showed during his first term that he cared about the stock market. As he begins his second term, the Trump Put seems to be alive again.

As a consequence, the S&P 500 is testing its all-time high at about 6100. Even though readings are overbought, this could be a "good overbought" advance that takes the market to new highs, with upside potential at the dotted resistance line measuring at about 6300 by the end of January. On the other hand, it's disconcerting to see a breadth indicator such as the percentage above the 20 dma (bottom panel) fall on a day the market is testing its all-time high.

Here are the bull and bear cases.

 

The full post can be found here.

What a changing of the guard means for stocks

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 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 19-Dec-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 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 bond market reversal

Last week, we highlighted the risk-off tone caused by the bond market tantrum that was under way. As the week progress, softer-than-expected PPI and CPI reports calmed the bond market vigilantes and yields retreated.

 
The reversal occurred just in time for the changing of the guard at the White House.

The full post can be found here.

Trump 2025 market = Reagan 1981?

There are many remarkable similarities between the 1980–1981 stock market pattern and today. Ronald Reagan was elected in November 1980 amidst a wave of partisan enthusiasm and ushered in a revolution, much like Trump. Reagan entered office with a foreign policy win, which was the release of the American hostages held by Iran. Trump enters office ahead of the Israel-Hamas ceasefire that will see the release of hostages.
 
The S&P 500 topped out for the market cycle in late November just after Reagan won the election, though the Dow, which was the more widely quoted market index of the day, made a second high in April 1981. The NYSE Advance-Decline Line topped out in September 1980 and telegraphed the market’s technical deterioration.

 

There are many eerie similarities. Today’s stock market is struggling to regain its highs after a rally after Trump’s electoral win. The Advance-Decline Lines are also weak and technical analysts have expressed concerns about negative breadth divergences. The key difference is the Volcker Fed raised interest rates to punishingly high levels during Reagan’s era, while today’s Fed is pursuing a policy of monetary easing. The 2-year Treasury rate, which is a proxy for Fed Funds expectations, rose steadily and didn’t top out until August 1981.

The full post can be found here.

What an actual bond market catastrophe looks like

Mid-week market update: Is the bond market tantrum over?

Here is the good news. In the wake of tame PPI and CPI reports this week, the 30-year Treasury yield retreated while in a resistance zone (top panel). In addition, there is nothing worse than a failed breakout. The second panel shows the inflation factor trade, consisting of long TIPS and short long-dated zero coupon Treasuries, which staged an upside breakout and reversed itself.

 

The worse of the yield spike fears may have passed. But that was nothing. As a lesson. Here is an actual case of what a potential bond market catastrophe from uncontrolled debt growth looks like.

The full post can be found here.

A focus on financials

The Q4 earnings reporting season kicks off Wednesday with reports from major banks and financial companies. This is a good opportunity to review the outlook for the financial sector.

 

The full post can be found here.

What's rattling the stock market?

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 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 19-Dec-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 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.

Is the honeymoon over?

What’s rattling the stock market? The S&P 500 has been mired in a trading range that began in early November. It sold off in mid-December and flashed an extremely oversold reading on December 20. Subsequent rally attempts have failed and the index is testing its December lows. A definitive breakdown opens the door to a decline to the 200 dma at 5573.

 

Four weeks ago, I published an article entitled “The Public Embraces the Trump Honeymoon”. Under ordinary circumstances, a relief rally should be well underway by now. Is the honeymoon over? How patient should investors be with the bull case?

The full post can be found here.

A preview of the Sino-American Trade War 2.0

China’s leadership was caught off-guard in 2016 because few people expected Trump to win the election. This time, Beijing has had plenty of warning, and it is far better prepared for Trade War 2.0.
 

The key difference is the divergence in the path of economic growth, as signaled by the bond market. Chinese 10-year yields have plunged below 2%, which is a sign of a dramatic slowdown. By contrast, U.S. 10-year Treasury yields have risen, which reflects concerns over a heightened fiscal deficit and rising inflation.

 
In the face of economic weakness, China seems to be preparing for Trade War 2.0 on a different dimension of belligerence. China has embraced von Clausewitz’s famous quote on war: “War is merely the continuation of politics by other means.”

Investors should prepare for greater newsflow volatility and rising geopolitical risk in the months ahead.

The full post can be found here.

A tale of two markets

Mid-week market update: When we last left the stock market on the weekend, the bulls were given a homework assignment (see A failed Santa rally, what now?).

1. The S&P 500 and Russell 2000 had to stage upside breakout through the falling dotted trend line. While the S&P 500 briefly broke out, it retreated yesterday through the trend line. The Russell 2000 never came close to a breakout.
2. The S&P 500 and Russell 2000 had to break out of their sideways range. Not yet.
3. Small caps should outperform, indicating broadening breadth and better participation in an advance. The bad news is the small cap Russell 2000 is lagging. The good news is the equal-weighted S&P 500 is holding up well on a relative basis, and small caps outperformed yesterday during the market decline.
   

Tuesday's equity pullback was attributable to the rise of the bond market vigilantes, who pushed bond yields up and rattled overall risk appetite. On the other hand, the stock market's own technical internals are supportive of an advance.

 

In other words, it's a tale of two markets.

 

The full post can be found here.

A failed Santa rally, now what?

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 15-Nov-2024)*
• Trading model: Bullish (Last changed from “neutral” on 19-Dec-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 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.

Santa has left for the year…

As I pointed out last week, the Santa Claus rally window is the last four days of the year and the first two days of the new year, and it’s one of the seasonally bullish periods of the year. History shows that a failed Santa rally often leads to subpar returns for the remainder of the year. The first day of the window was December 24 and the last day was January 3.

Santa has failed to call this year. The S&P 500 and the Dow closed above their respective Santa rally levels, though the Russell 2000 was marginally positive.

 
If adage about the Santa Claus rally is to be believed, the odds favour a subpar year in 2025 for the S&P 500: “If Santa should fail to call, the bears may come to Broad and Wall”. 

 

The full post can be found here.

Trump's messy governing challenges

The year started with a bang. Investor hopes were high on the expectation of the implementation of Trump’s pro-business and pro-growth policies, but stock prices struggled and ended last week in the red.

According to FactSet, the bottom-up aggregated S&P 500 target price for year-end 2025 is 6,678.18. But in the last 20 years, bottom-up analysts have historically overestimated the S&P 500 year-end price by 6.9%. Applying the 6.9% discount we would arrive at an adjusted target of 6,084.19, which represents a price gain of 5.7% for the year.

The FactSet adjusted estimate is roughly in line with my expectation of low single-digit gains. Along the way, however, I expect a higher degree of market volatility during the year as the Trump 2.0 Administration takes office and faces the challenges of governing.

The full post can be found here.

So much for December seasonality

Mid-week market update: I reiterate my belief that while seasonality is informative of climate, it is not a forecast of the weather ahead. 2024 was a difficult year based on seasonal patterns, as depicted by Jeffrey Hirsch of Almanac Trader.

 

Instead, the stock market was weak in the second half of December and small caps leadership did not emerge during that period. That said, the S&P 500 ended to year right at trend line support and the NASDAQ 100 ended the year at 50 dma support.

 

 

 The full post can be found here.