Exhausted bears, tiring bulls

January 21, 2024 at 13:22 PM EST

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 “neutral” on 28-Jul-2023)*
Trading model: Neutral (Last changed from “bullish” on 02-Jan-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.

Bearish capitulationLast week, I suggested that the current market environment “argues for a buy the dip and sell the rip posture in trading”. When the S&P 500 fell a miniscule -1.8% on an peak-to-trough intraday basis, my models were registering signs of bearish exhaustion, which was a sign to buy the dip.
How could a -1.8% intraday drawdown spark such oversold extremes? One inter-market clue came from Asia, where Chinese and Hong Kong stocks cratered on bad news out of China. The Hang Seng Index skidded -4.1% on Wednesday to a new 52-week low, and there wasn’t a single advancing issue.

Jason Goepfert of SentimenTrader found that such episodes tended to resolve bullishly. It was therefore no surprise that the Hong Kong market rebounded the next day, and so did the S&P 500.

The full post can be found here.

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