Happy Labor Day, I hope you enjoyed the long weekend. Now back to work to get five days of work done in four! Kicking off that effort, here’s my belated Monday blog, which will be a bit heavier on charts and technicals than usual – as we want to dive into the possibility of the model pivoting back towards a more “risk-on” stance.
As I’ve said many times recently, the model seems to be in very deep negative territory. We have been getting contrarian signals from certain indicators, but largely they have been corroborating the model.
We did get a bit of good news from the model today, which I will show you.
Let’s take a look at the AAII survey, which we have looked at many times in the past. Remember, it is a contrarian indicator.
You can see that the “bears” have outnumbered the “bulls” for the last month plus, with last week being a virtual tie.
Our good friends at Sentimentrader do some work to smooth out the weekly data to give us a better idea of the longer-term bull-bear ratio. You can see below that it is coming off the lows after April of 2025 (Tariff lows) and is now making a higher high.
Then they overlay the 20-week moving average with a move above 48 for the first time in 6 months (basically looking for an oversold reading getting normalized).
The 1 week to 1 month time period is not great, but beyond that the win rate gets to 80%+, with the 6-month reading at 100%. Here are their comments, which are worth reading.
Meanwhile, how does that translate to our model? Our model has been deeply negative (bearish or conservative, however you want to say it), but it’s possible we are starting to see the tide change.
So while it’s still negative, it has turned up a bit from the bottom. That could be a false indication and we see new lows, but the model doesn’t stay negative forever. To dig a bit deeper, here is another chart that shows a better view using the S&P 500.
We will need to see a breakout above the downtrend line in order for the model to potentially flip.
If we do see the model flip, you can expect us to go from “risk-off” equities to more “risk-on” equities. That means a change from things like utilities and staples to consumer discretionary and tech. Basically a switch from smoother stocks that are more consistent to stocks that are more economically sensitive. It would also likely signal a breakout of the markets to new highs and a continuation of small- and mid-cap stocks outperforming. I would expect international markets to continue outperforming US markets if that were to happen. Truth is that we expected both small/mid-cap stocks and international stocks to outperform in either an up or down market. That has pretty much played out that way this year.
As we move forward into September and October (historically weakest months of the year), it could line up nicely for the model switching to a “risk-on” position, a change from how it’s been positioned for the better part of this year. We will have to wait and see.
That’s it for this week, I hope you have a good week. If you have any questions or comments about this or any other topic. We will certainly be happy to have a conversation.