Tactical Rules Give A Flashing Green Light

SUMMARY

• The Fed is neutral, balancing labor and inflation concerns.
• The US Trend remains positive but lacking short-term momentum.
• The Crowd is pessimistic, giving a buy signal.

Since the last update of our ‘Three Tactical Rules’ on March 3^rd little changed despite volatility from Iran War escalation fears and inflation concerns. The S&P 500 traded as low as 6343 before rebounding above 6800, driven by a temporary ceasefire.

The Three Rules remain a ‘flashing green light,’ reflecting a constructive backdrop: the Fed is on hold, the trend is positive though slower, and crowd sentiment has swung to extreme pessimism. While the overall signal held steady, the underlying component ratings shifted meaningfully over the past six weeks.

'Don't Fight the Fed': Inflation May Warrant Pivot - FLASHING YELLOW

Fed funds futures markets suggest investors expect rates to be on hold into 2027, as Iran war aftershocks could raise stagflation fears. Despite the Fed's easing bias — reinforced by the upcoming transition from Powell to Warsh — geopolitical forces may prove more consequential. Core PCE remains elevated at 3.0% and unemployment low at 4.3%, leaving little room to focus on labor market downside. In our view, the Fed's attention should instead be on upside inflation risks, particularly the second and third order effects of high oil and gas prices.

The Fed's March 18th meeting minutes revealed officials pushing for more balanced language on rates, explicitly leaving room for hikes if inflation stays above their 2% target. Unlike our prior view, we no longer see the Fed squarely on the investor’s side — the war has changed that calculus. Fed funds futures have begun pricing a small probability of rate increases, and we have downgraded our Fed rating to a 'flashing yellow light' from a 'green light.'

Internationally, the Bank of England (BOE) and the European Central Banks (ECB) have held rates steady this year after cutting throughout 2025. Energy import dependence is weighing on both economies, and overnight index swap markets now price in multiple hikes for each through year-end — a sharp reversal from our last update, when markets expected BOE cuts mid-year and ECB rates to stay on hold. This shift aligns both central banks with the Bank of Japan (BOJ), which has already been hiking amid rising inflation from wages and energy costs. Globally, we now view central banks as neutral rather than on the investor’s side.

‘Don’t Fight the Trend’: Positive US Trend Lacking Short-Term Momentum - FLASHING GREEN

The S&P 500's primary trend, defined as the 200-day moving average, is rising at an annualized 12% rate, down sharply from 31% at our last update. While this pace is more sustainable, we believe that short-term momentum appears to have stalled, as the index has recently been rangebound.

Historically, the S&P 500 has risen over any given three-month period roughly two-thirds of the time. However, when the trend's annualized rate is positive but below 15% and short-term momentum is negative, those odds deteriorate. We currently view short-term momentum as flat, reflecting the trend's slowing pace. However, we have left the Trend at a ‘flashing green light’ as momentum has not turned negative.

International Trend: Will Remain Positive for at Least 7 Months - GREEN LIGHT

Internationally, the MSCI All Country World ex US (ACWX) trend has stabilized over the past six weeks, with the primary trend rising at an 18% annualized rate, down from 42% at our last update. Despite underperforming the US since the war broke out in late February, international equities have maintained a 7.50% year-to-date edge over domestic equities.

To illustrate the trend's strength, ACWX could remain at its current level for nearly eight months before turning negative, in our view — a positive sign, as our tactical work shows a positive trend increases the odds of a positive return over the next three to six months. We are therefore upgrading the international trend to a 'green light' from a 'flashing red light,' as the prior unsustainable pace has corrected to a more desirable level.

Beware of the Crowd at Extremes: Poll Extremes Gives Buy Signal - GREEN LIGHT

Crowd Sentiment serves as the 'contrary' indicator within the Three Tactical Rules. The chart below reflects investor sentiment as measured by Ned Davis Research (NDR), where elevated readings signal excessive optimism and depressed readings signal extreme pessimism. Historically, NDR research suggests extreme pessimism has created attractive entry points for tactical investors. While NDR is our preferred data source for measuring investor psychology, we apply our own analytical framework to draw conclusions.

Daily and Weekly NDR Sentiment Polls are currently giving slightly different signals. Daily sentiment remains near the bottom of the extreme pessimism zone, while weekly sentiment has barely crossed back into neutral. Both represent an improvement since our last update. Historically, we have weighted the Weekly more heavily in this publication, as it provides longer-term perspective, while the Daily better captures investors' real-time views.

The war is clearly weighing on the Crowd, with higher oil and gas prices stoking inflation fears. However, as a contrarian indicator, this pervasive pessimism is a buy signal for equities. Current sentiment levels have made us more comfortable holding equities and seeking new opportunities. Thus, we are upgrading our rating for the Crowd to a ‘green light’ from a ‘yellow light’ in our previous update.

Conclusion: Rules Suggest Opportunistically Buying of Equities… - FLASHING GREEN

Viewed through three distinct lenses — a Fed on hold, a positive but slower trend, and pessimistic crowd sentiment — our Tactical Rules collectively signal a ‘flashing green light.’ While the rating is the same as our last update, the bias remains toward opportunistically buying equities. Given the fluidity of economic data, earnings guidance, and investor mood, the Three Rules will likely shift further in the weeks ahead. Over the next three to six months, we believe market conditions will continue to favor domestic and international equities over bonds, with yields remaining rangebound.

Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.