Three Rules Remain Neutral

The More Markets Change the More They Remain the Same


  • Fed rate cuts delayed as timing and magnitude are uncertain.
  • The Trend is positive globally but growing too fast domestically, in our view.
  • We believe the Crowd in the US is at an optimistic extreme and could remain elevated.

Since our last ‘Three Tactical Rules’ update on April 2, 2024, the US market has rallied due to strong Q1 earnings powered by AI driven technology and expectations that the Fed would begin cutting interest rates before year-end. The S&P 500 is currently sitting at an all-time high, as signs of inflation slowing give stock investors hope for a lower rate environment in the coming quarters. From a tactical perspective, our tactical rules of “Don’t Fight the Fed,” “Don’t Fight the Trend,” and “Beware of the Crowd at Extremes” collectively are a “yellow light”, unchanged from our last update. Over the last two months, the three rules’ ratings did not change domestically but strengthened marginally underneath the surface internationally. This was due to the European Central Bank (ECB) cutting interest rates and thus moving it from a “flashing green light” to a “a green light” using the “Don’t fight the Fed and Central Banks” construct.

Don’t Fight the Fed: Cutting Bias but Timing and Magnitude Uncertain - FLASHING GREEN

The Fed left the effective fed funds rate unchanged at 5.33% in its last meeting on June 12th, while taking a ‘trust but verify’ approach to the recent slowing of inflation. The central bank wants further evidence that inflation is indeed slowing towards its 2% target before beginning to lower interest rates like its European counterpart, the ECB. Currently, the Cleveland Fed’s NowCast inflation model is forecasting a slowdown in the Fed’s preferred inflation gauge, Core Personal Consumption Expenditures (PCE), rising 0.10% on a month-over-month basis in May before reaccelerating to 0.21% in June. If the forecast is correct, Core PCE will be 2.6% on a year-over -year basis at the end of June. We believe that the Fed’s ‘trust but verify’ approach is appropriate at this time because if Core PCE rises at June’s forecasted rate for the remainder of the year, Core PCE would end the year at 2.94%. Despite the Fed’s hesitance to lower rates, at least they are not raising rates and have a bias towards cutting rates over the next year as indicated by the Fed’s recent Summary of Economic Projections released at the June meeting.

The Summary of Economic Projections’ year-end median fed funds target is 5.125%, which would indicate just one rate cut for the year, down from the three rate cuts forecasted in March. The strong economic backdrop has caused the Fed to temper the pace of rate cuts, as the Atlanta Fed is forecasting GDP growth of 3.00% in Q2 2024. Hence, the Fed has adjusted the timing and magnitude of its expected rate cuts in 2024, while forecasting four rate cuts in 2025 with the median fed funds target of 4.125%. The Fed’s forecast is now more in alignment with our investment thesis of one rate cut in 2024, if any at all.

Given the current economic backdrop, and the Fed’s bias towards cutting interest rates, we believe that the Fed is on the side of the investor. Regardless of the magnitude or timing, the bottom line is the Fed is not raising rates and is looking for the moment to cut…thus our tactical rule of “Don’t Fight the Fed” is still a ”flashing green light.”

Internationally, the ECB has taken the lead by cutting its Main Refinancing Operations rate by 0.25% on June 6th to 4.25%. Further interest rate cuts by the ECB will be data dependent, but for now it has firmly put the central bank on the side of the investor and thus has moved its rating to a “green light.” While expectations are for the Bank of England (BoE) to also cut rates soon, the central bank held rates steady at its recent meeting despite headline inflation hitting its 2% target, thus causing us to keep its “flashing green light” rating. However, given that the ECB controlled countries makes up a larger percentage of international investing and the Swiss National Bank (SNB) has cut rates twice this year, we would conclude international central banks are collectively a “green light.”

Don't Fight the Trend: Positive Trend is Once Again Rising Too Fast (Domestically) - YELLOW LIGHT

Source: Bloomberg, RiverFront. Data daily as of June 21, 2024. Chart shown for illustrative purposes. Not indicative of RiverFront portfolio performance. Index definitions are available in the disclosures.

The trend on the S&P 500, which we define as the 200-day moving average, has decelerated since our last update on April 2nd from what we saw as an unsustainable level at the time. The slowing of the trend has helped propel the S&P 500 to new highs as the odds for positive returns improved over the last three months. However, given that the S&P 500 is once again sitting at an all-time high, the trend is again approaching a level that we view as unsustainable. Currently, if we annualize the 200-day moving average over the last month, it is growing at a 27% annualized rate which is just shy of the 30% annualized rate at our last update.

Given the strength of the trend currently, as long as the S&P 500 remains above 5100, the trend will remain positive through year-end, in our view. Historically, a positive trend is good for future stock returns, and we believe that this time will not be different even if there is a healthy pullback in the S&P 500. However, without the pullback to slow the rising trend domestically, our rule of “Don’t Fight the Trend” is signaling a “yellow light”. This would normally call for our stock exposure to be roughly neutral, but we recognize the power of momentum and are not reducing exposure currently.

International Trend: Trend is Healthy - GREEN LIGHT

Source: Bloomberg, RiverFront. Data daily as of June 21, 2024. Chart shown for illustrative purposes. Not indicative of RiverFront portfolio performance. Index definitions are available in the disclosures.

Internationally, the trend of the MSCI ACWI ex-USA has accelerated since our last update in April. The international primary trend is currently rising at an annualized rate of about 15%. Currently, the international trend does not appear extended like its domestic counterpart, thus reiterating the likelihood for above average returns over the subsequent 3 to 6 months. Additionally, we believe if the MSCI ACWI ex-USA index remains at its current level of 328, the international trend will remain positive through year-end as well. Hence, the international trend is signaling a “green light.”

Beware of the Crowd at Extremes: Remains at an Optimistic Extreme - RED LIGHT

We regard Crowd Sentiment as the 'contrary’ indicator of the Three Tactical Rules…meaning when the crowd overwhelmingly feels one way about the market, it may be wise to consider doing the opposite. The chart on the page below shows one measure of investor sentiment as calculated by Ned Davis Research. When the line is high it shows extreme optimism, and when it is low, extreme pessimism. This is our preferred data source to measure investor psychology, though we use our own analytical framework from which to draw conclusions on sentiment.

For most of the year, the crowd has been in the ‘extreme optimism’ zone except for the period in mid-April when it dipped into the neutral zone. The crowd’s subsequent move back into the extreme optimism zone coincided with the technology led rally that propelled the S&P 500 to all-time highs. The Fed’s most recent meeting on June 12, 2024, did nothing to help ease the crowd’s optimism. The crowd believes that the Fed will cut rates and fuel further earnings growth in stocks, which will enhance the soft-landing narrative. Extreme optimism typically is not good for stocks, especially when it is rising with few signs of a pullback on the horizon. While the level of crowd optimism is the same as it was in our April update, it is important to recognize that it can remain elevated for an extended period, especially when it has not reached the highest optimistic extreme, as shown in the chart below. We would become more constructive on the ‘Crowd’ if a pullback began to push it closer to neutral. Hence at the current level, our qualitative rating is a “red light.”

Internationally, there is no NDR Crowd Sentiment indicator therefore we use a price relative strength indicator (RSI). This indicator is currently neutral, a “flashing yellow light”.

Copyright 2024 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to Past performance is no guarantee of future results. Shown for illustrative purposes.

Conclusion: Rules Signal Yellow Light Domestically and Flashing Green Light Internationally

The tactical rules signal a “yellow light” domestically, as a strong economy has postponed the Fed’s rate cuts, and the momentum of the technology trade is driving the trend towards unsustainable levels, as the crowd becomes more exuberant. While the data has changed the tactical rules remain the same as in April, highlighting the importance of adhering to risk management levels (stops), while continuing to ride the momentum trade. We believe that any market pullback will be normal given that stocks recently hit an all-time high and would help to improve the odds of positive returns going forward as sentiment eases. Based on our technical analysis, a normal market pullback would be shallow and would not be tradeable as it pertains to selling and repurchasing stocks. Thus, we are taking a wait and see approach while continuing to slightly favor stocks over bonds in our balanced portfolios.

Internationally, the tactical rules signal a “flashing green light,” driven by the more sustainable trajectory of the trend and central banks that either have cut interest rates, or are on the verge of cutting before the Fed. While international markets appear slightly more attractive on a short-term tactical basis, we will continue to temper our enthusiasm for the asset class due to political uncertainty and the lack of earnings growth improvement.

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.