Reading the Signals: What Points to a Rally

Watch: Reading the Signals: What Points to a Rally

A short video deep dive on this topic. Prefer to read? The full post is below.

Several Signals Are Lining Up at Once

In markets, no single number tells you what comes next. But when several signals point the same way, it is worth paying attention. Right now, four readings lean toward the constructive side. Earnings estimates are rising, profit margins are widening, investor positioning has turned cautious, and the seasonal calendar is favorable.

This post walks through each signal in plain terms. It also explains, just as plainly, why none of them can tell us what happens next. Understanding what a signal measures is the only way to know how much weight it deserves. And they do not all deserve equal weight. Rising earnings and widening margins are the firmest, because they look forward at company results. Cautious positioning is a useful but noisier read on the crowd. The seasonal calendar is the softest of all. We take them strongest first, and flag each signal's strength and what could break it.

Earnings Estimates Are Rising

We start with the strongest signal: what companies are actually expected to earn. Here the picture is improving. Consensus forecasts for S&P 500 quarterly earnings per share have been climbing through 2026.

The chart below shows the quarterly path analysts currently expect for the rest of the year.

Estimates rising matters because share prices tend to follow earnings over time. When analysts raise their forecasts quarter after quarter, it usually reflects real improvement in company results, not just optimism. That is a firmer foundation for higher prices than sentiment alone.

What could break it: These are forecasts, not results. Analysts often trim estimates as a quarter nears, and a real growth slowdown would turn the revisions lower.

Wider Profit Margins Behind the Numbers

Rising earnings are stronger when they come with wider profit margins. A margin measures how much of each dollar of sales a company keeps as profit. For the S&P 500, the consensus net profit margin is expected to widen over the next two years.

The chart below shows the expected path from 2025 through 2027.

Margins near 13.3% in 2025 are seen rising to 14.9% in 2026 and 16.4% in 2027. If those forecasts hold, companies would turn more of their sales into profit each year. That supports the rising earnings estimates from the previous section. It is part of why some analysts see room for prices to move higher.

What could break it: A climb from 13.3% to 16.4% is a big move that still has to happen. Higher wages, input costs or new tariffs could stall it, and the earnings case would soften with it.

When the Crowd Turns Cautious

The third signal comes from how investors are positioning their money. Two public data sources tell a similar story today. In the options market, traders have been buying more downside protection. The put/call ratio has drifted higher, which means more money is flowing into bets that prices fall rather than rise.

The second source is the weekly Commitments of Traders report. As of the read dated June 26, large speculative traders held a net short position of about 35,400 S&P 500 futures contracts. In plain terms, that group is positioned for the market to fall, not rise.

Why would caution be a constructive signal? Because markets often turn when too many investors expect the same thing. When most traders are already positioned for a decline, much of the selling may already be done. If prices then hold or rise, those same traders often have to buy back their positions, which can add fuel to a move higher. This is why heavy caution is sometimes read as a contrarian signal.

This reading is not a timing tool. Sentiment can stay cautious for weeks, and it can be cautious for good reason. It tells us where the crowd is leaning. It does not tell us the exact day the mood changes.

What could break it: A contrarian read only helps when the caution is overdone. If a real shock arrives, that same caution can prove justified, and the signal fails.

A Favorable Time of Year

The calendar is our last and softest signal. Stock returns are not spread evenly across the year. Some months have a much stronger historical record than others, a pattern known as seasonality. July has one of the strongest records of any month.

Over the last 20 years, July finished higher than it opened between 80% and 85% of the time on both the S&P 500 and the Nasdaq 100. The average gain was more than 2.5%. Over the last 10 years, the record has been even stronger. July also sits among the three best months of the year on 20-year averages, alongside April and November.

Seasonality is a tendency, not a rule, and it rests on thin evidence. There are only about twenty Julys to look at, and twelve months to choose from. So a strong July record is partly a matter of which month and window you pick. Set against the fact that markets tend to rise over time, it would not pass a strict statistical test. We treat the calendar as the softest signal here, well behind the earnings and margin trends. It nudges the odds in a general sense. It does not decide what any single year will do.

What Argues Against a Rally

No honest read points only one way. Beyond each signal's own weakness, two bigger risks sit above all four. The first is the wider backdrop. Interest rates that stay higher for longer would weigh on share prices, whatever earnings do. So would renewed inflation, or a policy shock on trade or taxes. And after a strong run, a good deal of optimism may already sit in prices.

The second risk is closer to home. If a rally were a sure thing, a fully invested account would make sense. Ours is not fully invested. The Risk Overlay currently holds about 49% of the book in stocks and the rest in cash, a setting we call Cruising. It reads that level from today's risk conditions, not from a forecast. Our own process is only about half exposed, and that tells you more than any single bullish signal.

How We Turn Signals Into Decisions

So the bullish signals line up: rising earnings, widening margins, cautious positioning, and a supportive calendar. But the counter-arguments are real too. It is tempting to pick a side. We do not run the portfolio that way.

Our process is data-driven, not gut-driven. It rests on three pillars: Stock Universe, then the Optimizer, then the Risk Overlay. The first two decide what we own. The Stock Universe screens the market so that whatever names post the strongest fundamentals rise to the top of the list. The Optimizer then decides which qualified names to hold, not how big each position should be. Every position is equal-weighted.

The third pillar sets how much we own. Every night, the system recalculates more than 20 risk indicators across markets and sets our equity exposure for the next day. It is time-tested to control drawdown, not to forecast prices. It does not claim to know where the market goes next week, and it does not read a single seasonal chart and decide to go all-in.

This is the F1 approach to investing: know when to accelerate, and know when to brake. In a calm, rising market the system can carry higher equity exposure. In a deeper decline it gears exposure down, where it is built to fall less than the market. We aim for that outcome, but we cannot promise it, because every correction is different. Our long-term goal is remarkable outperformance over the S&P 500 across 12 months and beyond.

Signals like the ones above are useful context. They are not a reason to abandon a systematic process. The whole point of a rules-based approach is that it does not swing on any one forecast, however tempting the setup looks.

“When several independent signals line up, we take note. But we still let the process, not the forecast, decide what we own and how much.”

Related reading: for why staying invested over the long run matters more than timing any single month, see Long-Term Investing: How Compounding Wins. For how discipline shapes what we will and will not do, see Why We Don't Short, Buy Crypto, or Use Leverage. For our current positioning, see the May 2026 Monthly Review. And if a single strong or weak day makes you nervous, our FAQ answers that directly.

Veloris Capital is a Popular Investor on eToro under the strategy name AlphaWizzard. If you choose to copy, eToro technically replicates our trades proportionally into your own account, and you stay in control of that account at all times.

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