Strong Week, But Defensive Signal Forming
Markets delivered another week of gains, with major indexes grinding higher despite choppy underlying momentum. The Wave-State Model captured the upside with the portfolio outperforming SPY by 76 basis points, though structural fragility beneath the rally triggered a defensive signal on Friday that could lead to repositioning next week.
The portfolio returned +3.11% for the week ending May 8 versus SPY's +2.35% and the equal-weight benchmark's +2.45%. The bullish allocation maintained since May 1 proved effective at capturing the rally, with higher exposure to growth and small-cap components providing the incremental performance edge. Week-to-week volatility was notable—SPY oscillated between a -0.37% decline on Monday and a +1.39% surge on Wednesday—but the framework's positioning stayed consistent throughout the chop.
However, Friday's session brought the first warning signal that the rally may be losing structural support. Both breadth and momentum indicators declined simultaneously, meeting the framework's criteria for a defensive trigger. This marks day one of a two-day confirmation period required before the portfolio shifts to a more conservative allocation. If the signal holds through Monday's session, the framework will transition to defensive positioning at Tuesday's open, reducing exposure to growth-oriented components ahead of a potential pullback.
The concern stems from the rally's character rather than its magnitude. While SPY has pushed to new highs, the advance shows signs of exhaustion on longer timeframes. Growth stocks have extended significantly from their moving averages following a near-vertical six-week rally, yet momentum indicators are failing to confirm the price action. This divergence between price and structure, where indexes make new highs without corresponding breadth or momentum confirmation, creates conditions where even modest weakness can accelerate quickly. The framework's defensive signal is responding to this structural fragility, positioning ahead of a potential mean-reversion move rather than reacting to it after the fact.
Since inception in early December, the Wave-State Model has delivered +8.86% versus SPY's +7.73% and the equal-weight benchmark's +9.62%. The portfolio has now moved into positive alpha territory against SPY (+1.13%), though it continues to trail the equal-weight allocation that maintains constant exposure to growth and small-cap components. The tactical framework's ability to outperform during this week's volatile conditions while generating the defensive signal before visible weakness validates the approach of using momentum and breadth structure to time positioning shifts rather than reacting to price declines.
QQQ has seen a moonshot upward thrust, caution is advised.
Performance Summary:
Week (May 1-8): ROQ +3.11% vs SPY +2.35% vs EW4 +2.45%
Since Inception (Dec 3 - May 8): ROQ +8.86% vs SPY +7.73% vs EW4 +9.62%
Author note: Market analysis and this blog post were conducted and written with the assistance of AI analysis under human oversight.
Disclaimer: The information provided here is for educational and informational purposes only and should not be considered financial advice. I am not a licensed financial advisor, and my portfolio may not be appropriate for your financial goals or risk tolerance. All investments involve risk, including the potential loss of principal. Historical data and market models are not indicative of future results. Please consult with a licensed financial professional before making any investment decisions.