In his latest Three Tactical Rules update dated September 29, Kevin Nicholson, Global Fixed Income CIO and Partner at RiverFront Investment Group, delivers a measured verdict on equity markets: the signals have not deteriorated, but they have not cleared, either. The collective rating across the firm's three-rule tactical framework remains a flashing yellow light. The road ahead, as the subtitle puts it, is under construction.
Since RiverFront's last update on July 28, the S&P 500 has gained more than 4 percent. Nearly all of that advance arrived in the first week of August. What followed was nine weeks of relative stagnation, attributable in Nicholson's view to the ongoing Iran War and its attendant headwinds: rising Treasury yields, persistent inflation, and U.S. debt crossing $40 trillion. None of this has shifted the collective Three Rules rating, but the dynamics beneath the surface are in motion.
The Fed Earns Its Credibility
The most consequential development since the last update is the Federal Reserve's September 16 rate hike, lifting the fed funds target range to 3.75 to 4.00 percent. At face value, a rate hike reads as bearish. Nicholson's read is more nuanced. "It is the intention behind the Fed's actions, not the actions themselves," he says, "that best defines our tactical rule of 'Don't Fight the Fed.'" The hike was about credibility, not tightening: it confirmed that Chairman Warsh's Fed remains independent, which markets ultimately find reassuring.
This Fed follows markets rather than leading them. Warsh has said "financial market prices are probably the most important source of information to guide central bankers." The evidence supports that posture: the two-year Treasury yield climbed 1.48 percent from the end of February through September 16 without a single policy change. The market raised short-term rates first. The Fed followed. "If the Fed's intention with the recent rate hike was to regain credibility with financial markets," Nicholson says, "we believe it was 'mission accomplished.'"
The Fed rule has been downgraded from flashing yellow to a steady yellow light, pending further data. The key tripwire: a sustained break above 5 percent on the two-year Treasury, currently at 4.85 percent, combined with rising leverage, would warrant a shift toward red. Globally, central banks are viewed as neutral rather than supportive, though Nicholson does not anticipate a prolonged hiking cycle.
The Trend Holds
The S&P 500's 200-day moving average is rising at an 18 percent annualized rate, up slightly from 17 percent in July. Despite a sharp deceleration in short-term momentum since early August, with the index returning just 0.28 percent after an initial 4.2 percent surge, the primary trend remains firmly positive. The index would need to simply hold flat for the next nine months before the trend would turn negative. Nicholson notes that, historically, the S&P 500 has risen over any given three-month period approximately two-thirds of the time. The green light stands.
Internationally, the MSCI All Country World ex-U.S. index trend is advancing at a 23 percent annualized rate and retains roughly eight months of runway before turning negative at current levels. International equities have slightly underperformed domestic peers over the past nine weeks but maintain a year-to-date outperformance margin of approximately 1.3 percent. The green light is maintained.
The Crowd Remains Divided
Sentiment is where the framework gets most complicated. The Daily and Weekly Ned Davis Research polls are sending divergent signals. The Weekly Poll, primarily survey-based, sits in the extreme optimism zone, propelled by enthusiasm around AI earnings potential. The Daily Poll, which incorporates market-based data including put/call ratios and volatility measures, sits near the top of the extreme pessimism zone, reflecting inflation anxiety and uncertainty around the Fed's terminal rate. With mid-term elections approaching, a historically volatile period, Nicholson is giving the Daily Poll more weight in the firm's analysis. Blended, the two polls produce a neutral crowd reading. The yellow light holds.
The Road Continues
With the Fed at yellow, both trend readings at green, and the crowd at yellow, the Three Rules hold their flashing yellow posture. "Given that our collective rating of the Three Rules has not changed since the last update," Nicholson says, "we continue to believe that the market will grind higher this year." The constructive outlook on equities over bonds persists, with one important qualification: inflation must not re-accelerate from current levels.
Five Key Takeaways for Advisors and Investors
- The Fed's September rate hike was a credibility move, not the opening of an aggressive cycle. The market had already done the work; the FOMC simply followed where two-year yields had led. The stance is neutral, not hostile, to investors.
- The S&P 500's primary trend remains positive at an 18 percent annualized slope, preserving historically above-average odds of a positive return over the next three to six months despite near-term stagnation.
- Watch the two-year Treasury yield at 4.85 percent. A sustained break above 5 percent, combined with rising leverage, is the signal that would trigger a downgrade from yellow to red on the Fed rule.
- Sentiment is splitting. Weekly surveys reflect AI-driven optimism; daily market-based data reflects inflation and Fed uncertainty. The neutral blend is neither a contrarian buy signal nor a warning of euphoric excess.
- International equities retain their green light at a 23 percent annualized trend pace, with eight months of positive trend runway remaining at current levels. A modest year-to-date outperformance edge over domestic equities remains intact.
Footnote:
1 Nicholson, Kevin. "Flashing Yellow Light Remains: 'Three Tactical Rules' Suggest Road Under Construction." RiverFront Investment Group, 29 Sept. 2026, https://www.riverfrontig.com/insights/three-tactical-rules-update-sept-2026/.
