Seven weeks on from RiverFront's last checkpoint, the market has gone almost nowhere — and so have the Three Tactical Rules. Kevin Nicholson, RiverFront's Global Fixed Income CIO and Partner, frames the stall plainly1: the S&P 500 is up less than one percent since June 9th, weighed down by a cooling AI trade. Each of the three rules — the Fed, the Trend, and the Crowd — holds its prior rating, leaving the composite signal unchanged at a "flashing yellow light." Nicholson's team reads that stagnation not as a warning to retreat, but as room to stay engaged: "Collectively, the Three Rules continue to favor a cautious optimism towards stocks in balanced portfolios."
The Fed: from ally to arbiter. Inflation cooled meaningfully into the July 29th FOMC meeting — headline CPI down to 3.5%, core to 2.6% — largely a byproduct of the US-Iran ceasefire and mid-June MOU. But renewed hostilities have pushed Brent crude back above $80, and futures markets are now pricing a hold this meeting followed by a 0.25% hike later in the year. Nicholson notes the shift in tone from the Fed chair himself: "currently the focus is on price stability according to Chairman Warsh." That reorientation matters for how RiverFront positions the Fed within its framework — no longer a tailwind, but not yet a headwind either: "we no longer see the Fed squarely on the investor's side — the war has changed that calculus." Still, Nicholson argues patience is available to the Fed, since tighter financial conditions from higher bond yields already do some of the work rate hikes would otherwise need to. The rating holds: "we are maintaining our Fed rating of a 'flashing yellow light.'" Abroad, the picture has hardened — the Bank of England leans toward hiking on 3.4% wage growth, and the ECB has joined the BOJ in raising rates against energy-driven inflation. Nicholson's assessment: "we now view central banks as neutral rather than on the investor's side… however, we do not see a prolonged hiking cycle ahead."
The Trend: still green, just slower. The S&P 500's 200-day moving average is climbing at a 17% annualized pace, down from 23% at the last update — the direct result of the AI-driven momentum fade. But the bar for staying positive is low: the index could sit flat for nine months and the trend would remain intact. Nicholson leans on history here: the S&P 500 has risen in roughly two-thirds of all rolling three-month periods, and a positively sloped trend with positive momentum improves those odds further. "We believe the trend remains the investor's friend. This is why we prefer US stocks over bonds in our balanced portfolios." International equities (MSCI ACWI ex-US) tell a similar story — deceleration from 29% to 22% annualized, a narrowing year-to-date lead over the US to 2.9% — but with a runway of over seven months before the trend would flip negative. Both trends keep their green light.
The Crowd: optimism, but not euphoria. This is where the update's real movement lives. RiverFront's blended read of Ned Davis Research's Weekly and Daily Sentiment Polls had both sitting in extreme-optimism territory last time; now they diverge — Weekly still elevated on AI earnings enthusiasm, Daily pulled back to neutral by inflation, tariffs, and the Iran conflict. With midterm-election volatility historically picking up, Nicholson's team is deliberately weighting the more reactive Daily measure more heavily right now. The synthesis: sentiment sits "between the upper end of neutral and the lower end of extreme optimism," an improvement that earns an upgrade — "we are upgrading our rating for the Crowd to a 'yellow light' from a 'flashing red light' in our previous update."
The bottom line. Three unchanged individual dials still add up to an unchanged composite: "Given that our collective rating of the Three Rules has not changed since the last update, we continue to believe that the market will go higher this year." Nicholson is careful to flag that every input here is fluid — economic data, earnings guidance, crowd mood, and geopolitical negotiations can all move the needle in coming weeks. For now, the house view favors both domestic and international equities over fixed income, with yields expected to stay rangebound.
Five takeaways for advisors and investors:
- The Fed has shifted from tailwind to neutral — a geopolitically-driven inflation risk, not a policy pivot, is behind the change.
- The US trend remains positive and has a wide margin for error — a flat market for nine months wouldn't break it.
- International equities still lead the US year-to-date, though the gap is narrowing as both trends decelerate together.
- Sentiment has cooled from extreme optimism to a more balanced reading, easing (not eliminating) the contrarian warning sign.
- The composite signal — flashing yellow — still argues for equities over bonds in balanced portfolios, but calls for active monitoring given how quickly each input can move.
Footnote:
1 Nicholson, Kevin. "Flashing Yellow Light Guides Three Rules." RiverFront Investment Group, 28 July 2026, www.riverfrontig.com/insights/three-tactical-rules-july-2026-update/.
