Last week, we noted that it would not be uncommon for the market to retest recent lows. That is what happened on Monday morning before rallying sharply off that level. However, that rally was short-lived as President Trump's "Liberation Day" on Wednesday afternoon liberated the market from its previous three-day gains. We will discuss the impact of that announcement further in today's commentary, but let's start with just the technical backdrop.
The market tried to muster a rally this week, and we are beginning to see early signs of a bottom forming. However, on Friday, the impact of tariffs and a slighter, hotter-than-expected PCE print sent markets tumbling. The good news is that the market remains on a buy signal, with an improvement in both money flows and relative strength. However, those improvements may be fleeting, with the market failing its first resistance test at the 200-DMA and decisively breaking below the recent uptrend. The current market dynamics are tenuous at best.
The market tried to muster a rally this week, and we are beginning to see early signs of a bottom forming. As shown in the chart below, while bumpy, volatility has fallen below 20, relative strength has improved, and momentum is turning into a buy signal. Furthermore, money flows are also beginning to reverse, suggesting a near-term bottom may be in.
Overall market performance is tracking closely to President Trump's first term as Wall Street tries to assess the impact of tariffs on earnings. The markets will complete that assessment soon, and they will rally once the outlook becomes firmer.
The sentiment chart has been updated, showing that bearish sentiment reached even more profound levels of negativity and is more than two standard deviations below the norms.
Last week, we discussed that continued bullish exuberance and high levels of complacency can quickly turn into volatility. Over the previous week, the market fell sharply following news of a potential viral outbreak in China and more concerns about tariffs from the Trump Administration. While those were the headlines that gained the market's attention, the reality was that the market was overbought and on a sell signal, setting the market up for pullback.
Last week, we discussed that continued bullish exuberance and high levels of complacency can quickly turn into volatility. As we noted then, introducing an unexpected, exogenous event can soon lead to a price decline if investors begin to reprice forward expectations. On Friday, that unexpected event presented itself when China, and most notoriously, the Wuhan Lab, reported the discovery of a new coronavirus in bats.
On Thursday, the market broke out of the bullish consolidation over the last few weeks, successfully retesting and holding support at the 50-DMA. Notably, the bullish trend remains intact, and retail investors continue to pour money into the market, with money flows reaching typical peak levels. With the market elevated, downside risk over the next few weeks will likely be contained to recent January lows. What would cause such a correction is unknown, but if money flows begin to reverse, such will likely provide the evidence needed to rebalance risks accordingly.
With Friday's close, the market turned in a positive month despite the "DeepSeek" shock to the markets this past Monday. As noted by Stocktraders Almanac this past week, the January Barometer sets up a more bullish view of the year's outcome.