Category: Newsletter

This past week, the market continued its advance. There is little reason to be bearish with key overhead resistance levels broken. However, as shown, the markets are reaching decently overbought levels after being extremely oversold. This suggests that at least for now, the "easy money" has been made. With the market above the 200, and above the 50 and 20-DMA, pullbacks should be between 5600 and 5800. Investors can use such a pullback to increase portfolio equity exposures and reduce hedges accordingly. Conversely, 5000 to 5200 becomes the next critical target if those lower supports are violated. However, such would require some unexpected event to unfold.

The market paused its advance before the Fed meeting on Wednesday, which was remarkably uneventful. The Fed held rates steady as expected and did not provide much guidance regarding its forecast for future rate cuts. However, on Thursday, the Trump administration discussed its first "trade deal" with the UK. Notably, the US has a trade surplus with the UK, making negotiating a trade deal easier. Nonetheless, announcing a long-awaited agreement gave the market hope that more deals eventually will follow. Unfortunately, other trade deals with actual "trade deficit" countries may be tougher and take much longer to negotiate.

This past week, two reports confirmed the economy is slowing. First, there was the weak GDP report, which showed growth of roughly one percent, after discounting the impact of the trade deficit. Secondly, while the employment number was higher than expected, the job growth trend is also slowing. However, those reports should have tempered market enthusiasm as they reduced hopes for Fed rate cuts. However, the market pushed higher as investors raced to jump back into "risk assets" as the market cleared initial resistance at the 20-DMA and reversed all of the "Liberation Day" losses.

The market rallied above the 20-DMA this past week as investors found some "silver linings" to the ongoing tariff dispute. Despite China saying "no negotiations" had started with the U.S., comments from both President Trump and Scott Bessent suggested that the Administration would "be nice" to China and that a "very good deal" could be done between the two countries. As we have noted previously, given the more extreme oversold condition of the market, any "good news" would allow investors to push stocks higher.

This week, the market was hit following a speech by Fed Chair Jerome Powell, in which he stated that the administration's tariffs could spark "higher inflation and lower growth." If that sounds familiar, it should. In 2021, Powell noted that inflation would be transitory as the money supply exploded by 42%. He was wrong then and is likely wrong again by fixating on hypothetical tariff shocks while ignoring the deflationary "red flags" from falling oil prices, slowing consumption, declining savings rates, and rising delinquencies.

Last week, we noted that the market was not expecting retaliation from China. That battle persisted this week as Trump raised tariffs on China to 104%, and China then retaliated with a further tariff increase of 84%. However, as we said last week, any good news would cause the market to rally sharply. On Wednesday, President Trump announced a 90-pause on the full effect of new tariffs. Interestingly, the same headline sent stocks surging on Monday but was quickly deemed "fake news" by the White House. I suspect that Monday was a "leak" by the White House to test the market response, and President Trump kept that announcement handly to stave off a further decline in the markets. Whatever the reason, the markets needed the break. Here is Trump's full statement:

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.