Much needed sentiment reset but not out of the woods

Coming into this year I was not bullish on the market for 2025 as I had noticed several red flags. In a nutshell, there was too much bullishness, too much complacency. The orange swan event of recent weeks has washed away and reversed such conditions creating a reset in sentiment. There's now plenty of evidence showing that the market may have either hit a bottom or in the process of forming one given the major retreat in positioning and expectations.  Here's some charts which show you what I mean:

Coming into this year, the consensus view was rosy for the markets with the average price target implying a 10% gain for the year. Now, the median price target has dropped to about 6000 on the SPX  as many firms have been scrambling to cut their targets and the consensus call now is that we are going to have a recession. There's obviously good reason for this sudden about face and pessimistic outlook, but I would be a lot more concerned if most stategits and fund managers remained hopeful and didn't capitulate. This reset in sentiment is much needed if the bull market is to eventfully resume. 

I like to use my "waking up from a 5 year coma" example in an attempt to view the market objectively, without being emotionally influenced by current narrates as you wouldn't know what they are. So, if you just woke up from a 5 year coma and I showed you the above charts along with an overlay of the chart of the the SPX, you would have to objectively conclude that the market would appear to be in a strong buy zone if you had a long term horizon. You would have to conclude that this decline looks like a severe correction/short lived bear market. History shows that if you put your faith in the indicators when they show extreme risk aversion and starting buying, you will get well rewarded...perhaps not immediately and perhaps with the market going down further in the days, weeks or even months ahead,  but in 9-12 months. Of course, it's difficult to have faith things are going to work out when you are aware of the narratives which are bleak and if you're watching the market every day, tick by tick while being blasted by news headlines like so many people do. Eventually, emotions and impatience gets the better of folks and they shit the bed.

Near the depths of the 2020 crash, the 2022 lows and now, I had this hopeless feeling that we were going to be fucked.  Maybe this time we will actually be fucked by this orange clown who is wrecking havoc, or perhaps things will somehow, someway not end up as bad as feared. Here's the thing...whenever you have a crisis, whenever moods sour so suddenly like they have now, it can create strong reactions/responses to mitigate or undue the very source of the crisis. I'm sure you've heard of the notion that if you put a frog in a pot of water and slowly increase the temperature, it would remain there and eventually get cooked without realizing it, but if you put a frog in a pot of boiling water it would jump out immediately.  The fact that we have seen an immediate and severe adverse reaction to Trump's tariff plans, has businesses already scrambling to make adjustments and/or plead with Trump to change course. It's also sounding alarm bells within the Republican Party and the courts to take action against Trump. But swift action needs to be taken now and damage is already done. Business confidence is shaken as plans are being put on hold and I'm sure economic activity has slowed as US imports from China have falling off a cliff. There's also going to be significant drop in tourism from foreigners and there's been dumping of US dollars and bonds. What a mess. On Easter Sunday Trump posted a hateful Easter rant about Democrats and Joe Biden on his Truth Social platform. What a piece of orange shit. And we have 4 years of this asshole. He's also been critical of Powell indicating his willingness to fire him. All of this just leaves a bad taste in people's mouths at a time when there is so much market uncertainty and fragility. 

Bottom line here is that we are seeing extremes that in the vicinity of where prior major corrections lows were made, but the scenario we face today has such ominous implications to take the market to significant new lows unless we see a major back peddling by Trump. Trump looks at the markets as a sign of approval and right now the market is sending the message loud and clear.  You always have to keep in mind that the market will price in all widely known information. There has obviously been a significant downward re-pricing of expectations, bracing for a drop in expected earnings for this quarter and probably next quarter. The question now becomes has the market priced in enough? The above charts suggest a lot of negatively has indeed been priced in but you can't assume the worst is over until market action proves it. Bulls do not get the benefit of the doubt. 

History shows that in a bear market, it typically starts off as a moderate more measured decline and it's only in the final or later phase where you see the scary, waterfall type declines as this is indicative of emotional, panic selling and forced selling from margined players. Strictly by observing the waterfall type action we're seeing, it would suggest we are in the final or later phase, rather than the beginning of a bear market.  It is reminiscent of what we saw in 2020, 2018 and 2011. Positioning/sentiment also supports this notion. Going further back to the GFC we saw the major waterfall phase of the decline in October 2008 by which the low then retested twice in November and March via lower lows as market internals showed positive divergences. Of course, the GFC was a once in century type storm. Although the current crisis can have the making of being a once in a century type storm, it is largely self-inflicted and can be undone although some damage would likely remain. The leverage in the non-government system is also nowhere close to what existed in the GFC.   

Market action will give you clues as to when this shitstorm has passed. During a true recovery, aside from the initial rally near the bottom which tends to be strong, you will see the market advance with resiliency and lower volatility accompanied by skepticism of its sustainability. Until we see this type of action, you have to assume we are in the grips of a bear market and respect that. So far, it has been the US market which has been hit the hardest, with International holding up a lot better, but if the US meltdown accelerates and hits new lows, I doubt International markets would continue to be safe havens. We are also seeing gold soar. This is clearly an indication of fear and a vote of non-confidence in the US dollar. This decline in the USD and rise in government yields is admittedly alarming, but the parabolic nature of the run up in gold as of late is also indicative of where we may be in the market cycle for gold and USD. Gold had been rising steadily and quietly for several months, but now is going parabolic which is what you tend to see near a major peak.. the oppose of the waterfall action you tend to see near major lows. Parabolic rises and falls are indicative of emotions and reckless momentum trading. Of course, it's always difficult to know how long it can carry on for, but history shows that time is NOT on your side if you betting for such trends to continue without a least a major correction. Here's another indication of where we are in the sentiment cycle when it comes to the US dollar. The cover on the left was in October and the cover on the right was from last week. My how times have changed so quickly.

Bottom line: Things feel really hopeless and there are clear signs of bearish extremes which you typically see near a major low, but you have to respect the market action which is not good and we can certainly make new lows here given the economic consequences of what Trump is doing and the damage in confidence he has created. Market action will tell you when the coast is clear and right now it's a hard no.  

Orange Swan

Holy shit. That pretty much sums up what's been happening in the market. After my last post, the market made a marginal new high before getting the biggest rug pull of all time. In my previous post I mentioned that if the trade war escalates again, it would create market turbulence again.  Well, it started off as moderate turbulence as Trump went back and forth making threats and then backing down/modifying them. Then he dropped the bombshell when he announced his "liberation day" reciprocal tariffs with his idiotic chart showing what tariffs other countries were supposedly charging the US, when in truth the "tariff" for each country was their trade deficit divided by imports.  This was far worse than what the market was expecting and the market has imploded since dropping 20% from the recent peak making this the 3rd bear market decline (20%+) in 5 years which is unprecedented. This weekend Trump explicitly stated what he has always believed going back 30+ years which is he wants to eliminate trade deficits with all other countries, due to the US being "ripped off".  Very few people, me included, thought he would go this far and this is why the market has collapsed. 

Noted tech permabull Dan Ives provided a very dire assessment to the consequences of these punitive tariffs which take effect April 9 due to the global nature of the supply chain for tech companies. It would also be terrible for autos and lots of other businesses. Trump just basically dropped a bomb on the economic plumbing of the world which took decades to develop all because of his boneheaded belief that trade deficits are bad, as it means you are being "ripped off". Trump, Navaro, Lutnick and the rest are clueless stooges.

Take a step back and look at the stats. The US is the most dominant, and arguably most prosperous country in the world. Median American real personal income has been in a  rising trend for decades and is one the highest in the world all while having a trade deficit every year since the mid 70s. "But it's unsustainable" is the rhetoric. Really? Why? Look folks. don't believe in the bs that Trump and Co. are spewing. Here's a simple example to understand why a trade deficit is not necessarily bad, and can actually be good. A real estate agent has a "trade deficit" with his assistant, paying him $50,000/year to book appointments, answers emails, do marketing, ect. This allows the agent to focus all his time on meeting clients and closing deals which results in him maximizing sales resulting in $400,000 in commissions/year. So, the agent wasn't getting "ripped off" having a trade deficit with his assistant. In fact, he benefited from it. If instead he eliminates this "trade deficit" and does all the work himself, he will have to spend a significant amount of time and effort doing admin and marketing himself, which means less time to spend meeting clients and closing deals. Also, he will probably not be proficient in doing the admin and marketing which will further decrease his deals. In the end, he is worse off. This is obviously a simple example, but you can see the point. By using comparative advantages, countries establish trade which in the end is a win for everyone in aggregate. Yes, I know that there's unfair trade practices (which should be addressed), and people can lose jobs to workers who do it for cheaper in foreign countries which forces them to find another job. It's not a perfect system, but it's the nature of capitalism which has led to the prosperity and standard of living we enjoy today which is far better than what we had several decades ago. Of course, there are still major problems we face today like housing affordability to name one, but again, look at the stats overall. Anyhow, I digress.Trump and his stooges wants the US the manufacture everything again. No chance that is going to happen. Tariffs or no tariffs, the economics don't make sense. And do they want Americans to go back to working in shoe and textile factories again? Come on man. It's asinine. With the more value added manufacturing jobs, again, the economics have to make sense. If you want those jobs to return, focus on tax reform and other incentives targeted to specific industries if it's feasible. 

Over the weekend a lot of folks including guys like Bill Ackman were begging Trump to reconsider these ridiculous, punitive tariffs, but he didn't budge and told everyone to "take their medicine". People are still holding their breath that this could all still be a big bluff as per Trump's Art of deal tactic of asking for the moon and then settling for less. It's obviously still possible as there has been reports that countries have reached out to Trump but I'm not going to hold my breath at the this point. This clown needs to be reigned in by his own party and that's going to require 2/3 of congress to vote on a bill that would cede Trump's power to issue these tariffs. That's a huge ask as it would require a significant amount of Republican senators to turn on Trump. Some have already start to consider it as they are being pressured by business and farmers, but again, I won't hold my breath. It would probably take considerable damage and time for them to act which by then would be too late. 

This is an orange swan event, I'm not going to lie, this has a 2020, 2008 feeling to this.   If I just look at the indicators, despite seeing some extremes, I also saw too much hope and desperation over the weekend which told me we weren't done yet with the selling.  To get a true washout you need to see capitulation.  I'm not sure if today's crash opening was it. The VIX did hit 60 which is obviously quite high and ticks the box of being an extreme, but keep in mind the VIX hit 80-90 in the GFC and Covid meltdown.  Today, even the safe havens of bonds and gold have been selling off. There's no place to hide.  I have a nauseating feeling when I look at the market. In the past that meant that a ST low was probably not too far off from a time perspective, but again, I won't hold my breath. If this post ends up marking the bottom or close to it, I will gladly accept this post being the ultimate contrary indicator, but deep down I don't think so.