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.
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