My previous post pretty much pinpointed the exact point when the market staged a massive rebound. Basically, Trump is showing his willingness to water down his tariff threats. For example, he provided carve outs for semi-conductors and electronics and he exempted auto tariffs for Canada and Mexico so long as they comply with the USMCA. He was privately approached by the CEOs of Walmart and Target who warned him of empty shelves and rising prices in the months ahead if he follows through with this threats. No doubt other big CEOs have gotten into this ear. Therefore, there's probably some hope or expectation that any tariffs imposed will be more gently administered to allow for companies to adjust.
The market has now recovered all the losses post liberation day which is quite impressive. In my previous post I said to look at market action to determine whether a rally appears to be bear market rally or the start of a new bull phase. So far, it appears to the latter due to the relentless nature of it. Meanwhile positioning/sentiment is overall still firmly skeptical. AAII sentiment in particular has exhibited a persistent amount of high bearishness that is only comparable to the depths of bear market lows. Many correctly point out to see what these folks are actually doing with the money vs what they are feeling. They have indeed been pulling back their equity exposure, which is currently at 64%. This is not the same degree as the GFC but it comparable to the 2022 bear market. Near the market peak, at end of December, equity exposure was 70%, likewise, it was 70.5% end of December 2021 which was also the market peak. By end of October 2022 exposure declined to 61%. The currently allocation of 64% is obviously close to 61% but not there yet, but it could get there even if the market continues to rise or just holds as these folks may be inclined to sell into strength. Given the persistent high level of bearish sentiment, it would appear that selling into strength would be a strong possibility.
I have a friend who approves online trades for TD customers. He told me that during the liberation day meltdown he said the rush into money market funds was the most he had ever seen. Barrons conducted a survey of money managers at end of March/early April which showed bearishness at at 30 year high... this was prior to the liberation day meltdown!
BofA bull market indicator has had a notable reset
This indicator has been whacky as of late, not being in sync with other indicators. Keep in mind this is a global sentiment, not the US although these markets are usually highly correlated. Note the very low positioning of hedge funds. Hedge funds in particular, have been big sellers during this latest rout.
The latest surge in the market has rendered it ST overbought, but that what you typically see when you get a bullish thrust from a correction or bear market bottom. A rare Zweig Breadth Thrust was triggered recently, which has strong bullish implications for the next 6 and 12 months. In fact, it has a perfect record for these times frames.
I've seen some people on twitter debating whether this signal was actually triggered, but I saw a similar study from sentimentrader which gave the same message and so I am going to conclude the signal is valid. Of course, there's not guarantee that any signal is going to work this time and it does not preclude the possibility of significant weakness in the short term.
I can certainly understand how one can be quite skeptical of any bullish signals. After all, it appears almost certain that there's going to be significant economic weakness for the next quarter or 2 given the collapse in container shipments and reigning in of capital spending as a result of the tariff turmoil. But this is widely known information isn't it? So, is the market in denial or could it be already looking across the valley to a more sanguine environment? Here's how the latter could transpire: Trump makes "deals" or at least provides a framework which suggests tariffs aren't as bad a initially feared. Another possibility is that imposed tariffs either get bypassed or uncollected to a significant degree. The proper collection of tariffs is something that is not getting any attention. How are understaffed customs agents going to properly enforce the enormous amount of tariffed goods, many of which could have complicated tariff rates/rules applied to them? Ultimately, the bullish resolution could be that somehow, some way the tariff threats turn out less than feared. It obviously takes a leap of faith to believe in such a narrative and the path to this narrative could very well have twists and turns, but here's the thing....if you wait for things to turn rosey again before deciding to buy you will probably end up doing so at all time highs. I said the same thing a few times from late 2022 to early 2023. You have to pay up for certainty. Back then the fear was that rate hikes were surely going to cause a recession. Now, the narrative is that tariffs are surely going to cause a recession. Then, just like now, it was difficult to go against this negative view.
As always, I will defer to the indicators and market action and right now despite a ST overbought condition which is likely to result in some market weakness, it suggests to expect an optimistic resolution to all this turmoil somehow, someway at some point. It certainty doesn't feel that way (I certainty have strong doubts) but it rarely feels that way when there's a crisis of some sort. It requires a leap of faith. I see lots of calls for a re-rest of the lows. While I expect there to be some ST weakness, I don't think we'll see a retest if the bull case ends up playing out....we'll just have to wait and see what happens.
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