/ March 24 / Weekly Preview
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Monday:
S&P Global Services PMI Flash (50.8 exp.)
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Tuesday:New Home Sales (0.68M exp.)
CB Consumer Confidence---
Wednesday:
Durable Goods Orders MoM (-1% exp.)
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Thursday:
Initial Jobless Claims (225K exp.)
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Friday:
Core PCE Price Index MoM (0.3% exp.)
Personal Income MoM (0.4% exp.)
Personal Spending MoM (0.5% exp.) -
Monday:
N/A
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Tuesday:McCormick & Company
GameStop
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Wednesday:
Dollar Tree
Chewy
Paychex
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Thursday:
Lululemon Athletica
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Friday:
N/A
Has the Market Bottomed Out?
Over the past few weeks, our technical analysis has centered on three potential outcomes for the recent correction. While certainly distressing, the price action was neither unexpected, nor did it deviate too much from past historical patterns. These swift declines usually resolve in a bottoming out process and a reflexive rally. What happens next is the real question.
For now, the market has managed to not decline during the past 5 sessions. SPY is actually up +0.2% for the week. While that doesn’t sound too bullish, at least we didn’t get a complete breakdown (scenario C). We didn’t exactly get a break above the 200-DMA either, with SPY suffering 3 intra-day rejections from this level. However, several metrics now suggest that a temporary bottom has been established. While bumpy, 1M Implied Volatility has fallen -27% from 8.11% to 5.89%, relative strength has improved, and momentum is turning into a buy signal. In other words, it’s starting to look like everyone who wanted or needed to sell has already done so. This week, we expect the price action to resemble either Scenario A or B on the chart below. The most probable outcome is Scenario B, where a strong rally resolves into a consolidation process before a further advance.
However, even with the meager improvements in technicals, we must be aware that investors are not “out of the woods” just yet. We will continue to manage portfolio risks and use any rally to rebalance exposure lower, not higher. At least until it becomes clear that the bullish trend completely resumes.
In the short term, investor sentiment has fully reverted from the euphoria of early December. This dramatic reversal stems from President Trump’s tariff rhetoric, prompting some analysts to adjust their growth projections downward. Investors own political convictions may have also played a role in the prevailing selling pressure (though political bias should never influence investing decisions).
Overall, the tariff talk served as the catalyst that sparked “uncertainty” — which the market ferociously hates. Given a backdrop of overly extended and bullish sentiment, the reversion was swift. The US dollar weakened, foreign markets outperformed, and—most notably—valuations adjusted downward to align with diminished growth expectations. However, the market is by no means cheap, at a combined 22.3 TTM Price to Earnings ratio. That is why (technical analysis notwithstanding), we are not in a position to “bet the farm” on stocks just yet.
We see no real issue in the short term. The reduction in valuations, combined with highly negative sentiment and technically oversold conditions, provides the “fuel” for a market reversal. That reversal, however, may be part of a larger and protracted process in the medium term, and that’s where the real risk lies ahead.
Should prices increase, investors are likely to chase the uptrend, "buying the dip" and driving prices further up, which in turn would draw additional buyers into the market. This is to be expected, since we are trading in a negative GEX environment, for SPY as well as most other sector ETFs — meaning that market makers will also contribute to a “short squeeze” if and when it occurs. As we saw during 2022, these “counter-trend” rallies can be rather significant.
Crucially, a “counter-trend” rally does not mean a more extensive correction process is not occurring.
Enterprise, our main asset allocation model, is currently trading in “defensive” mode — holding a hefty 54% weight in cash, and only 39% in equities. While not exactly in “bear market mode”, the strategy is signalling increased volatility ahead, and it’s hedging accordingly for it.
The model has a strong real-life track record of identifying critical trading conditions and aligning portfolios to minimal risks whenever these conditions prevail. That is why, especially in uncertain times, Enterprise is our go-to strategy.
As the markets deteriorated, all Sectors except Utilities (XLU) have traded well below their “neutral” (Absolute Z-Score = 0) technical level. When accounting for both Absolute and Relative to SPY Z-Scores, the highest gainers from a reflexive rally would be the recent losers: Tech (XLK), Transports (XTN), Consumer Discretionary (XLY) and Basic Materials (XLB). We also like the resilience of Financials (XLF).
From a Factors perspective, growth oriented companies, as well as small caps and momentum names should benefit as well. Bonds and bond proxies (Staples, Healthcare, Real Estate) could see outflows in this scenario.
Our Trading Strategy
The markets are presently in a tenuous disposition, and we need to allow developments to unfold over the coming days and weeks. In time, the market itself will signal the appropriate course of action for us to take in portfolios. Many investors make the error of presuming they can outsmart "Mr. Market"—a belief that often results in more losses than it does in gains.
From a probabilistic standpoint, in the short term, we are due for a rally. We will use that rally to rebalance stock exposure lower in our own portfolios. If the bullish trend fully resumes, it will be easy to add exposure again. If the rally eventually fails and the markets move even lower in the medium term, we will have already reduced risk in anticipation of this outcome.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!