/ March 31 / Weekly Preview
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Monday:
N/A
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Tuesday:ISM Manufacturing PMI (49.5M exp.)
JOLTs Job Openings (7.63M exp.)
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Wednesday:
ADP Employment Change (105K exp.)
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Thursday:
Initial Jobless Claims (225K exp.)
ISM Services PMI (53 exp.)
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Friday:
Non Farm Payrolls (128K exp.)Unemployment Rate (4.2% exp.)
Fed Chair Powell Speech
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Monday:
Progress Software
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Tuesday:N/A
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Wednesday:
RH
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Thursday:
N/A
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Friday:
N/A
The Blind Leading the Blind
And — stay tuned for some key platform updates to be announced this week!
Last week, we were asking the critical question of whether or not the recent correctionary process was over or not for the equity markets. We presented the following chart, laying out 3 possible scenarios: an optimistic “Scenario A”, featuring a full rebound and breakout; a more likely “Scenario B”, with the markets continuing to consolidate, and a pessimistic “Scenario C”, where a technical breakdown occurs and levels fail to hold.
Up to Thursday, it did seem like we were trading in the “consolidation” Scenario B presented above, with a rebound taking shape at least initially. Data from the options market was looking bullish, support was holding and the general vibe was more positive. Friday’s tariff scare and hotter-than-expected PCE print sent markets tumbling, however. Despite the short term technical support and currently oversold conditions, the overall disposition has now changed to a more dire one, as both the 200-DMA and the S1 level have failed to hold.
The technical break now puts bears in control of the narrative, with the focus moving to the downside, at $504 (S2). While it is not unusual for the market to retest recent lows, we are growing increasingly concerned about the possibility of a prolonged period of correction which we would not want to take a hit from.
Even if lower levels are possible, and this is the beginning of a larger corrective process (similar to 2022), the market will have intermittent rallies along the way. At the moment, the correction remains largely within historical bounds, as the current drawdown of major sector constituents (-9.89%) is just slightly worse than the median drawdown recorded in the last 5 years (-7.66%).
However, just to put it out there, the maximum drawdown figure stands at an average -29.8% over the same time period — so that’s the corrective part that we don’t want to be caught in.
Last week’s price action puts us clearly in “sell the rally” mode until further notice. We’ll be waiting for Enterprise to refresh its portfolio tomorrow, and take some guidance from this asset allocation model.
Sentiment is also tilting toward the grim side yet again, with investors becoming noticeably more distressed as prices decline. Our job here is to simply notice that “Extreme Fear” is just a couple of tick-marks away in terms of price and make a mental note not to sell in a hole.
As previously mentioned, 15 - 20 days pass on average since the first time “Extreme Fear” is recorded up to a real “capitulation moment”, where the market finds a bottom. March 12 was the first time we’ve seen “Extreme Fear” on our indicator, so it does suggest another bout of panic may be in the works.
Notably, sentiment is NOT a market-timing indicator. It tends to indicate when sellers are likely becoming exhausted — that is all.
If the correction is over, we need to see evidence of buyers beginning to emerge. For that evidence, we can turn to our second indicator, one that will be explained in detail in today’s feature announcement: Dark Pools Data.
Trading in dark pools refers to the buying and selling of stocks outside of public exchanges, in private venues that aren't visible to the general investing public. These Dark Pools are operated by private firms, like big banks or independent trading platforms, and they allow institutional investors (think hedge funds, pension funds, or mutual funds) to execute large trades anonymously, without “showing their hand” to the “lit” — aka public — market.
Regulators do require dark pool trades to be reported eventually. As of today, this new dataset is available to our subscribers as part of the Watchlist configuration, and will be available for screening purposes as well. Normally, if dark pool buying outpaces selling in a stock, it should suggest bullishness among the “smart money” — institutions.
Overlaying 3 different time aggregations (1W, 2W and 1M) for the dark pools index with Sector ETFs results in the following chart. We can see a clear pickup from bearish levels in Tech (XLK) and Transports (XTN), and a general short term improvement for all tracked sectors. Just using Friday’s data reveals very little buying in the Tech and Communication areas of the market, however — which are critical to index level performance.
On the fundamentals side, analysts are now adjusting their targets lower from the lofty expectations set in early December. Goldman Sachs have recently published their 3 month and 1-year outlook for the S&P 500, seeing a low of 5.300 next quarter and an eventual rebound to 5.900.
On that note, there is now a very wide divergence between the topmost year-end forecast and the lowest street estimate for where the S&P 500 eventually ends the year.
Last week’s key data also included corporate profits, which hit a record high on a nominal basis. The annual growth in profits stands at around 12% YoY for Q4 2024, which is not something we normally see ahead of a recessionary environment.
Our Trading Strategy
We are getting conflicting data points from various facets of the market. On one hand, technicals have deteriorated dramatically, yet sentiment is in a zone we would not be inclined to sell into just yet. Most of the sellers should be exhausted by now.
The fear that’s taken over investors is normally associated with recession projections. Yet no data point (leading or lagging) is looking like signalling a recession at the present time. Slower growth — yes, that was always a possibility. But no recession in sight at the moment.
Given lofty valuations, such a reversion like the one we are seeing at the moment is not entirely unexpected. That being said, valuations on a trailing basis have now reverted close to the cycle median, where buyers are getting a much better deal now than they were getting before.
Right now, we believe nobody knows anything about the future. The price action is a case of the blind leading the blind. The Fed doesn’t know, we don’t know, and hedge funds don’t know just how the US administration’s tariffs will impact the economy. We also don’t know what is the pain point up to which policymakers are willing to tolerate a declining stock market. Certainly a -5% YTD performance from SPY is not enough to trigger any response. A -10% decline just might. But this is just speculation.
For now, we’re moving forward by managing risk, paying close attention to our exposure and positioning and choosing to reduce the potential for volatility, not increase it.
Meanwhile, stay tuned for a slate of updates regarding the V2 platform, as we’ll be having an unusual amount of those lined up this week.
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!