What do you call half a month spent in the most volatile market in years, featuring a headlong flight from U.S. dollar assets, hypersensitivity to every policy headline and a furious equity rally of almost unnerving velocity that recovered half the lost ground while leaving in place most of the confusion? The easy part. That, at least, is one glib, hindsight-enabled way to frame the spring-loaded rebound in the S & P 500 and other indexes off their low 14 trading days ago. The snapback, which has now traveled more than 10% from its closing low and up 14% from the panicky intraday trough on April 7, was able to feed off doom-draped sentiment and true washout technical conditions following a 20% index descent in seven weeks. .SPX YTD mountain S & P 500, YTD For added drama, there was a disorderly stampede out of Treasuries and the U.S. dollar , banishing hope and leaving an upside air pocket that was partially filled when buyers seized on the Trump administration’s equivocal feints toward a de-escalation of trade aggressions. So where does this leave us and what has the rally proved? The S & P has recovered exactly half its total decline on a closing basis, and slightly more than that from the midday April 7 low. High-stress, low-conviction markets often rush to their next test, and this one has pushed right into the widely watched gap left by the panicky selloff April 3, following the shock of President Trump’s punitive tariff scheme. The statistical characteristics of this speedy partial recovery have won plenty of technical style points and triggered some relatively rare signals that hold favorable implications for market performance looking out six to 12 months. Most of these involve very strong market breadth and a succession of unusually big daily gains. Encouraging indicators The arcane but revered Zweig breadth thrust triggered Thursday, a clustering of extreme positive breadth days that arise after oversold conditions. There have been 19 acknowledged instances of this phenomenon, and the S & P was never lower over the following six-to-12-month horizon. Some argue there were other “false positives.” And they have become less rare: Zweig thrust readings occurred on average every four years from the 1940s through 2010, but more like every other year since (the last one coming November 2023). This is likely due to decimalization of stock trading this century and the proliferation of ETFs and other index products that allow the entire market to be “traded” at once. There are other favorable patterns: Bespoke Investment Group notes that every stock in the Nasdaq 100 was up on Tuesday. And the S & P 500 posted three straight daily gains of at least 1.5% Tuesday through Thursday. Whenever either of those things have happened in the past, stocks were undefeated over the next year. The caveats: All of these tendencies rely on fairly small sample sizes. There was often more short-term volatility and losses on the way to those positive one-year results. And let’s remember, the market historically is up over any random 12-month period more than two-thirds of the time, a decent tailwind to any signal’s performance record. It would be wrong to dismiss these encouraging indicators out of hand, or to insist dogmatically that the market could never find a bottom under the current vexing macro and policy circumstances. Still, more nuanced methods for determining whether the market has reached “escape velocity” after a correction are somewhat less clear now. Still troubling signs Strategas Research’s Chris Verrone says that with the key indexes now in a defined downtrend, the bar is higher for validating recovery attempts. Internal momentum (the percentage of stocks surging to new multi-week highs) hasn’t been convincing. The indexes are right on the cusp of what stands as pretty obvious resistance on the charts. And Verrone notes that, even if the low for this phase is in, some 80% of all serious pullbacks eventually revisit the vicinity of the low to retest it. While sentiment and institutional positioning remain negative enough to support the market, already the fast-money speculators were re-activated by the multi-day surge last week. Retail investors were the only cohort to persistently buy into the market weakness, based on various measures including Bank of America Merrill Lynch private-client flow data from recent weeks. Will this be the relatively rare — if not fully unique — correction cycle where the broader public wasn’t fully scared away and was quickly rewarded? Jonathan Krinsky, technical strategist at BTIG, had been calling for a relief rally for weeks but Friday suggested the market could stall and churn here for a while. Among other factors, he notes that the usual pet stocks of the aggressive small-investor crowd, the Goldman Sachs Retail Favorites Basket, “is up 11.4% over the last four trading days.” The past two comparable moves in this small-investor proxy, in November 2022 and March 2022, led to stiff near-term declines in the basket within weeks. While it perhaps makes sense to operate tactically as if bear-market rules apply, it’s still a somewhat subjective calI, even with those medium-term trendlines pointing downward. I’ve noted in the past the unusual frequency of past S & P 500 declines that stopped at 19% based on closing prices, or only fell past a 20% loss on an intraday basis. So far, the current downturn in the S & P falls into this category, the closing low a bit beyond a 19% drop. Other examples were in 1990, 1998, 2011 and 2018 — more often than random chance might suggest, implying that a supportive bid sometimes appears at the down-20% threshold. Of those years, only 1990 was associated with a U.S. recession, a brief one that was half over by the time stocks began to recover. For sure, the ongoing tariff shock has sent recession odds shooting higher, forcing businesses to curtail hiring and investment. Trade deal window The way the market rally has fed off of the delay of Trump’s skyscraping tariff rates and an unpersuasive focus on hypothetical potential trade deals suggests that investors perceive there is still a window in which the harshest trade measures can be withdrawn, before the real economy sustains deep and lasting damage. Whether this is true, and how long that window will stay open, are the crucial questions. Thus the intense attention on signs that the suddenly wretched “soft” economic data – surveys of consumers, CEOs, investors, purchasing managers, regional Federal Reserve Bank business contacts – will spill into the “hard” evidence of employment, spending and output numbers. Here we see the wide gulf – building since the inflation shock a few years ago but worsening lately – between formerly correlated consumer confidence and unemployment readings. The initial weeks of first-quarter earnings season have brought the typical 70% rate of companies exceeding forecasts, along with a near-universal shrug of the shoulders by management in describing their outlook for the year. The tariff overhang – a completely optional campaign to tax global production and supply-chain efficiency that can be called off any time by one man – mocks efforts to offer good forecasts. As such, the market’s digestion of corporate results might say more about how far expectations have fallen along with share prices. It’s early, but there are tentative encouraging clues. FactSet says, “To date, the market is rewarding positive earnings surprises reported by S & P 500 companies for Q1 more than average and punishing negative earnings surprises reported by S & P 500 companies for Q1 less than average.” Where year-ahead profit forecasts go from here is something close to the whole ballgame for determining the fate of the market’s attempted recovery. 3Fourteen Research plots the average trajectory of 12-month S & P 500 earnings projections around 10% corrections, separated by whether a recession arrived within a year of the 10% drop (marked by the vertical dotted line). A vast divergence, perhaps unsurprisingly. The current path looked a lot more like the non-recession norm until recent weeks, when estimates began to roll over a bit. So, the stakes have risen along with the index’s run from the low. Harder trudge ahead? After the liquidation crescendo a few weeks ago and with “Sell America” an instant mantra among world investors, mere gestures toward less-severe tariff measures and “better than feared” economic data were enough to embolden buyers and force a squeeze-and-chase rally. At this point, recouping the other half of the February-to-April collapse appears a harder trudge. To a degree, it’s always the case. The hedge-fund collapses and Russian debt default in the 1998 financial panic and the U.S. sovereign-debt standoff in 2011 also did not feel as if they had been solved at the point the stock market started rebounding. Yet it seems a lot to ask to have the S & P 500 somehow return quickly from here to the recent multi-decade highs in valuation with such a wide range of macro scenarios in play, an erratic policymaking rhythm and a somewhat constrained Federal Reserve. To make much more upside progress from here in the near term, recent hints of moderating trade hostilities likely must give way to tangible movement in that direction, with the collective hope for economic resilience replaced by rational confidence that it indeed persists. For this rally, it’s plenty achieved, more to prove.
