Who’s left to sell?

Mid-week market update: Four weeks ago, I rhetorically asked in a post, “Who’s Left to Buy?” The BoA monthly Global Fund Manager Survey had shown cash levels at a 15-year low. In addition, a Schwab survey of customer accounts showed cash at similarly historical lows. It was the case of an accident waiting to happen.

So the accident did happen as the S&P 500 fell -10% in about three weeks. This month, the Fund Manager Survey showed the sharpest sentiment reversal in five years.

 

Is it time to ask, “Who’s left to sell?”

Numerous sentiment indicators are supportive of equity price gains. The latest Investors Intelligence survey showed a collapse in bullish sentiment.

 

Similarly, Goldman Sachs prime brokerage revealed a similar pullback in long/short hedge fund positioning.

 

It’s not just the long/short funds. Commodity Trading Advisors (CTAs) are in a crowded short in U.S. equities. Any hint of market strength will spark a short covering buying stampede.

 

At a minimum, these sentiment readings should put a floor on stock prices.

A turn in price momentum is supportive of a relief rally. From a top-down level, the 14-day RSI of the S&P 500 Intermediate Term Breadth Momentum Oscillator has recycled from oversold to neutral, which is a tactical buy signal.

 

At a single-stock factor level, price momentum ETFs are all showing turnaround signs after their recent sudden collapse.

These factors should be supportive of high stock prices in the near-term.

From a technical perspective, breadth and momentum indicators are showing signs of recovery. The S&P 500 is holding above its 5 dma, which is a signal that this isn’t a “sell the rip” tape anymore. The next resistance level for the bulls is the 200 dma at about 5750.

The wildcards to the bullish scenario is the market reaction to changes in policy. The Trump Administration is expected to make a reciprocal tariff announcement on April 2. It is said that each country will get a number representing the level of reciprocal tariff to be imposed. The uncertainty revolves around the question of whether the announcement represents the first shot in negotiations, or actual tariff implementation.

The accompanying chart shows the Goldman Sachs estimate of the impact of tariffs on CPI. Current tariff levels have added 0.2%, The Goldman baseline adds another 0.5%, and full reciprocal tariffs takes that to about 1.3%. The Fed expects to look the the one-time (transitory) effects of tariffs on price levels, though it is expected to stay on the sidelines in wait-and-see mode in its monetary policy decisions.

On the other hand, soft sentiment-based indicators are softening, which is supportive of further easing. Consumer sentiment has collapsed, and numerous business surveys have highlighted the negative effects of tariff policy uncertainty on capital spending and hiring plans.

 

The FOMC decision had something for both bulls and bears, hawks and dove. It revised its forecast inflation rate up, unemployment up modestly, GDP growth down from 2.1% to 1.7% in 2025, and the median dot plot was unchanged, though the dot plot range rose. More importantly, the Fed reduced the rate of quantitative tightening, or the reduction in the size of the Fed’s balance sheet, which amounts to a form of stealth liquidity injection into the banking system.

 

Bottom line: The path of least resistance for stock prices is up, but be prepared to see the S&P 500 re-test its recent lows. My inner trader is maintaining his long position in the S&P 500. The usual disclaimers apply to my trading.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

Disclosure: Long SPXL