Mid-week market update: Today’s market action has a constructive quality to it. The S&P 500 managed to stage an upside breakout through 5500 resistance and fill the price gap just above that level. The latest development saw the index pulled back to succesfully test the 5500 resistance turned support
It’s normal to see the market consolidate its gains after a ZBT. Here’s an update.
A ZBT Re-examination
I voiced my discomfort of the ZBT buy signal on the weekend. I am keeping an open mind but I remain highly concerned. RecessionAlert argued that there was no ZBT buy signal if investors use the NYSE common stock only advance-decline data, instead of the all issue data, which contains debt and closed-end funds. The use of common stock only data is more consistent with Marty Zweig’s idea of the breadth thrust of common stocks.
Arun Chopra went further and analyzed all ZBT buy signals since World War II. Here are the S&P 500 patterns for 2011-2025.
Here is 2004-2013.
Here are the rest, going back to World War II.
Here are my main takeaways from reading these charts. Most ZBT buy signals occurred against a period of wildly choppy market action, followed by the ZBT buy signal that was usually the final low. The period of choppy action hasn’t preceded the latest signal, which argues for a re-test of the previous low in the near future.
There are no guarantees in life or investing, re-tests of lows are not always successful. What is different this time is the lack of fiscal or monetary support for stock prices. The Republican controlled Congress is struggling to pass a tax package that’s meaningfully stimulative without blowing up the deficit. The Fed is in wait and see mode in the face of rising prices from the imposition of tariffs and it’s unlikely to cut rates in the near future.
Recession Risk rising
In the meantime, recession anxiety is rising. The odds of a recession has risen to 66% at the Polymarket betting market. Remember – recessions are bull market killers.
The WSJ reported that JPM CEO Jamie Dimon said that a mild recession was his best case scenario:
Trade negotiations were top of mind at the International Monetary Fund meetings in Washington last week. In a closed-door talk hosted by JPMorgan Chase in front of over 500 investors, Treasury Secretary Scott Bessent said that he expects negotiations with China will take between two to three years and that the goal wasn’t to decouple the two economies, people who attended the talk said.JPMorgan CEO Jamie Dimon addressed the crowd afterward, and said he believes the best case outcome from the trade war would be a mild recession for the U.S. economy.
In closing, I offer the following market analogs from Nautilus Research for the S&P 500. While the use of market templates for future performance isn’t my favoured form of analysis, the patterns cannot be entirely ignored. Bearish outcomes outnumber bullish ones. Pick your poison.
I get it. But this makes me think of those front page of Barrons contrarian signals.
People don’t want to believe it because of sentiment.
Now on the monthly chart $$HYIOAS has a really long upper wick. What I found interesting is that lower wicks are much less common. Fear is stronger than greed I guess.
The SPY put out a beautiful monthly hammer candle. When you look at the combination of $$HYIOAS with a long upper wick and a SPY hammer or long lower wick, the SPY usually goes up. Toss in the ZBT and you get “markets can stay irrational longer than one can stay solvent”
Not a setup to go all in long, but not one to short.
Correction: Recessions are bull market killers
Not bear market killers
Cam
From your 13th April missive:
“The readings of the Trend Asset Allocation Model has been downgraded from neutral to risk=off. The Trend Model uses trend following techniques to generate signals, and trend following models are always late by design. It’s not a bug, it’s a feature.
That said, I have some reservations about the downgrade, which calls for an asset allocation shift from stocks to bonds. The model portfolio will be selling 20% of its S&P 500 holdings and buying 7-10 year Treasuries as a substitute”.
So, simply ignore the ZBT signal and hold a 40:60 bearish stock:bond allocation for now, or is there a change in the Trend model?