Login 
Preface: Explaining our market timing models We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade. The Trend […]
Something unusual happened recently. During risk-off episodes, U.S. economic pain has been cushioned by falling bond yields and an appreciating USD, which translates into lower interest rates and more consumer spending power. The risk-off episode that began in early April, which was just after the “Liberation Day” tariff announcements, saw the opposite. The price […]
Mid-week market update: It’s time to sound the all-clear signal, as least in the short run. Both the S&P 500 and the equal-weighted S&P 500 have decisively staged upside breakouts through the falling trend line. The bulls have regained control of the tape. The next resistance test is the 50% retracement level at […]
Preface: Explaining our market timing models We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade. The Trend […]
Ahead of the Second Gulf War, Secretary of Defense Donald Rumsfeld famously referred to “known knowns”, “known unknowns” and “unknown unknowns” when responding to a question about Iraqi weapons of mass destruction. Fast forward to 2025, investors have to contend with a series of known unknowns and unknown unknowns as they consider their investment […]
Mid-week market update: Market internals are showing signs of a wash-out. Readings are normalizing after an extreme oversold condition against a backdrop of extreme fear. Stock prices should advance from here. However, the S&P 500 just experienced a “death cross”, where the 50 dma falls below the 200 dma. Notwithstanding today’s negative surprises from […]
Preface: Explaining our market timing models We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade. The Trend […]
Bloomberg’s U.S. chief economist Anna Wong published a chart outlining the impact of Trump’s tariff pivot. Trump raised tariffs on China and cut the “reciprocal tariff rate” to 10% for all others, except USMCA members Canada and Mexico, for 90 days. The resulting weighted tariff rate is not substantially different from the “Liberation Day” rates […]
Torsten Sløk at Apollo believes that the bond market tantrum can be traced to an unwinding of the basis trade.
In the basis trade, hedge funds put on leveraged bets, sometimes up to 100 times, with the goal of profiting from the convergence between the futures price and the bond price, as the futures contract approaches expiry.
How big is the basis trade? It is currently around $800 billion and an important part of the $2 trillion outstanding in prime brokerage balances. It will continue to expand as US government debt levels continue to grow, see charts below.
Why is this a problem? Because the cash-futures basis trade is a potential source of instability. In case of an exogenous shock, the highly leveraged long positions in cash Treasury securities by hedge funds are at risk of being rapidly unwound. Such an unwind would have to be absorbed, in the short run, by a broker-dealer that itself is capital-constrained. This could lead to a significant disruption in market functions of broker-dealer firms, such as providing liquidity to the secondary market for Treasuries and intermediating the market for repo borrowing and lending. For example, during Covid, the Fed was at the peak buying $100 billion in Treasuries every day.
The stock market is washed-out and poised for a rally. The failure to weaken prices further on today’s news of Chinese and EU tariff retaliation is a constructive development. It just needed some positive news. Trump’s announcement today seems to have been the spark.
Keep in mind, however, that this is just the end of the first phase, which I call the escalation phase. Next comes the ups and downs of the negotiation phase. Tactically, the short-term S&P 500 upside target is the 50% retracement of 5400. Secondary resistance can be found at the next Fibonacci retracement of 564-/
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
Business is a confidence game. The president is losing the confidence of business leaders around the globe. The consequences for our country and the millions of our citizens who have supported the president — in particular low-income consumers who are already under a huge amount of economic stress — are going to be severely negative. This is not what we voted for.
Ackman’s reaction stands in contrast to a recent WSJ poll taken before the tariff news: “Republican skepticism of free trade surfaced when voters were asked whether tariffs help or hurt the U.S. economy. Some 77% of Republicans said tariffs help create U.S. jobs and are beneficial, while 93% of Democrats said they raise prices and are mostly a negative force.”
The news backdrop continues to be negative. The Trump Administration shows no signs of backing down on tariffs, but market stabilization in the face of bad news is a sign of seller exhaustion, as I outlined yesterday.
Addendum and clarification: The market did stage a brief and sudden rally on a headline that Kevin Hassatt had announced a 90-day pause in tariffs. The announcement was denied and the market retreated. The move was not on the lack of news.
Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.
Subscribers can access the latest signal in real time here.
In light of the market’s negative surprise from Trump’s tariff announcement, the key question for investors is whether the latest pullback is just a plain vanilla correction or the Big One, which signals the start of a recession-induced bear market. As the accompanying chart shows, the S&P 500 experienced average intra-year drawdowns of -14.1%, compared to the current pullback of -17.4% so far.
While the Fed is unlikely to cut rates, it could flood the financial system with liquidity should financial conditions become overly disorderly. One real-time estimate for financial conditions is the junk bond financing rate (red and blue lines), which is also an estimate of the equity risk premium for highly leveraged companies. Current junk bond readings have edged up, but market stress levels are not blowing out so much that warrant official intervention.
To be sure, banking system liquidity is still expanding and plentiful, which should be supportive of equity prices.
What About a Trump Put?
Instead of addressing what may be the roots of unfair trade practices, the implicit message of this policy is “get the trade deficit down”. If that’s Trump’s priority, don’t expect a wholescale trade policy pivot in the near future even if the stock market crashes. Trump’s approach to calculating the other country’s tariff rate also puts into the question of the utility of trade negotiations. How can any country expect the U.S. to negotiated in good faith based on made-up numbers, especially in light of Trump’s past record of tearing up past agreements like USMCA?
In the wake of the tariff announcement, Street economists and strategists are all downgrading their GDP growth and earnings expectations while raising their inflation estimates. For investors, the equity outlook depends on the two questions of whether the long-term view of the economy will fall into recession, which tends to deepen bear impulses, and the short-term view of market positioning.
By contrast, the odds of a recession before 2026 on the betting site Kalshi stands at .63%, which is consistent with the latest JPMorgan strategy team’s revised estimate of 60%.
In the short run, downgrades in the macro outlook will depress risk appetite. But how much selling is left?
One clue comes from the March 2025 BoA Global Fund Manager Survey, which was taken before the sell-off began, shows a sharp pullback in risk appetite and a global institutional stampede out of U.S. equities into non-U.S. markets.
How much selling is left in the short run?
NASDAQ 100 relative performance has become oversold, as shown by the 12-month NASDAQ 100/S&P 500 ratio shows that NASDAQ stocks (black line). While oversold markets can become more oversold, this is a level where they are also ripe for a bullish reversal.
Another sign of panicked selling can be found in the price of action of gold and gold miners, which sold off sharply Friday as stock prices tanked despite acting well as a hedge against stock market weakness. I am a long-term gold bull, but recently warned that gold mining stocks were overly extended. European and Chinese equities, which had been a recent destination for a rotation from the Magnificent Seven, also sold off Friday. These are signs that the market is undergoing a forced “sell everything” liquidation phase of capitulation.
From a sentiment perspective, readings indicate that markets are poised for a relief rally.
The AAII weekly sentiment survey continues to show readings of extreme fear. Both the bull-bear spread and the level of bearish sentiment are at levels seen at the GFC market crash and the bottoming process in 2022.
The CBOE put/call ratio has spiked to levels indicating significant levels of fear, and so did the 10 dma of the put/call ratio. The market reaction to China’s retaliatory tariffs may be the final tactical signal of sentiment capitulation that precedes a tactical bottom.
From a contrarian magazine cover perspective, the latest cover of The Economist is also a sign that Trump is likely to walk back some of the announced tariffs, which would spark a relief rally.
The stock market is obviously very oversold. The red dots in the accompanying chart shows the history of the S&P 500 when it had a two-day consecutive decline of over 10%. This is extremely rare and, if history is any guide, the market has recovered soon afterwards. To be sure, I argued last week that these historical studies of market behaviour are not useful because we have undergone a regime shift. You will have to make your own decision about whether to trust these studies of market history.
Three of the five components of my Bottom Spotting Model have flashed buy signals. In the past, two or more simultaneous component buy signals have been good trading buying entry points.
If and when the relief rally materializes, investors should be prepared for just a bear market rally. When I warned about a long-term sell signal in early February based on negative divergences (see A Long-Term Sell Signal?), I wasn’t anticipating a trade war that could spark a global recession.
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
Many of the depicted foreign tariff rates make no sense as they bear no resemblance to the actual rate. The chart on the next page from JPMorgan Asset Management depicts the pre “Liberation Day” tariff rates charged by the U.S. and to the U.S. Worth noting from the Trump announcement is the 17% Israeli tariff rate, despite Israel’s decision to reduce its tariffs on all U.S. imports to zero ahead of the Trump tariff rate setting decision. The White House table also shows a European Union tariff rate of 39%, which is vastly different from the figure shown in the JPM chart. In another case, like Australia, with which the U.S. runs a trade surplus, Trump has imposed a base tariff rate of 10%. In effect, he is punishing countries for the crime of trading with America.
To reiterate my point from last week, Trump’s objective is to reverse the effects of globalization, which he believes are unfair to America. As Branko Milanovic showed, the winners of globalization are the middle class in emerging economies, mainly because they found more and better paying jobs, and the elite of the developed economies, for engineering globalization. The losers were the people in subsistence economies which were too undeveloped to take part in globalization, and the middle class of the developed economies.
Assuming that Trump succeeds in his America First policy, the new winners will be America’s middle class, or the providers of labour. In Trump’s zero-sum game world, the obvious losers will be the suppliers of capital, which Trump has labeled “the globalists”. As well, the highest levels of “Liberation Day” tariffs were imposed on the poorest countries such as Cambodia (49%), Sri Lanka (44%) and Bangladesh (37%). These measures are consistent with the efforts to reverse the gains of low-wage emerging market economies.
I discussed the costs of Trump’s America First reshoring policy last week and I will not repeat them. One news item that came across my desk is the shocking potential for a brain drain from America.
The sudden rush of scientific talent out of the U.S. would have a depressing effect on the progress in total factor productivity in the long run.
Trump may be able to reshore manufacturing, but what will be the source of U.S. innovation in the future?
Wall Street celebrated Trump’s election in anticipation of his pro-growth policies of lower taxes and greater deregulation. It turns out that the price tag of those policies was America First, which is intended to reshore manufacturing. One of the side effects of that policy raises the cost of labour. If the suppliers of labour win, the suppliers of capital lose, all else being equal.
So where does that leave investors?
How does someone formulate investment policy under such conditions?
Similarly, Ryan Detrick pointed out that CTAs are in a crowded short in equity futures. Even the hint of less bad news would be enough to set off a short-covering stampede.
Coming into the announcement, the consensus bear case has coalesced around the scenario of an immediate implementation of a uniform 20% across-the-board tariff rate. The bull view would see a more targeted rate of 12% to 20%, along with a delayed implementation schedule. Treasury Secretary Scott Bessent offered some relief when he pre-announced that the stated tariff rate will be a ceiling from which individual rates could come down.
A similar level of uncertainty vibe can be found in the Dallas Fed’s Texas Service Sector Outlook Survey.
On the other hand, the hard data has been resilient. The Economic Surprise Index, which measures whether economic data is beat or missing expectations, is recovering after dipping below zero. Better macro data would put upward pressure on the 10-year Treasury yield as the two series have shown some correlation in the past.
Layoff announcements are also rising sharply.
On the other hand, the ADP report this morning beat market expectations and it shows improvements in private payrolls across all firm sizes.
Stay tuned. Will good (job) news be good (stock) market news? The hard-soft data tussle is the next battle of bulls and bears.
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.
Jurrien Timmer, director of macro at Fidelity: You can follow him on X/Twitter here. He also has a weekly newsletter that you can sign up for on LinkedIn.
Preface: Explaining our market timing models We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade. The Trend […]
Markets were rattled by policy under Trump 1.0 by his unpredictable and chaotic nature. Trump 2.0 promises to be more of the same. Other than the transactional nature of Trump’s deal making, what’s his ultimate end game? It’s to undo the effects of globalization. The political backdrop can be explained by Branko Milanovic’s famous […]
Mid-week market update: The stock market’s relief rally arrived this week when the WSJ reported over the weekend that Trump’s “Liberation Day” reciprocal tariffs due to be announced on April 2 will be narrowly focused. The S&P 500 rallied to regain its 200 dma. The index pulled back below the 200 dma when Bloomberg reported […]
Preface: Explaining our market timing models We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade. The Trend […]
The latest FOMC statement and subsequent press conference were full of references to “uncertainty”. Most notably, the FOMC statement changed the language related to the Fed’s goals being “roughly in balance” to “uncertainty around the economic outlook has increased”. Not only is uncertainty elevated, but also the risks to inflation, GDP growth and […]
Is it time to ask, “Who’s left to sell?”
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.
At a single-stock factor level, price momentum ETFs are all showing turnaround signs after their recent sudden collapse.
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.