Can Market Upside Continue Amid an Unprecedented Shift in the Economy?
The tariff issue is still far from over and there are a number of signs of economic slowing. But there are positive technical developments.
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Immediately after the S&P 500 fell into a technical correction, the market enjoyed a sizable two-day bounce. This bounce was driven primarily by oversold technical conditions, a high level of negativity, and the absence of negative news, particularly tariffs.
Technicians are celebrating the fact that on both days of this rally, the upside volume was more than 90%. When the buying is that broad, it typically is a good signal that a bottom has formed and that the indexes will be higher in the future. According to Sentimentrader.com, since 1920, there have been 18 times when the S&P 500 has had two consecutive 90% up days after the S&P 500 hit a six-month low. In all 18 cases, the S&P was higher two months later, with an average gain of 6.2%.
That is a bullish statistic, but we are dealing with an unprecedented shift in the economy due to President Trump's policies. Tariffs are set to go into effect in about two weeks, but they are still being developed. The tariff issue is still far from over and is going to be a continued source of volatility.
Trump is scheduled to speak with Russian President Vladimir Putin on Tuesday. Progress there is likely to be positive, but on Monday night, bombing in Gaza resumed, and that is causing a rise in oil.
The key issue that the market will be grappling with is economic health. There are a number of signs of economic slowing: consumer confidence is dropping fast, and unemployment is starting to rise.
Fed Chair Jerome Powell will be announcing Fed policy on Wednesday afternoon, and there is now some intense political pressure on the event. Trump has been quiet about interest rates recently, but he has a history of pressing Powell to make cuts.
Technically, the big issue is whether the recent bounce can continue in a straight line without a significant pullback first. While there was weakness on Tuesday morning, lately the market has been able to shake off some early struggles and gain traction during the day. The close will be the key.
My game plan is to focus on protecting recent gains and to continue to look for good entry points in stocks with strong fundamentals. Small-caps have been exhibiting some relative strength, which is good news for stock pickers.
At the time of publication, Rev Shark had no positions in any securities mentioned.
