What’s Needed to Fix This Bull Market?

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Last week, the S&P 500 joined the Nasdaq 100, earning the designation of being in a “Correction” by declining 10% from the high.

It’s tempting to look for reasons to believe that the market is near the bottom, but first, let’s look at the big-picture conditions that created this situation.

If we look at the topics of the last several Market Outlook articles we can see the problems unfold.

Feb 9^th: Inflation fears expressed by consumers lead to a market selloff.

Feb 16^th: Momentum stocks are the leading bullish area in the market, but AAII sentiment measure showed that the retail investor was getting significantly bearish.

Feb 23^rd: “Storm clouds” or warning signs become obvious as the market declines led by consumer sectors, and Walmart’s (WMT) strong uptrend was violently reversed by its earnings report.

March 2^nd: GDPNow forecast registers a big decline, consumer sectors accelerate lower

March 9^th: Tariff threats have become too large and significant for the market to price in as temporary negotiating tactics. As a result, the market reprices for an increased fear of slowing growth and the recognition that President Trump is not going to let the market’s decline change the policies that it clearly doesn’t approve of.

This week: Tariffs and DOGE actions drive consumer angst and uncertainty to historically high levels. The market continues to decline, led by consumer-related sectors. Goldman Sachs, Citi and other analysts announce cuts in their forecast for growth and the market.

These charts describe the current situation well:

Small Business Uncertainty:

The NFIB measure of uncertainty as of Feb 2025

Consumer Sentiment

 

Retail Investor Bearish (AAII Survey – Bearish Responses)

Fear In The Market (VIX)

Economists turn bearish

High valuations lead to market forecasts being cut even by bullish analysts!

For example, one of Wall Street’s most bullish market strategists, Ed Yardeni, wrote…

“We didn't raise our recession odds today, but we did lower our S&P 500 targets for the end of 2025 and 2026 to 6400 and 7200 from 7000 and 8000. We aren't cutting our earnings outlook yet, but recession fears caused by Trump Turmoil 2.0 are already causing the forward P/E and forward P/S of the S&P 500 to tumble, led by the valuation multiples of the Magnificent-7.”

In Summary

As described above, the market’s bearish sentiment and market action have been led by a fear of the consumer cutting back, leading to slower growth. This is illustrated by the XLY and XRT sector ETFs sitting at the bottom of the YTD performance column in the table below which you can also find here.

In short, the consumer doesn’t have confidence in the economy, economists are expecting slower growth, and the stock market is nervous as a result.

 

What’s Next?

In last week’s article, we described a simple formula for measuring how dangerous a decline is using the rule for the SPY that if the market closed 5% below the 20-week or the 200-day moving average, this would suggest a deeper and more prolonged decline. Last week, the weekly criteria were not met, but the daily criteria did get triggered.

This would suggest that a defensive posture would make sense until the SPY trades well over the 200-Day Moving Average (3% over would be a good measure). This is especially important if the market makes a new low.

Considering that the sentiment driving the market lower is related to the consumer’s confidence and expectations for economic growth, and both of these factors seem to be related to the uncertainty created by the execution of new tariff policies, there are a few potential catalysts that could lead the market to become more bullish in a sustainable way.

1. An improvement in consumer sentiment.
2. Economic growth proves to be resilient.
3. The Fed cuts interest rates in a way that convinces investors that it will spur growth.

If any of the above occurs, we’d expect to see the XRT, XLY and XLP sectors all respond with bullish trends.

Before news related to any of the options above, it is possible that the market could bottom for technical reasons that demonstrate that it is oversold.

Here are a few reasons why the markets may bounce from here.

1. On Friday the consumer sentiment data (shown above was quite negative, but the market didn’t sell off. In fact, the SPY, QQQ, IWM and DIA all closed over the prior day’s high. This is a bullish pattern if the market continues higher on Monday – See the live charts here.
2. The Market Sentiment has reached excessively bearish levels based on the AAII Survey (above) and the CNN Fear and Greed index below.
3. The ratio of the short-term and intermediate-term VIX has turned up after reaching over-sold levels as shown below. You can follow this chart here.

There are a few other reasons outlined in the bullets and this week’s market analysis video below.

Uncertainty Is The Biggest Factor and Hardest To Predict.

When the market is trending, and investors have confidence in the driving sentiment, the trend can withstand unexpected challenges in the news flow and data. In this case, the trend (up or down) is likely to continue.

However, right now, the market’s down trend has been a result of declining confidence in the predictability of earnings, inflation, economic growth, disruptive tariffs, and more.  The bearish case for stocks is that this uncertainty becomes more definitively and predictably bearish. The bullish case for stocks is that the current uncertainty gives way to a return to confidence that the economy is strong, earnings will continue to grow, inflation will continue to cool, and the pro-business fiscal policies and bullish animal spirits that the market was confident about in November return.

In the March 2nd issue of Market Outlook, “This May Be Worse Than Inflation,” we highlighted the pattern of looking for the condition where XLY and XLP are both trending in the same direction to identify a durable trend. Currently. they are both trending down. If this pattern becomes bullish, it would be a sign that the market has renewed confidence in the consumer and the economy.

 

 

Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts. The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral.  The video analysis dives deeper.

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Summary: While Friday’s action was encouraging for a nascent market turnaround, we need to see further confirmation, like the Nasdaq and S&P regaining their 200-Day moving averages. Value stocks continue to outperform and seem to be poised to lead the market up or outperform on a further decline, although Semiconductors could also signal a reversal in the beaten down tech sector and a return to risk-on.

Risk On

• Markets hit new recent lows on Thursday and were oversold on price and Real Motion and were setup for mean reversion trades across the four key indexes. We got a strong bounce on Friday. We need further confirmation that this wasn’t just a short-term relief rally. (+)
• The number of stocks above their key moving averages hit oversold levels and are already starting to reverse, particularly on the 20-Day Moving Average. (+)
• Value stocks improved into a strong warning phase this week. (+)
• BTC has effectively held its 200-Day Moving Average, going back several years. It tested that average and recovered nicely. (+)
• Seasonal trends are confirming a potential bounce in the latter half of March aligning with many other mean-reversion signals and could indicate a particularly strong bounce. (+)

Neutral

• Risk-off sectors like Gold Miners and Utilities were up on the week. However, semiconductors were also up, which if it holds up, could translate to a more significant tech rally.(=)
• Volume patterns are still very weak, though marginally improved from recent levels. (=)
• Even though the McClellan Oscilator is still in negative territory, it has leveled off and bounced from oversold levels. (=)
• The new high new low ratio on the Nasdaq is potentially basing out at low levels that could support a mean reversion bounce. (=)
• The SPY color charts (moving average of the percentage of stocks above key moving averages) shows neutral readings on a short-to-midterm basis (=)
• As we noted last week, Volatility measurements hit overbought levels and is in the process of mean reverting from key resistance levels in both the cash and futures-based ETF. (=)
• Foreign equities continued to outperform U.S. equities by some of the widest margins in quite some time. (=)
• All of the modern family members are trading under their 200-Day Moving Average. Semiconductors are now slightly outperforming the S&P on a short-term basis, which could be a lead indicator of whether we are going to enter a more risk-on environment. (=)

Risk Off

• Latin american equities were strong this week, likely related to commodities, especially metals, Silver, Gold and Copper. (-)
• The Nasdaq and IWM color charts (moving average of the percentage of stocks above key moving averages) continues to give negative readings across the board. (-)
• Risk gauges remain fully risk-off despite Friday’s bounce. (-)
• Gold bucked the trend and put in new all-time highs, which is consistent in a risk-off environment as we have pointed out in the past. Equities can go up against this trend, but one usually accedes  to the other. (-)
• The dollar remains under pressure and was marginally down on the week. Considering the importance of the dollar in global finance, and declining equities, this is a negative. (-)