Counter-Trend Rally Coming After Stock Beatdown?

This past week saw the continuation of an unfortunate recent trend, as stocks broadly declined for the fourth consecutive week. This recent decline continues to be fueled by the same two factors, uncertainties regarding the new Administration’s trade policy, namely tariffs, and concerns about fading strength from U.S. consumers. The fear is that if these two factors continue as is for too long, it could begin to affect enough factions of the economy and could risk tipping the country into a recession. Now, this is not our ‘set in stone’ opinion about where the economy is headed, however, this is the current ‘Bear’ thesis which is winning out in the stock market, and it is important to lay out this thought process plainly. Even as ugly as the recent action in the market has been and seeing the S&P 500 this week ultimately break down through several key support levels, the downside momentum is showing some signs of slowing which we believe could point to a few things. Firstly, that we are closer to the end of this correction than the beginning and secondly, that we could be in store for a counter-trend rally in the weeks to come.

Due to the steepness of this recent slide in markets, stocks went from trading at All-Time Highs just a little over three weeks ago, to now find themselves in deeply oversold territory, at least in the short term. We may not have found the bottom of the correction quite yet, but stocks have fallen enough at this point that they are well due for some buyers to begin reentering the market bargain hunting. This would likely result in stocks seeing a nice counter-trend rally and in fact, on Friday, we began to see some early signs that this may be starting to take shape.

The S&P 500 finished trading on Friday displaying a ‘Bullish Hammer’ pattern in its weekly chart. This specific pattern is a frequently followed and reliable trend reversal pattern. This pattern was formed largely on the back of a major bullish thrust in Friday’s trading in which the index gained 2.13%, its best trading day since early November ’24. Furthermore, there has been a recent phenomenon when anytime that stocks began to regain their footing and trade higher, this strength would quickly be met with further selling, not allowing any bullish momentum to form. Friday’s trading was encouraging, because the index stayed in the green all day and was not met with traders continuing to sell into the strength. Also, on Friday, nearly 83% of NYSE listed stocks gained value, so this bullish surge in equities was broad based. Of course, one day does not make a trend. However, these are encouraging early signs that we perhaps could be due for a welcome reprieve from the selling in the coming weeks.

Key Events to Watch this Week

February U.S. Retail Sales
Earnings Reports (NKE, DRI, CCL)
FOMC Meeting & Press Conference
Headline Risk (Tariffs)

As markets are fresh off of a fourth consecutive week of declines, this coming week will feature plenty of significant market-moving events. As serious concerns are beginning to build around the U.S. consumer and if they are starting to seriously pullback on consumption and spending, this week will provide some hard data to help answer this question. The first of these data points will come first thing on Monday morning when the U.S. Retail Sales figure for February is published. This will give investors a good idea about whether these fears of the consumer fading in the early part of the year have merit or if the major disappointment in January’s report was more of an aberration. Seeing two consecutive months of disappointing sales figures would only further stoke concerns about the U.S. consumer. In addition to this there are a handful of consumer-focused earnings reports due this week that will also shed light on the situation. This week investors will hear Q4 earnings results from Nike, Inc., Darden Restaurants, Inc., & Carnival Corp. Each of these companies’ earnings and more importantly Q1 guidance, will provide a further measuring stick of consumer strength. Anticipate that these companies’ announcements will be watched closely.

After the financial news cycle of late has been moving at such a rapid pace, this week’s FOMC Fed meeting has not received the attention that it typically commands. However, since in recent weeks, fears about the economy have now arisen, markets will likely be on edge and ready to react to developments of this meeting and the subsequent press conference by Fed Chair Powell. Fed Futures markets are all but guaranteeing that the Fed will not cut rates at this meeting, yet the odds for multiple rate cuts later on this year have seen a notable increase. Investors will be listening to Powell’s speech and hoping for dovish messaging from the Fed Chair and reassurance that the Fed is ready to step in to support the economy should it be needed.

The final note for this week is that we are still remaining cognizant that markets are unsettled, and volatility remains as little clarity on U.S. trade policy has come to fruition at this point. Headline risk still remains a key factor during the short term for the markets. While we fully believe that in the long term, much of the recent volatility will resolve itself and prove to be just ‘noise’, we are taking a more cautious approach to markets and when and where we pick our spots until current uncertainties are made clear and the volatility begins to subside.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,