/ April 06 / Weekly Preview
-
Monday:
N/A
---
Tuesday:
Durable Goods Orders MoM (-0.5% exp.)
---
Wednesday:
FOMC Minutes
---
Thursday:
Core PCE Price Index MoM (0.4% exp.)
Personal Income MoM (0.3% exp.)
Personal Spending MoM (0.5% exp.)
Initial Jobless Claims (209K exp.)
---
Friday:
Core Inflation Rate YoY (2.7% exp.)
Inflation Rate YoY (3.3% exp.)
-
Monday:
Progress Software Corporation
---
Tuesday:
Nike, Inc.
McCormick & Company, Incorporated
---
Wednesday:
ICON plc
ConAgra Brands, Inc.
---
Thursday:
Acuity Inc.
---
Friday:
N/A
Defense over Offence
Got a question about the markets, your investments, or a topic you’d like us to discuss in an upcoming article? We read every message and may feature your question in our daily write-ups!
Email: andrei@signal-sigma.com
Follow & DM on X: @signal_sigma
Equity markets closed Q1 as the worst quarter since 2022, with the S&P 500 index down -7% and about half of index constituents recording drawdowns of at least -20%, consistent with bear market levels. Every member of the Magnificent Seven finished in the red.
We’ve recently seen a sharp reflexive rally to cap a holiday shortened week, fueled primarily by oversold conditions and short covering. With oil still trading at above $100 / barrel and sentiment still fragile, there is little conviction behind the advance.
In a prime-time address, President Trump displayed both threatening and peaceful rhetoric, confirming ongoing ceasefire negotiations while warning that U.S. forces would “hit Iran hard” and reduce them “to the stone age” before withdrawing within two to three weeks. This was followed by more drama over the weekend, with the conflict basically unresolved and a new deadline for Tuesday.
The reflexive rally was unsurprising, following 5 weeks of continuous declines. Oversold markets have a tendency to cling to any bit of good news and rally sharply as traders chase prices. However, until SPY manages to clear the 200-DMA for at least 5 consecutive sessions, we remain cautious.
Number of S&P 500 stocks with drawdowns in excess of -20% (currently 253)
In reference to the study above, whenever the number of S&P 500 stocks with drawdowns in excess of -20% goes above 250 (1 standard deviation), returns in the following period longer than 2 weeks are overwhelmingly positive. The current setup (253 stocks) would be a valid contrarian signal, from this perspective.
However, the 1 and 2 week intervals can bring further losses up to -18% for SPY. In other words, betting on the market in the very short term tends to be risky, while this becomes a non-issue in the longer term. The table below is revealing as it tells us significant losses are clustered in the near term.
Another revealing study involves the behavior of markets around the key 200-day moving average, especially in conditions where this acts as broken support. It turns out that whenever the 200-DMA is violated, while the 50-DMA is also sloping downward, short term returns skew extremely bearish.
This is in fact the most bearish outcome we’ve ever backtested on this platform. The ultimate sell signal, triggered on March 20.
Breaking below the 200-day moving average is not a minor event. Historically, a clean break below that level without a swift recapture has resolved to the downside more often than not.
The outcomes from such a break of support are detailed in the table below, showing an absolute train-wreck in terms of near term returns. This study again confirms the possibility of double digit short term declines for SPY, similar to the first study presented above.
As such, the technical set-up for the broad market remains a precarious one, despite last week’s rally. We are still in a highly vulnerable timeframe that expires around April 20-25.
A potential silver lining rests in a rumour we’ve been hearing over the last couple of weeks, apparently confirmed by Citrini research: the Hormuz Strait is not nearly as “disrupted” as currently perceived by investors. Citrini sent an analyst with $15,000 in cash, recording sunglasses, and a pack of Cuban cigars to the Strait of Hormuz in order to gain intel on what the ground situation really looks like. He discovered a stark difference between tanker reality and press headlines.
Nevertheless, in markets, perception IS reality. While the bounce last week was solid, the question heading into Q2 is whether this rally has legs or is simply another dead-cat rally in a larger corrective phase.
At the moment, the market is pushing into resistance at both the 20 and 200 daily moving averages. We recorded a short term buy signal in terms of momentum, but that was mostly on account of highly oversold previous readings. While the rally could be tradeable, a more reliable entry point can be found in either one of three cases:
The market deteriorates further, either up to $606 or a successful retest of recent lows (around $630); this would create historically oversold conditions that amount to a clear contrarian BUY signal; we have no such signal in place yet, as the decline has been relatively mild so far;
The market trades above the 200-DMA for 5 continuous sessions, thus confirming the end of the correctionary period;
SELL signals expire around April 20-25, ending the critical period and ensuring the market has fully digested the Iran conflict and potential repercussions;
In our opinion, investors who are fully allocated are better served by deploying hedges at this juncture. This is not a moment to chase returns.
As shown in the study below, once we get a clear confirmation that SPY has traded above the 200-DMA for 5 consecutive sessions, odds for returns improve greatly at all time periods.
Our Trading Strategy (Sigma Portfolio)
For the next couple of weeks, the markets remain vulnerable to further sharp losses. As time goes by, and the news flow gets digested, forward risks tend to dissipate. We’ll get plenty of other catalysts besides the oil price soon, most notably inflation figures.
The March FOMC Minutes and Friday’s March CPI report are the week’s key inflection points. The FOMC Minutes will show how divided the Fed was on holding rates at 3.50–3.75%, after incorporating the Iran oil shock, 15% global tariffs, and weak February payrolls into their projections.
Friday’s March CPI is the most important print, as it fully captures the oil surge toward $100. With February at +0.3% MoM headline and core, a hot March reading—especially above 0.4% headline or 0.3% core—could delay rate cuts to December or completely eliminate them, given tariff and energy-driven inflation pressures.
The historical data we’ve analyzed in this article only gives us half of the answers we’re looking for. This is exactly the type of market that can go both ways. After a month long decline and terrible headlines & sentiment, a rally was inevitable. The burden of proof now lies with the bulls. It’s them who need to “prove” the trend has reversed. Sellers don’t currently need to prove anything.
Furthermore, we will soon get access to more fundamentals data, with companies starting to report Q1 earnings next week. CEO commentary and forward guidance will start to weigh more heavily in market pricing. Eventually, we will get a durable bottom to signal accumulation, triggered by at least one (but most likely a couple) of potential conditions:
200-DMA recapture for at least a full 5 consecutive trading sessions (on SPY);
Oil below ~ $85 / bbl;
Positive market reaction to Q1 Earnings / Guidance; stable forward revisions;
Credit spread compression;
Until then, it’s Defense over Offence.
Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this blog post. I currently do not own or plan to own any position, long or short, in the securities mentioned.
I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this blog post myself, and it expresses my own opinions. I do not have a business relationship with any company whose stock is mentioned in this blog post. The information in this blog post is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.