/ May 12 / Weekly Preview
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Monday:
Monthly Budget Statement
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Tuesday:Core Inflation Rate YoY (2.8% exp.)
Inflation Rate YoY (2.4% exp.)
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Wednesday:
N/A
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Thursday:
PPI MoM (0.2% exp.)
Retail Sales MoM (0.1% exp.)
Initial Jobless Claims (230K exp.)
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Friday:
Building Permits Prel (1.45M exp.)Michigan Consumer Sentiment Prel
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Monday:
Monday.com
ZoomInfo
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Tuesday:Tencent Music
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Wednesday:
Tower Semiconductor
Cisco Systems
Jack In The Box
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Thursday:
Walmart
Deere
Take-Two Interactive Software
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Friday:
N/A
Correction Over?
Last week, we discussed that the market was improving on many internal metrics, specifically Dark Pools flows and GEX values for many key stocks and ETFs. While hedge funds and institutions have been major sellers during the correction period, retail was buying the dip in size.
As for us? Our actions were rather small and restrained, designed to keep us close to benchmark performance through the decline. We really didn’t do much of anything, and for the better, it seems. However, we might soon be nearing an inflection point, where action is warranted. But more on that later.
For now, the market paused its advance before the Fed meeting on Wednesday, which was remarkable for how unremarkable it was. The Fed held rates steady as expected and did not provide much guidance regarding its forecast for future rate cuts. Fed Chair Powell repeatedly stated that there is simply too much uncertainty regarding trade policy and economic outcomes for the Fed to guide in any meaningful way.
On Thursday, the Trump administration discussed its first “trade deal” with the UK. Notably, the US has a trade surplus with the UK, making negotiating a trade deal easier, since the US exports more than it imports. Nonetheless, announcing a long-awaited agreement gave the market hope that more deals eventually will follow. It also assured some investors that Trump can be reasoned and negotiated with — and that the tariff saga was a negotiating tactic rather than a permanent reality.
Unfortunately, other trade deals with actual “trade deficit” countries (China) may be tougher and take much longer to negotiate. For now, the most recent developments from the U.S.-China trade talks over the weekend are positive. Following high-level talks in Geneva, both sides announced a "constructive" outcome, with a 90-day rollback of previously established tariffs. Meanwhile, "working teams" are expected to meet regularly in order to address economic issues. No timeline or specific agenda for future talks was disclosed.
Technically, the market is beginning to repair much of the damage from the “Liberation Day” tariff announcements. However, the analog to the 2022 correction remains worrying. In a similar technical setup, back then we had the 50-DMA cross below the 200-DMA, followed by an intermittent rally.
Such is the same disposition we’re seeing today, with markets retracing much of the previous decline, following a crossover signal. In 2022, the price move was just a “bear market rally”, which served only to “suck investors back in”. What followed was a rug pull and a further decline. Will this be the case today as well?
Determining whether a sharp rally qualifies as a "bear market" rally can be challenging while it is ongoing. In retrospect, these situations are simple to recognize, leading investors to frequently ponder what they could have done differently.
With no definite answer at the moment, we can only compose a list of reasons why either the bullish or the bearish scenarios might follow. In the bullish camp we have:
Q1 earnings above expectations, increased investor confidence, especially in the “Mag 7” and associated AI narratives;
Investor sentiment is recovering from extremely low levels and remains cautiously optimistic — but not euphoric;
Treasury yields are stable alongside decreasing inflationary pressures;
The uncertainty surrounding tariffs, which was a primary factor in the recent market correction, is diminishing;
Market valuations have experienced some correction in recent weeks;
And then there are several reasons for concern:
Economic indicators and consumer confidence are declining;
Political policy uncertainty continues to be high;
Despite the recent market rally, there is still considerable technical deterioration;
Investors were unprepared for the scale of the recent correction, leading to potential significant selling by those looking to exit (trapped long positions);
Monetary policy uncertainty continues to be significant;
Although valuations have decreased, they still remain substantially above the long-term median and average;
Continuing the theme of institutions selling, Dark Pools buying on Friday was very weak, with an average of just 43% for the top S&P 500 stocks. For now, given this shaky backdrop, we would opt to remain cautious until a technical support level is clearly established.
Normally, we would look to our Fundamental analysis for guidance. However, the large policy shifts create a lot of uncertainty related to company earnings, so we have instead relied on technical analysis and system positioning to navigate this period.
If we were to try and shift to a fundamental model, we’d need a reliable estimate for S&P 500 EPS. As of May 1st, S&P Global has ratcheted down their 2025 EPS projection. And it wasn’t just a slight adjustment, but a full downgrade, from $258 / share to $238 / share. Most likely, the shift downward will continue and could reach $195 / share (the linear growth trend midpoint). For 2026, the estimate is now $274.
If we assign a high (but not impossible) P/E ratio of 24 x to $238, we get 5.712 as a price target for the S&P 500 (or roughy $571 on SPY). Allowing for a much reduced CAGR slope, in line with historical averages — 8% —, this is how the price chart might look like, when fundamentally adjusted with these figures:
As earnings into 2026 are being revised sharply lower, valuation risk remains elevated. Valuations recently declined as the “P” fell, but the “E” remained stable. Now the “P” is rising as the “E” declines, increasing the valuation issue for investors.
In the table below, we’ve computed the median valuation for a top 10 S&P 500 stock, compared to its minimum and maximum value over the last 5 years. From a valuation perspective, upside is about +30%, while downside is -60%. This ratio is more balanced when analyzing broad market companies, not in the top 10, to be fair. As such, we would say that the Russell 2000 is more aligned with historical fair value than the S&P 500.
To sustain elevated valuations, a couple of circumstances need to align:
Economic growth must remain more robust than the average 20-year growth rate. (Low probability)
Wage and labor growth must reverse (weaken) to sustain historically elevated profit margins.(Low probability)
Both interest rates and inflation need to decline to support consumer spending. (Challenging but possible)
In closing, we’d like to highlight a tweet from a good friend, mr. Stephen Harlin, MD (@@TailThatWagsDog).
Our Trading Strategy
“Don’t think about it” - that’s about the best piece of advice we’ve got during this turbulent period. If one were to simply follow technical signals, Dark Pools flows and GEX, without adjusting exposure too much (if at all), real results would be above average.
While we’ve seen technical improvements (as evidenced by our own Enterprise strategy), and GEX flipping positive for both SPY and QQQ, institutions have been net sellers during the last month. Recent trends show that there is a pickup in Dark Pools buying, despite the fact that hedge funds and active investors have lightened up on exposure significantly.
We’re looking for either a significant exposure increase from Enterprise, a successful re-test of lows in terms of technical market action, or a large increase in Dark Pools flows that signals a shift in risk appetite for the smart money. Any of these signals would act as a bullish impetus to justify buying.
For now, our balanced approach is doing its job, with our portfolio performance turning positive for the year, despite the -2.00% negative benchmark returns on the same period.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!