/ May 27 / Weekly Preview
-
Tuesday:
Durable Goods Orders MoM (-7.8% exp.)
CB Consumer Confidence
---
Wednesday:
FOMC Minutes
---
Thursday:
Initial Jobless Claims (230K exp.)
---
Friday:
Core PCE Price Index MoM (0.1% exp.)Personal Income MoM (0.3% exp.)
Personal Spending MoM (0.2% exp.)
-
Monday:
N/A
---
Tuesday:AutoZone
Okta
---
Wednesday:
Nvidia
Salesforce
Nutanix
Abercrombie & Fitch
Capri Holdings
Dick's Sporting Goods
Macy's
---
Thursday:
Foot Locker
Li Auto
Costco Wholesale
Dell Technologies
Elastic
---
Friday:
N/A
Tariff fatigue?
During the past week, our analysis has focused on the technical side of the market, with 2 main themes standing out:
the rally has repaired much of the damage done during the April correction, breaking several resistance levels;
short term extreme overbought conditions make a pullback more likely than not before the market can advance;
On Friday, the market gave way early in the morning on fresh comments by President Trump instituting 25% tariffs on Apple (AAPL) on any product not manufactured in the U.S. and 50% tariffs on the EU, as trade talks were not going well. As is always the case, amid a bull run, sellers are still unwilling to sell over fear of “missing out” on rising asset prices. It takes some “event” to bring sellers into the market, which we saw early on Friday.
Yesterday, Trump reversed his stance on EU tariffs, agreeing to lengthen the deadline into early July. We believe investors are starting to become increasingly “immune” to this type of news, and must ask the question: is “tariff fatigue” setting in?
Judging by the action in the futures market, that may be the case. Not only did SPY bounce off the 200-DMA as comments from Scott Bessent took the sting out of Trump’s announcements, but the treasury market also calmed down just enough.
Even with Bessent’s comments, the market remains overbought short-term, and a further consolidation process is likely into this week, despite the early surge. From a bullish perspective, the 20 and 50-DMAs are now sloping positively, which should provide rising support levels. The 200-DMA and the S1 retracements should also hold firm.
Over the next month, stock buybacks should also provide plenty of tailwinds from a day-to-day supply-demand perspective. Dark Pool flows are now reading neutral (46% as of Friday), but GEX moved into negative territory for most sector ETFs, as well as for SPY and QQQ.
This will most likely translate into a more volatile environment, as price movements get exacerbated by market makers looking to hedge their books.
Currently, this appears to be an "unstoppable" bull market, and investor sentiment has significantly shifted towards optimism (and even “euphoria” by some measures). Nevertheless, all bullish trends eventually conclude. This does not imply that a market "crash" is imminent, as the market remains above the 200-day moving average at this time. This indicates that the previous correction phase may be over, with support accumulating at somewhat lower levels. That being said, certainty is never guaranteed.
Normally, when our sentiment indicator reaches 2-standard deviations extremes, the previous move tends to normalize and reverse. In this case, normalization means a pullback, since “everyone” is on the same side of the trade.
And who exactly is “everyone”? We’ve also touched on the subject last week, but it’s worth repeating: retail investors.
Per J.P. Morgan, retail investors purchased a net of $4.1 billion of US stocks in the first three hours of trading on Monday morning, as stocks declined -1% on news of Moody’s downgrade. As their graph below shows, Monday’s retail buying stampede dwarfs prior instances, and it’s very illustrative for the degree of FOMO which clearly exists.
By definition, retail investors are purchasing stocks from institutions (large banks, insurers, hedge funds). Unsurprisingly and directly related, Hedge Fund short-selling just rose to unprecedented levels. Over the past 3 COT reports, Hedge Fund shorts surged ~$25bn – the largest amount for at least the past 10 years.
Viewed through another lens, Hedge Fund shorts as a percentage of total open interest reached 41% – the max dating back to February of 2021.
Generally, institutional investors are often more accurate in their projections. However, in the short term, especially in recent years, retail investors have actively ”bought the dip” during market corrections. Now, the key question becomes: will retail investors run out of cash or will institutions be forced to cover (or resume long positioning)?
These kind of disputes boil down to the concept of “value”, to which we also normally subscribe to. The question of setting a “fair value” implies also understanding what is “cheap” and what is “expensive”. We provide such analysis in our Quarterly Valuation article series.
At the moment, it’s been especially hard to pin down any sort of reliable projection. Some investors have noted that the market is “flying blind” similar to the Covid recovery effort. It’s easy to empathise with this point of view, as tariffs get announced and then dropped on a whim. At the moment, nobody knows:
Just how much inflation enacted and maintained tariffs will ultimately cause;
What the Fed will do as a consequence;
The impact of tariffs on corporate bottom lines;
In this environment, scenario planning becomes essential. Companies and investors must weigh multiple possible outcomes:
Scenario 1: Tariff Absorption – Firms eat the costs, protecting consumers but squeezing margins. This could lead to lower stock valuations, particularly for companies with already thin margins, while bonds will benefit from reduced inflation fears;
Scenario 2: Cost Pass-Through – Companies raise prices, fueling inflation but preserving margins. This risks demand destruction, especially in non-essential goods, and could force the Fed’s hand on rates. Bonds will most likely decline further;
Scenario 3: Trade Escalation – Retaliatory tariffs from other nations intensify, hitting exporters and global supply chains. While currently improbable due to an apparent willingness to negotiate, this could lead to stagflation, where inflation rises alongside economic stagnation. This is a worst-case scenario for both stocks and bonds. It’s not entirely clear that the market has avoided this outcome, as only negotiations have been announced, not actual trade deals with China and the EU (kek partners in this dispute).
Basically, retail investors are saying a “Hail Mary!”, buying and hoping. They are most likely looking at the post Covid crash recovery as a template where the market scaled new highs, despite many challenges.
However, it is worth remembering that there are many competing differences between the current macroeconomic backdrop and 2020.
Our Trading Strategy
For the past month and a half, we have opted to slow down our trading and let the market settle. We are optimistic on a longer term basis, but recognize that many unanswered questions remain. The retail - institutional investors gap is very wide and poses significant risks from a supply and demand perspective. We would be much more comfortable if this situation was reversed (retail selling and institutions buying).
While this remains an unpredictible and volatile market, in our opinion it’s still a bull market. That last part is what matters most. When all is said and done, we are interested in adding to risk exposure at the moment, and looking for the right time to do so. Our main asset allocation strategy (Enterprise) is already 75% long stocks, and holds little cash — we will follow suit.
However, since the Sigma Portfolio mirrors real life, we are much more mindful of potential downside. While the “relentless rally” seems to continue, short-term overbought conditions remain and patience is required in order to navigate this environment. For the moment, we wouldn’t want to stray too far off the “balanced” setting that our portfolio currently has.
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!