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The rally over the last two years has helped investors forget that markets also go down. After two +20% consecutive years, a sudden 8% drop from recent highs has investors panicking. Bear in mind, no pun intended, that the S&P 500 is only down 4% for 2025. Consider the graph below. It shows that the running five-day put volume set a record. So the question is whether we are now in a topping process with more losses to come or on a short break from the bull market. To rephrase the question, should we buy the dip or sell the rip?
Buying the dip implies the market is nearing a bottom. This presumes investors will get comfortable with tariffs and fiscal spending cuts. Possibly, it also means that Trump’s other plans, like lower taxes and looser regulations, generate optimism. We can’t rule out a more dovish Fed to boost optimism. Moreover, earnings expectations do not decline much despite signs of slowing growth.
Conversely, selling the rip implies the market is in a topping process. Furthermore, it likely means below-average growth or even a recession.
So are we buying the dip or selling the rip? The answer may be both. We do think the market is very oversold. However, the macroeconomic landscape is deteriorating, and we believe it will be hard for earnings to match current expectations. However, we rely heavily on technical indicators. This helps keep a level head when bad decisions are more likely to get the best of us. We are leaning toward a rally but eventually selling the rip. In other words, let the market’s oversold condition normalize a bit. Moreover, if economic conditions continue to deteriorate and our important long-term indicators turn bearish, we may reduce exposure.
What To Watch
Earnings
Economy
Market Trading Update
Yesterday, we touched on the depth of the recent sell-off. The markets were set to bounce in the early morning, but more threats of tariffs on Canada quickly canceled that rally. Nonetheless, even though the market finished lower, there was decent “bottom fishing” during the day, with the more beaten-down Technology stocks finding a bid. As shown, the markets remain on a deep oversold basis, and a counter-trend rally to the 200-DMA, which is now initial resistance is likely in the next day or two barring any more rhetoric from the White House.
Notably, while headlines are lit up with recession talk, this is not currently the case. It will take several months of data to determine if a recession is in the offing. However, while it may seem as if the recent decline is traumatic, it is just 9% from the peak and just a normal correction after a significant run from last August’s lows. The current technical damage will take some time to repair, so we are now in a “sell the rally” mode, as noted yesterday.
Continue to manage risk accordingly but use rallies to rebalance as needed
Walmart and Delta Send Warnings
The CEOs of Walmart and Delta recently warned that they are seeing more sluggish consumer activity. To wit, the Walmart CEO stated, “You can see that the money runs out before the month is gone, you can see that people are buying smaller pack sizes at the end of the month.” Delta’s CEO offered similar caution: “The outlook has been impacted by the recent reduction in consumer and corporate confidence caused by increased macro uncertainty, driving softness in Domestic demand.” He also noted that Federal air bookings are off about 50%.
In addition to hard economic data and soft surveys, corporate statements are a good way to assess the economy. These two consumer giants tell us they are seeing some softness. Accordingly, earnings reports, especially for personal consumer-facing companies in mid- to late April, will be very telling.
NYSE A/D Line: A Topping Process In Progress?
As we have discussed since the beginning of this year, the risk of disappointment remains elevated. Wall Street analysts remain optimistic about earnings and economic growth, but market behaviors tell a different story. Volatility is rising, and as we stated previously, volatility is likely to be a regular “dance partner” this year as markets come to grips with slower economic growth, rising political uncertainty, and over-valued markets.
We, nor does anyone else, know how the market will end this year. This is why technical indicators play a crucial role in helping investors gauge market momentum, trend strength, and potential reversals. As of early March 2025, several key indicators—the NYSE Advance-Decline (A/D) Line, Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD)—are signaling caution, suggesting that investors should take a closer look at their risk management strategies.
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