All Clear Signal

As I said a few weeks back, we can buy the dip if we get oversold enough. Last week, the maximum uncertainty point was reached as Trump's Liberation Day set a low bar for risk assets to jump over. The oversold levels I had been waiting for were achieved (chart below). The path of least resistance is now up. It reinforces the old adage that "when it comes time to buy the market, you won't want to." I didn't want to buy last week, either. But I should have.

Pecent of Stocks above 50 MA

The damage to investor confidence from the stock and bond market's tariff hissy fit has begun to subside after the random but encouraging deferrals on retaliatory tariffs and compromises in the auto and semiconductor sectors. Harsh business realities have pushed back against the blunt instrument approach favoured by Navarro, forcing the White House to back-track. Although the tariff cudgel may still be wielded to force 'wins' for Trump's America First vision, it will be a long slog with one-off deal-making and compromises as the preferred approach.

Not for one minute do I believe we are entirely out of the woods, but the forced liquidation and panic are now behind us, and we must now focus on the babies in this bathwater. It's a market of stocks—not a stock market now. And that's what has been missing for the past two years of relentless dominance by the Mega-techs. The long-awaited rotation to areas of the global market that offer quality and value is finally here. Apple, Meta, Tesla, and perhaps Amazon have seen their highs. They can now provide the fuel for rotation trades that are just beginning.

I liken this to the 1987 crash. That event, as tumultuous as it was, was more damaging to investor psychology than the real economy. The consumer effects were limited to areas around the major financial centers. With most of MAGA-Street America in a state of denial while they blithely follow the news via FOX News's distortion channel, I see a comparable period of surprising, albeit muted, economic resilience ahead. For markets, reshoring and skill-upgrading capex is the new bull case. They're likely to keep the economy from imploding and give investors, with their notoriously short attention spans, something on which to focus.

But be careful, many businesses will falter, especially China-focussed importers. The market's job is to focus on the quality-value side of the equation. Some say that 'U.S. Exceptionalism,' which has dominated investor behaviour since the Fed pivot in early 2024, is over. But the mud flung on America's cleanest dirty shirt by Trump's tariffs can wash off given enough time. Investors will gravitate to the beneficiaries of the Trump-Navarro doctrine as they are currying favour as we speak. Nvidia's new plant announcement is just the first of many.

From a macro standpoint, there isn't much to say other than it is still a bull market until the Fed says it isn't. Yesterday, Governor Waller gave us the first inkling of easier Fed policy. He even resurrected the now-vilified 'transitory' word that Chair Powell had previously banned from the Fed thesaurus. But as I argued last week, he's right to focus on the downside risks to growth rather than the step-function jolt to inflation from tariffs. The Fed put lives!

The correction may have more to go (retest?) due to lowered earnings expectations, but this morning's bank results were a positive surprise. Discretionary spending such as restaurants and airlines may suffer further pain, but the growth scare shouldn't morph into anything approaching a recession, given lower gasoline prices and stable housing markets. Tax bill extensions and deregulation are future supportive elements to help drive investors' risk-on vibes.

The bond market scare, caused by a combination of hedge trade unwinds and Sovereign liquidation rumours, has subsided for now. King Dollar is also taking a much-needed break. Bond vigilantes will have to wait another day. The crowded 'U.S. Exceptionalism' trade in the currency badly needed a mid-course correction and is now getting it. There is nothing to see here, just an old-fashioned over-bought correction. This dip should be bought.

There are many good-quality businesses on sale. The stock market is always a store that sends people running into the streets when they put stuff on sale. I'm giving the long-suffering stock pickers a green light. But tread carefully; Trump could run the red any time in his new TESLER.

Risk Model: 2/5 - Risk Off

The market rebound has righted the ship from a pricing standpoint—RSI and 220 DMA—but 3-month volatility, AAII sentiment, and Copper/Gold indicators are still in risk-off mode. Keep some dry powder for next week.

Although gold was a better diversifier than just about anything, it is now an overly popular and crowded trade that could unravel at a moment's notice. Stock market sentiment is as bad as it gets and roughly comparable to the 2008 GFC and COVID-19 shocks. Is it really as bad as that from an economic standpoint? You decide.