Hi all,
The word of the month on Wall Street has been “Uncertainty”. Uncertainty surrounding fiscal policy (government spending/cutting). Uncertainty surrounding monetary policy (will the FED cut rates this year, and if so, how many times?). Uncertainty surrounding geopolitics.
We believe the reason so many investors have been caught off guard to start 2025 was because they believed uncertainty was low. But like gravity, uncertainty exists everywhere and always, whether you believe in it or not.
We’ve seen a clear move out of the darlings of 2023 and 2024 into more defensive sectors, as well as into unloved and cheaper parts of the markets like international stocks and energy names. Those of you who have been cursing us under your breath for our steadfastness with regards to international exposure (rightfully so), are now seeing the benefits of diversification and enjoying a smoother ride than the flavor of the month club.
This year’s price action in the wake of a first year of a presidential term, and a year following back to back 20%+ returns on the S&P 500, has been pretty typical. Bumpy, sideways action, followed by sharp snap backs, as the market decides where it wants to focus. The only thing that’s really stood out to us has been how bearish the market sentiment has become, without price being the primary driver (it’s been dysfunction of government this time).
Let’s look at a few of the psychological metrics we follow.
Our first chart comes from Jay Kaeppel, Senior Market Analyst at SentimenTrader. His own proprietary Panic/Euphoria model has gotten to a level seen 7 times in the last 25 years. Each time over the next month or so, the road continues to be bumpy, but looking out 12 months, average returns are in the 30% range (not a prediction, but it’s an outcome that very few are giving appropriate consideration).
Next, we have some data from Ryan Detrick at Carson Investment Research. This chart shows the number of times we saw the persistent and broad type of buying we saw last week. In the last 40 years, it’s only happened 11 times where we saw 90% of all stocks in the S&P 500 going higher two days in a row. Again, the bias here shows that the next 1-3 months remain sideways to positive, but 12 months out, positive 100% of the time.
Disclaimer: Past performance is not indicative of future resultsBut, it’s never easy. Using a volume-based metric, the last six times we’ve gotten these back-to-back “thrust” days, we’ve seen a short-term “retest” of these lows to confirm that the buying pressure in the market is real.
So what does it all mean? It means 12 months out from these signals, we are very bullish, but in the short-term expect some more pain and the market heading back toward lows as things start to look dicey again. As the great Walter Deemer would say, “Most climactic lows are usually tested at some point, but not all tests are successful.” At the moment, we believe the retest will hold these current lows, and most likely the market’s next bounce will be the best buying opportunity for 2025. We also still believe that new all-time highs are very possible for later this year.
– Adam