March 21, 2025
Good morning,
We are long term investors for our clients and believe that the key to successful long-term investing is to keep portfolios aligned with the prevailing long-term trends in markets. Long term trends all begin as short-term trends. Non-durable short-term trends are noise. The art and mathematics behind investment success is discerning the lasting trends from the noise. Morning Notes, therefore, tend to deal in the moment, but with an objective of detecting long-term trend change.
Recently, the Morning Note has been focused on the steep correction that started a month ago and centered on U.S. equities. The key question is whether it is a correction or the start of a bear market. The evidence is beginning to lean toward the former, but we are a data point or two away from a verdict. Recall the four conditions defining an entrenched downtrend’s conclusion: oversold, rally, retest, and breadth thrusts. Long term readers have seen this formula many times here.
The combined two-day rally last Friday and Monday, reversed the cellar dwelling, extremely oversold daily sentiment indicator and checked boxes 1 and 2 of the 4-step formula. The market pulled back on Tuesday, putting it in step 3 (retest) with the necessary volume and breadth qualifications.
Now what? The duration of the retesting phase (step 3) can be roughly proportional to the original decline (16 trading days in this case). Another 16 days would bring us to April 4, near the April 2 deadline for reciprocal tariffs. Since tariff concerns were the main catalyst for the selloff, the April 2 deadline could bring a resolution, one way or the other.
Note: proportionality is just a rule of thumb. A failed retest (new low) at any time puts the market back to step 1. Conversely, an extremely powerful rally (like last Friday-Monday) would catapult the market to step 4 (breadth thrusts) that confirms the downtrend is over.
Today is a massive quarterly expiration of futures and options of all kinds. Noise will probably overwhelm any signal in today’s trading. Don’t be too alarmed at the possible spike in daily volatility.
Be well,
Mike