April 8, 2025
Good morning,
For the last several weeks, we have been following the four steps to a bottoming process that the market undergoes when in a downtrend: oversold, rally, retest, and breadth thrusts. As mentioned last Friday morning, one of the rules of the process is that if a retest fails (a lower low), the process resets to step 1. And, for the past several weeks, we have been seeking a bottom against the backdrop of a market in a cyclical bull phase of a secular bull market. The overall technical condition of the market, from a probability perspective, pointed to a correction in the neighborhood of a -20% drawdown (once the volatility dustup settled).
The market meltdown after Trump’s tariff announcements broke virtually every technical measure. Friday was a 15:1 down day, the worst reading of the selloff. From a technical perspective, the only positive is that the market has hit extremely oversold levels only seen a handful of times in the last 100 years. The market can always get more oversold, but a bounce rally off such extreme lows is a reasonable expectation. A bounce rally would be step 2 of the 4-step bottoming process but against a very different technical backdrop, with almost twice the downside risk of down -35% or more.
The most challenging element of the current selloff is the conditions could change with a single social media post from the president. But until that happens, we’ll stick to our disciplined risk management approach and begin de-risking portfolios where tax constraints will allow us. More on that tomorrow morning.
Futures are up +2.5% pre-open – there’s less than an even money chance that holds all day. But maybe this is the start of a bounce rally – we’ll see.
Be well,
Mike