“tariff increases will be significantly larger than expected’…
- Fed Chairman Jerome Powell, April 4, 2025
“…investors hoped that the tariffs unveiled at the president’s ‘Liberation Day’ wouldn’t be so extensive. The president might back off. The threats might be a short-term negotiating tactic. Fewer countries than expected might be included. Instead, the levies were even worse than what most anticipated.”
- The Wall Street Journal, April 3, ,2025
As most of you already know, we closely monitor sentiment and expectations when assessing the risk and reward in our trading and investing endeavors. Considering the stock market’s meltdown last week resulting from the worldwide tariffs that President Trump announced after the market close on Wednesday, a key explanation for why such a violent selloff occurred can be easily found in the quotes and excerpts above.
As Fed Chair Jerome Powell said, “larger than expected” tariffs were hoped to not be so extensive by investors. With the U.S. every bit involved in an expanding global economy for years, investors ignoring Trump’s threats and hoping for tariffs that wouldn’t be as extensive and as big as announced, it is understandable why the “known, unknown” on the calendar was met with widespread selling.
Stocks sold off, and coincidentally the Cboe Market Volatility Index (VIX – 45.31) -- a measure of volatility expectations -- rose to its highest level since August 2024. The VIX action reflects uncertainty increasing as to what the larger-than-expected and more-extensive-than-expected tariffs mean for economic growth.
Simply put, last week’s action was a massive unwind of hope, even though the stock market was already displaying cracks, from a technical perspective. While sentiment was not nearly as optimistic relative to what we observed in December and January, it is clear now that there was – or dare I say it “is” - more optimism to be washed out.
“Be prepared for anything to happen and be open to all possibilities beyond Monday. This is more pertinent than ever …we risk an end-of-month close below the SPX’s 12-month moving average. Since 2010, there were six times the SPX closed below its 12-month trendline at the end of the month. In five of those instances, the index went on to decline to at least its 36-month (or three-year) moving average before a new high… the only good news for bulls is that the SPX’s 36-month moving average is sloping higher…The bad news is that this trendline is currently sitting at 4,735, or 15% below Friday’s 5,580 close. If downside of this magnitude is in the cards, option buyers can snag portfolio protection to hedge such a scenario, and one can make money with few dollars at risk to leverage downside as a speculative tool. If you are trying to prepare for anything to happen while being open to all possibilities, having an option-buying strategy in your toolbox is an excellent first step.”
- Monday Morning Outlook, March 31, 2025
The underlines in the excerpt above from my commentary last week, which were not underlined at the time, proved timely.
First, after the S&P 500 Index’s (SPX – 5,074.08) month-end close below its 12-month moving average - one of several technical measures of the “cracks in the market” I referred to above - the SPX retreated nearly 10% last week.
The magnitude of last week’s decline was faster than I anticipated. But then again, the magnitude and swiftness would fall under the, “be prepared for anything to happen” and “be open to all possibilities” that I felt was a good time to reiterate. I also advised options as both a portfolio protection and speculative tool to navigate the current environment and those that listened likely profited and/or limited the damage to their portfolios.
And as I alluded to last week, it is the SPX’s 36-month, or three-year, moving average that, based on recent history, is at risk of being touched or breached in the days, weeks or months ahead. This moving average is currently sitting at 4,765 (up 28 points relative to the prior week since it is sloping higher), or 6% below Friday’s close. If the 36-month moving average is breached, it is the 50-month moving average that has marked some troughs, currently sitting at 4,656, or about 100 points below the 36-month moving average.
As a side note, the site of the 50-month moving average is also the vicinity of a 38.2% Fibonacci retracement of the Covid lows in 2020 and the February high.
The SPX is almost 20% below its all-time closing high (20% below the all-time is at 4,915) and below the major low in early August at 5,120 (a low driven in part driven by delta-hedge selling). As such, it is possible we are on the cusp of a bear market, which means sentiment gauges that I’ll talk about later may need to hit more extremes than what is typical before a trough is in place.
The traditional bear-market definition is a 20% decline. But we like to use long-term moving averages, such as a breach of the 36-month or 50-month moving averages, since they are time- and price-based.
But first, let’s discuss the short-term, since “tradeable” rallies can be expected when volatility is as high as it has been, but you can’t leave continuation moves out as a strong possibility either.
If a tradeable rally occurs, I expect Thursday’s close around 5,400 prior to Friday morning’s gap lower to be the first level of resistance. This level also coincides with where buyers emerged on pullbacks in late July and mid-September 2024.
But if selling continues, the first potential short-term support level is the round 5,000-millennium mark, which marked an approximate key low in April 2024. Just 85 points below that is 4,915, which is 20% below the February closing high. Note that the SPX peak in February was almost exactly 20% above the August low. Note that 4,915 equates to roughly 490 on the SPDR S&P 500 ETF Trust (SPY – 505.28), a strike that saw notable ask-side volume in the April standard expiration series on Friday that could act make this strike have “magnet” potential in the near future.
With so much technical damage done not only last week but weeks prior, I said that we may have to see more extremes in sentiment measures for a long, sustained trough to be in place.
For example, in the past year, the 10-day buy (to open) put/call volume ratio on SPX components could hit readings in the 0.60-0.70 level for a meaningful trough to occur. But this was in the context of a stronger market.
If you go back further in time, readings in the 0.90 to 1.00 area occurred, and this is usually in the context of weaker markets. I concluded a few weeks ago there was enough pessimism to mark a trough, but technical indicators needed to improve. We never got improvement in the technical backdrop. And as such, it may require much higher extremes in pessimism before a bottom is in place.
The second chart is SPX component short interest. I have been on record as saying that the multi-year highs are bullish, unless there is major technical deterioration in the market. During the past several weeks, we have had such technical deterioration, which means shorts may grow even more bold and there is less potential for forced covering due to margin calls. Plus, while total short interest on SPX components is at multi-year highs, it is not at an extreme like we saw in 2015-2016.
Fund managers have reduced equity allocations, but again, such allocations are “middle of the road” – not high, but not excessively low by historical standards.
Anecdotally, I think there is optimism to wash out. I have heard some proclaim there is room to negotiate down tariffs (glass half full thinking) which is better than the potential for tariffs to go higher. I haven’t discussed possibilities like world leaders banding together to take on the U.S., making these rates last longer than expected. This isn’t a given, but the sentiment doesn’t strike me as outright fear.
I’ll leave you with this. Uncertainty is not a new thing in the marketplace, nor are bear markets. Anything can happen. This is why options were created – to hedge, to make money in down markets with less dollars at risk or bet on rallies with less dollars at risk. Hopefully, you have an option strategy in your toolbox, as they are designed to work for you in all environments.
Todd Salamone is Schaeffer's Senior V.P. of Research
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