April 21, 2025

Preview from my weekly report*

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Diminishing emotional intensity of still-fearful investors with developing bullish divergence.  

Highlights from last week’s market action and news:

• The S&P 500 stock price index (symbol: $SPX 5,282.70) fell 1.50% last week.
• Average daily trading volume declined, possibly suggesting diminishing emotional intensity of still-fearful investors. 
• Extremely high trading volume for April 3 to 11 may suggest capitulation and selling climax.
• On-Balance Volume (OBV) has remained stronger than price since the February price peak, suggesting developing bullish divergence.
• RSI and MACD short-term price momentum indicators were extremely oversold as of 4/8/2025 and held up relatively well last week as price sagged lower.
• Sentiment indicators (which generally follow the price trend) have been showing Extreme Fear, which is bullish according to The Art of Contrary Opinion.
• $SPX and QQQ turned systematically bearish last week based on Simple Moving Averages—but SMAs are lagging indicators, reflecting what happened in the past.
• The equal-weight ETF of S&P 500 (RSP) and Small-capitalization stocks (IWM) remain systematically bearish based on SMAs.
• The Cumulative Advance-Decline Issues Line remains systematically neutral and a bullish divergence is evident compared to the price indexes.
• Gold price jumped to another new all-time high last week and remains systematically bullish.
• Copper, EFA, EEM, and Chinese stocks bounced back from oversold and remain systematically neutral.
• Crude Oil ($WTIC) staged an oversold bounce but remains systematically bearish.
• US dollar ($USD) broke down below 3-year lows and turned systematically bearish.
• Bitcoin ETF (IBIT) shows diminished downside momentum over recent days, which could be an early indication of Price trend improvement ahead.
• iShares Core US Aggregate Bond ETF (AGG) remains systematically bearish.
• Consumer Discretionary Sector SPDR (XLY) turned systematically bearish.
• Industrial Sector SPDR (XLI) turned systematically bearish.
• Consumer Staples Sector SPDR (XLP) turned systematically bullish.
• Trump announced a 90-day pause for the implementation of reciprocal tariffs on consumer electronics from all nations except China.
• China ordered its airlines not to take any further deliveries of Boeing’s jets.
• The US government barred the sale of Nvidia H20 chips to China, which will cost Nvidia $5.5 billion.
• China demands greater respect from the Trump administration before agreeing to trade talks.
• Trump said there was “big progress” in talks to strike a trade deal with Japan.
• Trump said he is very confident about reaching trade deals with EU and China.
• Health insurance stocks fell as UnitedHealth Group reduced its full-year earnings outlook.
• Analysts now expect Q1 year-over-year earnings growth of +6.7% for the S&P 500 stocks, down from expectations of +11.1% in early November.  Full-year 2025 corporate profits for the S&P 500 are seen rising +9.4%, down from the forecast of +12.5% in early January.
• The European Central Bank (ECB) cut interest rates for a seventh time. ECB President Lagarde said downside risks to economic growth have increased.
• Fed Chair Powell said Trump's tariffs may make it difficult to achieve full employment and stable prices for "probably for the balance of this year." The Fed waits for greater clarity before adjusting monetary policy.
• Trump wants the Fed to cut interest rates. Trump accused Powell of being slow and late.

The bullish case for market stock price gains:

• Extreme fear of rising tariffs and trade wars may be overblown.
• Advantageous trade deals may be negotiated.
• A more competitive trade position may increase demand for US products, stimulate investment in US production capacity, increase US GDP, and increase US tax revenue.
• The stock market’s downside price correction has cut valuations to reasonable levels from overvalued, overpriced levels.
• Following the previous 15 downside corrections going back to 2008, the S&P 500 rose more than 15%, on average, over the next 12 months, according to Dow Jones Market Data.
• The downside correction from the 6147.43 peak of the S&P 500 on 2/19/2025 to the bottom at 4538.04 on 4/7/2025 could be an Elliot Wave ABC three-wave reaction (down, up, down) against the larger degree bull market trend.
• Hedge funds are the most bearish in the 5 years since 2020, according to Goldman Sachs. These funds are “weak hands” traders who will quickly buy to cover shorts and buy long as soon as they suspect that the price trend has turned to up from down.
• According to the latest survey from Bank of America, investors cut their US stock holdings by 40 percentage points from the previous survey, the most on record, from 17% overweight in February to 23% underweight in March, while cash levels have risen to 4.1% from 3.5%, the biggest jump since 2020.
• CPI inflation has come way down, to below 3% from a peak rate of 9% for June, 2022.
• The Federal Reserve Board has begun to lower short-term interest rates, although the Fed appears to be in no hurry to lower rates and the path forward is data dependent and therefore uncertain.
• Consumer spending and the economy have remained remarkably resilient.
• The Conference Board’s Leading Economic Index® (LEI) for the US “no longer signals an impending recession.”
• Corporations are buying back their own stocks.
• The Trump administration is expected to promote business-friendly, pro-growth economic policies, with lower corporate taxes, looser regulations, and reduced red tape.
• A growing economy, resilient consumer spending, and a strong jobs market would support rising corporate profits.
• Elon Musk’s DOGE is trying to reign in out-of-control government deficit spending, which could cut budget deficits and help limit interest expense on government debt and help limit inflation.
• Negotiations to end the Ukraine war could save tens of thousands of lives and save US taxpayers many billions of dollars.
• Artificial intelligence could usher in a new era of productivity and profits.
• Geopolitics has threatened to be the biggest tail risk to markets for many months, but Trump appears determined to make new deals for peace and prosperity.

The bearish case for a cautious stock market strategy:

• Investors have been extremely fearful that Trump’s tariffs, tax cuts, and immigrant deportations could increase inflation in the short-term, worsen geopolitical tensions, lead to global trade wars that disrupt supply chains, depress global business and corporate earnings, and lead to a recession.
• Elon Musk’s DOGE faces opposition from Democrat politicians and judges--a roadblock facing the pro-growth Trump agenda.
• The Conference Board US Consumer Expectations Index for the economy dropped 9.6 points to 65.2, the lowest level in 12 years and well below the threshold of 80 that usually signals a recession ahead.
• The Conference Board Leading Economic Index® (LEI) for the US declined by 0.3% for February. In light of substantial policy uncertainty, the CB forecasts real GDP growth could slow to around 2.0% in 2025.
• Consumer Expectations for Inflation have been rising.
• Inflation may remain stubbornly high due to tight labor markets reflecting an aging work force with fewer working-age adults, climate change costs, more expensive green energy, the cost of delayed replacement of aging infrastructure, geopolitical risks to supply chains, trade restrictions, and out-of-control government deficit spending.
• Heavy supplies of new bond offerings and rising inflation could mean higher-than-hoped-for interest rates.
• Some investors fear that the speculative enthusiasm for artificial intelligence might be overblown, the hoped-for benefits might not pan out, and AI could outsmart us and go rogue.

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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

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