The Quiet Signals: Tracking Early Signs of Stability

Thoughts on the Market

We came into last week making new selloff lows, only to be followed by back-to-back monster days. A lot of that was just an oversold market with plenty of shorts getting squeezed. But the really interesting part came from Thursday’s massive intraday reversal.

After Trump hinted there might be light at the end of the tunnel, it quickly turned out to be more like an incoming train. And still — despite having every reason to roll over after a solid bounce — the market actually managed to hold onto most of its gains for the week.

No matter what happens from here, we think putting on our hedge made sense. And if you waited for that oversold bounce like we suggested, you managed to get that bear put spread at roughly half the price. That said, any sharp downside move that takes the S&P 500 below 6300 is now covered down to 5800 through May.

What’s starting to catch our attention, despite Trump’s comments, is that crude oil futures (WTI & Brent) for July and beyond haven’t settled above their March 20 highs, with most down 5-6% since then. Meanwhile, front-month contracts (May & June) hit fresh highs last week, steepening the curve big time — as you can see in our usual chart below.

As of today, most maturities over the next two years have slipped back below $70 — suggesting the market is actually buying into Trump’s timeline.

This brings us back to the cheat sheet we shared last week. Even though oil futures hit new highs — mostly just on the front end — the Dollar Index pulled back, and high-yield credit spreads and the VIX basically collapsed. In other words, this could be one of the first signs that the market is starting to look past all this.

That said, the consensus we’re picking up among investors is that it still feels unnatural. Most seem conditioned to only call a bottom once we finally get that last flush.

In our view, it’s a classic case of recency bias — everyone remembers exactly what happened a year ago. But like we said last week, if there’s no big resolution, we’d simply expect this market to just slowly grind lower, as it remains challenging to take large directional bets.

A year ago, Trump’s tariff bazooka caused maximum uncertainty overnight — the kind of thing that usually tanks a market, just like during Covid. This time is obviously different, yet people are still waiting for the same repeat.

Unless something really crazy happens in the next few days or weeks, we don’t see why the market should follow that same path.

Looking at it another way, you could even say we’ve already gone through a selloff similar to last year.

Our chart below shows the S&P 500 from 2025 onward — once by price, and once by P/E multiples. Sure, last year’s price drop of -18.9% was way bigger than this selloff’s -9.1% max drawdown, but this year’s valuation pullback (-18.4%) is almost the same as what we’ve seen last year (-19.5%).

The point here is to give some additional context. Don’t get married to those extreme flush readings we tend to see at market lows, and don’t expect every selloff to end the same way. If we do get those washout readings, great — that’s usually a high-certainty bottom. If not, at least other things can help us see that the selling might be nearing its end.

What the above chart also shows is that the valuation selloff already started back in late October, even though prices kept pushing to new highs until late January.

So, to get a better read on what’s going on, it helps to zoom out and split the market into two parts: Technology — which makes up about a third of the S&P 500 — and everything else.

Up until Tech peaked on October 29, this was a momentum-driven bull market. Tech was leading, the rest was following, and the whole index was in full momentum mode.

Then came the big divergence. Tech rolled over, but everything else kept moving higher. That’s when dispersion became the theme — because outside of Technology, things still looked fine. Net-net, the S&P 500 went sideways, as strength in the rest of the market offset Tech’s weakness.

The “something’s gotta give” moment came when the Iran war broke out about five weeks ago. Tech kept selling off, and the rest of the market finally rolled over too. That’s when the S&P 500 really started to break down.

Now the question is: are we entering a new phase, or is this just an oversold bounce — basically noise within this selloff?

What we’ll be watching for to gain more confidence in a real bounce — or even that this selloff is over — is a bullish signal on the weekly Stochastics, meaning both lines crossing higher.

Like we said last time, it’s already in oversold territory. And after last week’s +3.4% bounce, the fast line has already started to turn higher.

Once we get that crossover, here’s what really matters:

• A quick move back above 50 on the weekly

• And the monthly holding above 50

As the chart below shows, pretty much every reversal since 2020 from deep oversold territory marked the end of a selloff — except 2022. Back then, the weekly failed to move back above 50 after the April bounce, and by June, the monthly had already dropped below 50.

For now, we’re still calling this an oversold bounce and waiting for more confirmation before changing that view. That said, there are some signs this could actually be a more lasting low.

One thing that really stood out last week was the 2-day rally — especially in Semiconductors, which on its own would be the largest S&P 500 sector at around a 15% weight.

As the chart below shows, the SMH ETF experienced a massive momentum thrust off the lows — right when it looked like it was breaking key support. Semis jumped over +8% in just two days, putting this move in the 100th percentile rank since 2011.

What’s interesting is that past 2-day moves of that size have often marked lows, or at least led to further upside. Looking at all previous instances (excluding ones that happened shortly after a prior spike), the results speak for themselves.

On average, the SMH ETF was up +12.1% three months later, with a win rate of 89%. In other words, this kind of move definitely shifts the odds in our favor.

---

So, where does that leave us?

We’re still watching for more confirmation that this bounce has legs. But as we pointed out today, it’s interesting that the Dollar Index, the VIX, and credit spreads haven’t hit new highs — even with oil moving higher. That alone could be the biggest hint yet that the market might be starting to look past some of these uncertainties.

That said, as with anything in volatile markets, things can move and shift fast, which makes us believe that taking advantage of this bounce to put on our hedge was the right move from a risk management perspective.

---