President Trump won the election in November of 2024. He told the world some of the things he wanted to do, many of them so far out from what we were used to that few believed that he would do them much less that he could do them. Then came the tariffs. Again, few believed that he would basically shake up world trade and attempt to completely change the rules that were on the board game of trade going back to the Marshall Plan post-World War II. Well, he has and there is seldom a week that we don’t get another “zinger” of his actions to put America first or at least change the way America has been dealing with issues. I don’t say this as a political bias, but rather a testament to the fact that this dude is really changing things!
So, what is an investor to do? The market was in a strong uptrend in 2023 and 2024.
2023
2024
Then came 2025, the first year of the new administration. Not just an ordinary new administration, but one that has been characterized by many changes in the way our country has been managed, the way we communicate what our intentions are and as a result an onslaught of political upheaval inside our country where friends and family members aggressively espouse their political leanings and, in many cases, end long standing relationships. I for one find this quite strange as politics are blown out of proportion (as always) by the media and the social media, but really things still take time to change and mature. The hope that springs eternal is that we have political leaders that are really doing what they feel is best for our country and its people. Again, many choose to dispute this, but it is the hand we have dealt- to ourselves by our voting decisions.
So, here we are in 2025. We are just now in the last quarter of the year and what a year it has been. The third in a string of strong equity markets. The first quarter, as is almost always the case in the first year of a new president, the market got whacked. The reasons “this time” had plenty of meat on the bone for the negative neigh sayers, but in the final analysis, the market acted just as it normally does in a Presidential Cycle. I have gone over this in these notes incessantly! Then came the low in April. It is called “Liberation Day” by the media. Again, hugely politicized name, totally wrong, totally incorrect terminology for what the political action was, but again, this is media! What we as “markets people” have to notice is to ignore the noise and pay attention to the facts and the action of prices. The facts were, strong economy, full employment, rising earnings and wages, all greater than market forecasters expectations, and global leadership. Huh, sounds pretty good. But look at the sentiment at the lows:
It wasn’t just bad; it was the worst investor sentiment ever recorded by econometric sentiment readings. But this simply can’t be! Everything else is great. But the expectation was that things quickly speeding to a train wreck, a train wreck that not only never happened, but did exactly the opposite. This is how lows are created, sentiment goes to an extreme and price levels of assets naturally reverse as is IN THIS CASE. So, the next question becomes, as I alluded to at the beginning of this diatribe, what next?
So, let’s again look at the statistics. The S&P 500 has rallied 35% over the last six months. This is the sixth time this has happened since World War II. Not a lot, but not unseen. October 8th marked the six-month anniversary. A key difference “this time” in 2025 was that the decline coming into April 8th was not a typical cyclical bear market. But Friday of last week came as a bit of a shock. But should it have? I think not as we really sorta needed a digestion. Many just didn’t expect this to be a one-day event! But big rallies leave the market overbought and vulnerable, especially when many were sitting on the sidelines waiting- impatiently, for it to happen.
Please take the time to analyze the chart below. I have overlayed the market for 2025 on top of the 5 previous cases (on average). I have then extended the chart beyond the first six months to see what has happened, on average, post the first six months off the lows. Doesn’t look so bad! Again, not forecasting, but simply showing what on average happens when things have unfolded as they have currently.
Again, we as humans are continually paying attention to the media and the social media. Pretty tough to avoid, hence, pretty tough to ignore. And without question things have to turn sour it seems. There is simply no way that things can remain on the trend they are with all the negative stuff going on. As the positive momentum inevitably cools, we will be watching for additional damage from a technical perspective to determine if the decline experienced Friday forces a decision to reduce equity exposure is warranted. I liken this to the way we do our grocery shopping and our pharmaceutical and drug storage. It seems that everything now comes with an expiration date printed on it. We go to the store, open the case where the milk is and the first thing we do is reach for the carton at the very back of the case as this must be the freshest, and we validate this by looking at the expiration date. Now we feel better!
Now let’s go back to the US stock market as measured by the S&P 500. Where is the expiration date? When does it spoil? When should we be smart enough to get out of the way? Sentiment turned cautious in late February 2025 as investors braced for the Liberation Day tariff announcement, so market returns were negative from point to point when the indicator was in the pessimism zone. Nevertheless, the Daily Trading Sentiment Composite provided good information, hitting a record low on April 8, suggesting the next piece of good news very well could be well received. The news came the next day with President Trump’s 90-day pause announcement.
Despite 32 record highs by the S&P 500 so far in 2025, the Daily Trading Sentiment Composite has spent only 11.4% of the time in its optimistic zone. During a strong rebound amid continued tariff and labor market concerns, neutral sentiment has been the equivalent of pessimism. Here is what the market has done since this April 8th date. This is the fact!
The investment landscape- according to the media, is so dire, we are all sitting around drinking spoiled milk. It tastes just fine, great in coffee, great in cereal, but the media keeps screaming, “Can’t you smell the milk! It’s spoiled! Your gunna get sick!”
Eventually, the milk will spoil, but currently we continue to read the expiration date, open the carton, smell the milk, and then recognize it is still fine and will continue to be until it starts to smell funny and eventually spoil.
Over the past few sessions, not only have the S&P 500 and NASDAQ 100 hit all-time highs, so have the Russell 2000, the S&P 500 Equal Weight Index, and the S&P 500 Advance-Decline line. Historically, these broader measures have often topped out before the S&P 500. The fact that they remain strong as well does not mean the market can't fall right away, yet it would be a bit unusual. Since ultimately only price pays more than anything, we need to see some breaking of support in the major averages to indicate that their trends are potentially reversing. Friday was a step in this direction, but not yet enough to signal that there could be a longer digestion in the making. A close below the 20-day EMA (exponential moving average) might offer a more timely heads-up. There have only been three such closes below this line since April 23rd and all of those lasted only one session before the S&P 500 was bid back up. These were the small blips down as seen in the chart above. A decline begins with a blip down, but isn’t a problem till it is more than a blip down.
I will leave you with one of my favorite and timeless charts. It is the one of how often corrections in the market occur, and at what bracketed levels of decline. Little ones (5-10%) happen 3.4 times per year. I like this a lot as it gives me a chance to get on board the parts of the market that we like at short-term discounts. Bigger corrections tend to happen less frequently as the graphic shows.
So, here we sit. We are invested in the markets as they continue to act fine. How long will they act fine? Well, we won’t know this until they start smelling a bit gamey. If the decline that started Friday grows in severity, we will be raising some cash to take advantage of opportunity when we then get a subsequent “over-sold” reading.
How do we have an idea of where we should emphasize and invest capital? For this I go to a graphic that I update daily from Dorsey Wright and Associates. They call it their DALI (Dynamic Asset Level Investing). This is a very clear graphic of where money is treated best based on measuring different asset classes, markets, and sectors against each other. THIS TAKES OUT ALL THE GUESS WORK based on Dorsey’s momentum based strategies.
Pretty simple to read: top to bottom- best to worst, left to right- best to worst, green- good, red-bad. Again, this is simply one of the major components of our research, but for those that are wondering why, it is pretty clear. This is an analysis based on current momentum and it is updated daily. It will not reflect immediate changes, but it is very good at recognizing trends. How long do the trends last? There is an old trader’s phrase, “The trend is your friend, until it ends.”
This marks the beginning of earnings season for the third quarter. Earnings were very good, and this should be reflected in the numbers posted. The issue will then become what is forecasted for the fourth quarter and into 2026. We will of course be here at the ready to adjust as we see fit. We don’t expect to be perfect in our timing here, but we do expect to manage as we feel best for our clients. If you have any questions, please NEVER hesitate to call.
- Ken South, Tower 68 Financial Advisors, Newport Beach
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