Pretiorates’ Thoughts 75 – Tariffic Times Ahead…

We are already used to a certain amount of behavior from the Trump administration. However, the Liberation Day is likely to be particularly memorable. The financial markets have reacted rather angrily. No wonder, with this move the door was opened to a tariff war. China has already responded with countermeasures. It is still uncertain whether others will follow. One thing is certain, however: uncertainty is what the financial markets love the least.

In mid-November 2024, we presented the 17-year cycle in Thoughts 58. The Nasdaq index had its high on December 16, 2024, and has since fallen over 20%. The S&P500 was able to generate a new all-time high in mid-February 2024, but in doing so created a so-called intermarket divergence, which is also a negative indication for many market observers.

The 17-year cycle has been active for several centuries, but has only been showing a particularly high accuracy rate in the financial markets for about 80 years. Eric Hadik (insiidetracktrading.com) goes into this cycle in detail. Each time, the index fell by at least 20 percent. The Nasdaq Index has already realized this, while the S&P500 Index has only fallen a little more than 16%. Today we are trying to find indications of whether Wall Street still has further downside potential or whether the time has come to make the first purchases.

It is interesting to note that the date of Liberation Day was chosen when the market had just regained its courage after a pessimistic period. A relapse back into pessimism naturally occurs more quickly than after being exposed to a positive environment for a long time…

When analyzing the indicators for important lows and highs, a distinction must be made between short-term and long-term sentiment indicators. If the short-term indicators show the first buy signals but the long-term indicators do not, there is a high risk that it is only a technical recovery. Fresh selling pressure would then be likely.

A short-term sentiment indicator is the volatility index. The current level of this index can be compared with its own 200-day average. If the current level deviates too much from its average line, a signal is generated. While the sell signals are not always of the best quality, the buy signals are fairly reliable. In fact, a buy signal has already been generated. At least a technical recovery would be possible in the next few days.

Whenever the US financial markets become unsettled, this is reflected in a higher premium that must be paid for default insurance. These so-called CDX have a high correlation with the stock market. They are important for the risk-on or risk-off sentiment. We can see that the CDX, shown inversely in the chart, represent a significantly increased risk…

Let us now shift our focus to the long-term sentiment indicators:

Whenever the number of new lows of the individual stocks reaches a high level, a bottom can be expected. Unfortunately, we are not there yet with this indicator…

A bear market can also end when the stock market can realize a positive trading day with broad support from as many stocks as possible. Unfortunately, no buy signal has been generated by this indicator either.

Another long-term indicator is the Zweig Breadth Thrust Indicator. This is a very reliable indicator for long-term buy signals. But at the moment we are not getting any support for the bulls from this side either…

The yield difference between bonds with good and bad credit ratings is another good indicator of how the financial market assesses strength. The fact that the spread is currently falling very sharply (inversely) is an indication that concerns are growing in the bond market. It is a fairly safe bet that this development will spill over into the stock market.

The copper/gold ratio provides a very good indication of the state of the economy. Copper rises during economically strong times, Gold when uncertainty prevails. The ratio has actually trended negatively since 2021. However, a weaker economy has since been delayed by the Biden administration providing a lot of financial support. Accordingly, cyclical companies were able to enjoy an extended party compared to non-cyclical companies (ratio in blue). However, with the start of a new chapter with Liberation Day, this ratio corrected particularly sharply – and still has further downside potential…

Obviously, the market reaction has significantly changed sentiment into the negative. However, investor positioning has hardly decreased. This means that there is a risk that they will still react, causing further selling pressure…

Conclusion: Liberation Day isn’t just another headline—it’s a turning point for the global economy. In the best-case scenario, cooler heads prevail, and negotiations smooth over the turmoil. But let’s not kid ourselves—this event also has the potential to throw fuel on an already raging geopolitical fire. The U.S.-China tensions take center stage, while unresolved conflicts with Russia, Ukraine, and Iran continue to loom large. Markets are bracing for the worst, and any whiff of positive news could spark a violent rebound. Until then, the bears are in the driver’s seat, and caution is king. For those tempted to dive in, remember the old Wall Street wisdom: “Never try to catch a falling knife”.

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