COILED SPRING CAPITAL

Conclusion

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As we finalize this report, futures are pointing to another sharp drop overnight, which is expected following Friday's weak close and the continued lack of meaningful progress on tariff negotiations over the weekend. It's important to note that markets rarely bottom on a

Friday.

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Our report highlighted extreme readings across multiple indicators, which often precede some form of reversion. While we recognize that the current environment is highly fluid and adding significant risk at this juncture can be precarious, we believe that for those with a longer-term horizon, increasing long exposure will likely prove profitable.

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While we can't predict with certainty when this will end, we can confidently say that the market is positioned for a meaningful reversal. Whether any near-term bounce marks the ultimate low remains to be seen, but a large gap down tomorrow could present a solid tactical trading opportunity.

We remain of the view that the pressure on markets will ultimately drive countries back to the negotiating table, and any positive news in this environment will likely be magnified.

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In simple terms, we expect a sizable counter-trend rally to begin this week and will be adding long risk for a tactical bounce.

Conclusion

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We have always maintained that calling tops in the stock market is infinitely more difficult than calling bottoms. We have a precarious setup with the stretched indexes being primarily driven by mega-cap stock outperformance. The DeMark signal confluence is getting louder, yet the rally is showing very few signs it wants to slow down or broaden out. We see green shoots appear in the lagging growth sectors, but most stocks continue to sit out the enthusiasm. This makes it very difficult for active managers to keep pace with their benchmarks and is forcing unusual crowding in some of these stocks, mainly the Mag 7.

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Was last week’s push to ATH’s for this ordained group of stocks a capitulatory moment, or was it a rush to add in front of what needs to be a stellar earnings season? We cannot offer any intelligent response because we don’t know, but we venture to say it is probably a little bit of both.

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The NAAIM exposure index and sentiment readings remain too elevated to consider making large allocations to the long side at this juncture. Our internal analysis remains mixed, yet breadth green shoots are revealing themselves. The macro inputs that we track are beginning to be cooperative, but the lagging parts of the stock market are not responding. Will we see a delayed reaction and a resurgence in the equal weight and small-cap indexes, or is the market trying to signal that macroeconomic pressures are too significant and biting into their businesses? The weaker macro releases could indicate an economy that is slowing too rapidly, and with rates too restrictive, the Fed may need to act sooner.

Conclusion

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Our last weekend report specifically stated that the stock market faced several binary risks that could upset the equilibrium. This was an understatement, and we were not advocating for this sort of meltdown of risk.

 

Here is the excerpt:

We classify this week as binary, and in such situations, we proceed cautiously. This means being less aggressive with new ideas and capital deployment until the dust settles. While we don't expect significant changes in our current market assumptions, we prefer fundamental confirmation before becoming more aggressive.

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While we feel vindicated for advocating caution, we regret not taking a more bearish stance. In our mid-week report following the FOMC message and a bullish Meta report, we predicted the stage was set for the election-year August seasonal tailwind. This was clearly incorrect.