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Let me not bury the lede - the S&P 500, Dow Jones Industrial Average and Nasdaq 100 are in the process of putting in a short-term top that could become something more ominous as we head into the second half of the year. If price action proves me wrong, I will change my mind. I was hopeful that the powerful rally off the April lows would not in fact turn out to have been a bull trap.

I still hold out this hope, but without any meaningful amount of confidence. The breadth thrusts everyone remarked upon may have been an elaborate element of this particular trap as breadth thrusts in general (when a majority of stocks spontaneously explode higher all at once) are thought of as a classical precursor to future gains. For more on this idea, watch “If This Is a Bull Trap, It’s a Good One” from May 13th.

Anyway, this week was a tough one for those who’d convinced themselves that we were out of the woods once Trump began softening his China rhetoric and entering into a 90-day negotiating period. We’re not out of the woods. It was the worst week for the stock market since the week we bottomed in early April. Retesting that April low will not be pleasant. If you were too equity-heavy on the way down, then got that massive reprieve as stocks rallied back to within 3% of the February high, I hope you did something about it. If not, you walked away from the screen on Friday saying “I’m too heavy” once again.

Let me show you something…

Below is the new downtrend starting to form in the S&P, Dow and Nasdaq. This is year-to-date. If I pulled it back, it doesn’t look as bad, but I’m trying to illustrate something very specific here:

In the next chart we’re focusing on the S&P 500 from a technical perspective. The rolling over this week has left us right at the doorstep of a downside violation of the 200-day moving average. We’re about two thirds of the way through to filling the breadth thrust gap from early May when Trump’s tariffs on China went from 145% to 30% thanks to Bessent’s successful talks in Geneva with his Chinese counterparts.

This week, Moodys cut their rating on the US Treasury on the heels of the Trump tax cut bill being rammed through the House. They weren’t thrilled with the implications for the budget deficit. In Bondland, the yield on the 10-year Treasury shot up over 20 basis points while the yield on the 30-year did something it hasn’t done in 17 years, breaking above 5% and staying there. Stocks got wobbly. Then Trump iced the cake with a barrage of tweets threatening Apple about making iPhones overseas, vowing retribution against Walmart for raising prices and telling the EU to fuck itself with a new 50% tariff effective June 1st. We never recovered, although there still were some pockets of green in certain corners of the stock market.

Textbook

This is how tops form. It’s textbook, actually. An old high is retested but the price fails to get back on the first attempt. Then a subsequent dip, followed by a renewed attempt which fails again. The pattern repeats itself until a statistical downtrend becomes obvious to the naked eye. By the fifth or sixth attempt, everyone is selling the rallies. Everyone knows the next rally won’t get as high as the last one. People give up. Then you’re in a range or a downtrend, depending on whether or not the lows hold or the lows get lower.

We’re not locked into this fate. Anything can happen. In the plus column, I would point out that there’s an army of buyers hanging in the trees of Sherwood Forest, arrows nocked, just waiting to fire at the buy button. They’ve never been through a a bear market that’s lasted more than six months (2020 was a blip and 2022 was kindergarten) or a recession that’s lasted more than ten minutes. Thirty million Robinhooders who won’t stop Robinhooding. They don’t care about anything. Good for them, they’re young and they should be buying weakness.

Anyway, we could pull out of this. I want us to. If we can hang on inside the new range - above the April low - until Q2 earnings season this July and the trade stuff doesn’t get any worse, there’s a chance. I’d also remind you that Trump can change his mind and throw another tape bomb out whenever he feels like it, with no warning, rhyme or reason that anyone can discern in advance. Sometimes the tape bombs are negative for stock prices but sometimes they’re positive. “Just got off a beautiful phone call with Tim Apple and Europe. Go buy stocks!!!” is a thing that could happen at 5am on Monday morning.

Now What?

So what do you do about it? “That’s a lot of throat clearing, Josh. Get to the point.” Okay. I think if you’re a trader, it’s time to learn both sides of the game - buying the dips but also selling the rips. Trading in a downtrend means shorter holding periods, tighter stops, less leverage, fewer positions, higher conviction setups. If you’re an investor and not a trader, ignore that last sentence.

If you’re investing through this, it’s important to stop yourself from calling audibles. As I discussed publicly, at the end of March we removed a significant amount of exposure to stocks in our tactical portfolios. This cushioned the fall into the middle of April as the S&P 500 fell into an almost 20% drawdown. But then it kept us in a risk-off posture as the market rallied 17% - erasing the entirety of that drawdown in record time. Because this tactical strategy is rules-based, even if I wanted to grab the steering wheel I could not have. Fortunately, I didn’t want to.

On the bond side, it’s a bit trickier. Positive real yields at the shorter end of the curve this spring made it so you did not have to wade out into the deep end and risk getting your head lopped off for income and safety. Our chief strategist Callie Cox wrote to advisors this week:

Here’s the five-, ten- and thirty-year Treasury yield index:

A best-case scenario would be the S&P 500 finds real support at the 200-day it’s currently sitting on. Nvidia comes out with another blockbuster earnings report this week and negotiations with foreign trade representatives go well. The employment data surprises to the upside on the first Friday of June (once again) and the middle of the month CPI report remains as tame as the last one. In that scenario, the rally can resume. We can challenge the February highs again this summer.

I know I’m asking for a lot to go right. if it doesn’t, the topping process continues. At least, that’s how I see it.

Real Men Don’t Panic Over Bond Yields

Huge thank you to the illustrious Rich Bernstein for putting on a dazzling display of market wisdom during this week’s new episode of The Compound and Friends.

Rich came fully loaded with great charts and a lot to say about stocks, bonds, interest rates, inflation, trade, tariffs, the Mag 7, international stock market diversifiers and more. You’re going to love it.

Listen on the podcast platform of your choice here or watch it on YouTube below:

Want to meet us in-person?

Quick reminder - we are coming to Chicago on June 2nd and June 3rd to celebrate the opening of our new second HQ in the Salt Shed. If you’re an investor and you think we can help with your financial plan and portfolio, this is your chance to come and see us. Send an email to [email protected] with the subject line: CHICAGO. We’re setting up the calendar right now. Barry, Michael, Ben, Blair, Tadas, Chart Kid Matt, Nick and the rest of the gang - including me - can’t wait to meet you.

That’s all from me today. Have an amazing Memorial Day Weekend, stay safe and have fun. - J to the B