Market Volatility Signals Potential For Major Reversal Ahead

The stock market is currently facing significant turbulence.

This week, the S&P 500 and Nasdaq both fell below their 200-day moving averages—a potential indicator of a significant trend reversal.

Concerns are mounting that policy changes from the current administration, such as federal spending cuts and tariffs, could trigger a recession in the U.S. economy.

While these risks are real, we share the sentiment that the likelihood of an economic recovery and a rebound in the stock market may be higher. In fact, stocks may be on the verge of bouncing back.

Market Challenges Are Self-Inflicted

Not long ago, the economy was performing well.

Key indicators such as low unemployment, robust job growth, and strong consumer spending painted a positive picture. Real wage growth was solid, inflation was easing, and interest rates were declining. Moreover, both consumer and business sentiment were on the rise, while corporate earnings were impressive.

However, investors are now anxious that President Trump’s policy adjustments might reverse many of these positive trends.

Such trends would stem from self-inflicted wounds. Importantly, these wounds are reversible; tariffs and sweeping federal spending cuts can be halted at any time.

Recent actions suggest the administration may indeed be taking steps to ease these burdens. Tariffs on Mexico and Canada have been delayed, and exemptions granted to specific sectors, including the auto industry. Additionally, Trump proposed future government job reductions be made with a “scalpel,” not a “hatchet,” indicating a more strategic approach.

This shift could signal a change in direction from the White House. Assuming this trend continues, Wall Street fears about an impending recession could lessen in the coming months.

This reinforces our belief that the potential for an economic recovery is much greater than the threat of a downturn.

We recognize, however, that we are not more knowledgeable than the market itself, and we are prepared to heed its signals regarding economic and stock performance in the near term. Our technical analysis suggests the market will provide critical insights in the coming two weeks.

Key Indicator: The Nasdaq 100

We are closely monitoring the Nasdaq 100 as our primary market bellwether.

It takes precedence over the S&P 500 for us, as it comprises the largest 100 tech companies—key players in our largely tech-driven economy.

This week, the Nasdaq 100 dipped below its 200-day moving average for the first time in over a year, suggesting a potential major market trend reversal.

Historically, this particular breach has occurred 11 times since 1990.

In all 11 instances, the stock market was either about to rebound significantly or face a major decline; the market’s direction depended on subsequent stock performance. Tracking the next two weeks will be crucial.

If the Nasdaq 100 can maintain a robust status by staying within 4% of its 200-day moving average, stocks have historically rebounded over the next year, with average increases exceeding 25%. This pattern occurred in early 1992, early ’96, late ’97, early 2004, mid-2010, late 2014, and late 2018.

However, it’s important to note that the outcomes are not always bullish.

Critical Period for the Stock Market

Historically, if the Nasdaq 100 does not hold strong and falls more than 4% below its 200-day moving average in the following two weeks, stocks have typically faced a downturn into bear market territory.

This scenario unfolded in early 1990 (preceding the ‘90s recession), mid-2000 (before the dot-com crash), early 2008 (prior to the 2008 financial crisis), and early 2022 (just before the inflation crisis).