We have witnessed the typical V-Bottom that often occurs when the market capitulates and makes an emotional bottom. The recovery has been swift with the NASDAQ100 (NDX) up over 28% in just five weeks since the April 7th low. We have described the market correction as really two. The market was already correcting since the February 19th high (1st correction). It bottomed around mid-March and it looked like the recovery was beginning. Then the tariff announcement on April 2nd started the “2nd correction”. The market has not only erased the tariff weakness, but has now retraced more than 50% of the “1st correction” loss.
The rally has been so swift that it is now entering an overbought technical condition and may back and fill before eventually making a new all-time high. The news on a potential trade agreement with China caused the market to open sharply higher yesterday. The strong opening created a gap in the chart. This chart gap often has to filled before the market can make new highs, so we would not be surprised if we retract by as much as 5% before resuming the uptrend. Interesting that the gap up also helped the market recapture the 200-day moving average which should create some support if we enter a backing and filling, profit taking period.
As we said in recent memos, we expect the market to start focusing on the fundamentals of good earnings, a positive inflation trend that could lead to lower interest rates, and deregulation which could spur economic activity.
The market may be a bit ahead of itself short term, but we believe weakness will be bought and the business and economic fundamentals will improve the balance of the year. We remain intermediate to longer term bullish.