Oversold to Overbought? Proceed with Caution

A contrarian signal sparks gains, but underlying risks haven’t disappeared.

KEY TAKEAWAYS

• Stocks surged on early progress in U.S.-China trade negotiations
• President’s Gulf state tour brought visible tech leadership and new investments
• Investor sentiment remains low—fueling a FOMO-driven rally
• Minimum 10% blanket tariffs remain likely despite easing of harsher measures
• Despite hints of sunlight peeking through, the economy hasn't turned yet—momentum is still southbound

MY HOT TAKES

• Markets love progress, but aren’t pricing in lingering risks
• Tech leadership is still tentative, not confirmed
• FOMO-driven rallies often end badly for latecomers
• Tariff risk has shifted, not disappeared
• The US economy is a slow-moving beast—don’t mistake a turn for a reversal
• You can quote me: “This cargo ship, the USS Economy, doesn't exactly turn on a dime.”
  
  

Nice and easy does it all the time. I don’t have a hard rule about reusing taglines, and this one is such a classic, I could never take it out of the running. A little insight into my warped psyche: I often think of theme songs for different market conditions, oft repeating them in mind throughout the session. This serves to lighten up what is typically a heavy session or to remind me to stay on course.

This has been a week of wonders for equities. Indexes were already showing positive signs in the last weeks of April as the President began to enter serious negotiations with US trade partners. Not surprising, China has drawn the most ire from the President, who placed most of his focus on China in his last presidency. This time around, the President inherited a complicated situation from the prior administration and it is clear that any deal with China is going to require a nuanced approach.

The whispers on The Street (Wall Street, that is) was that the President would save China for last. News that Scott Bessent was headed to China over the weekend was certainly positive and stocks agreed. NO ONE, however, would have ever expected the type of headway gained by negotiators this early in the match. The progress, as one might guess, had a significant impact on the equity markets. The tech-led rally that would ensue, would push the Mag-7 over some key resistance points opening the gate to further gains.

Then came the President’s trip to the Gulf states. Even if you were trying to get work done with the TV on in the background, you couldn't miss the parade of the tech titans joining the President on his goodwill tour. What’s more, the President was able to announce some sizable investments. Those investments will have a significant impact on last year's favorite tech stocks, and they rallied. While tech was an unmistakable leader last year, it is not yet evident that they will have the strength and momentum to carry the broader indices higher.

With investor sentiment at or near their lows with stocks rallying, FOMO (fear of missing out) has entered the room. In other words, traders who, in frustration, may have capitulated and sold when markets were near their lows, may feel that they are missing the recovery, so they quickly jump back in. Possibly even without doing their homework. Indiscriminate buying. 😟 That is why we typically witness respectable gains in the wake of low investor sentiment. It’s a contrarian indicator.

Is that good enough for you? If so, carry on. If not, pay close attention. There are indeed many negotiations going on right now and the good news is that most countries want to play ball. That is to say, they are willing to make concessions. However, President Trump, while willing to give some concessions and even delay tariffs, seems set on maintaining at least a 10% tariff on all imports. Now, I and many of my colleagues have spent a lot of time in the past several weeks, attempting to figure out EPS and growth impairments from tariffs. Further, we have been lowering estimates for economic growth. This latest set of announcements have sent us all back to the drawing board.

While it is good news that the US will not tariff Chinese imports by 145% and it is also good news that the Administration has relaxed some restrictions on AI chip exports, we have to remember that there are still tariffs and there will still be restrictions.

Further, as I have said many times, this cargo ship, the USS Economy, doesn't exactly turn on a dime. That is good news, allowing resilience to dominate whilst throwing a bad number or two. The bad news is that once it really turns south, it is hard, and it takes time to turn the ship around and head north again. Broader negative momentum is still here. We have not really seen any of the hard numbers reflect these headwinds yet. But we will over the next several months. Despite this, it is difficult to tell the magnitude and how long it will last. In other words, it is likely that the USS Economy may no longer be faced south, but it is still moving in a southerly direction.

So, why all the analogies? Because, while stocks may have been oversold last month, we don’t want to get too far ahead of ourselves and become overbought while we are still awaiting some signs from the economy–some real signs. That could leave the FOMO buyers in a very tricky situation. My advice? Nice and easy does it. All the time.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday with tech charging higher on newfound growth in the Gulf States, while more troubles for UNH held back the Dow and its healthcare sector mates. 10-year Treasury Note Yields gained 7 basis points reflecting a more cautious view taken by bond traders who are eyeing congressional budget proposals. 

NEXT UP

• Retail Sales (April) is expected to remain flat after last month’s pull-through spike of 1.5%. Pay attention to this one, it is considered one of those “hard” numbers, but beware, because it is clouded by recent front-running purchases.
• Producer Price Index / PPI (April) may have eased to 2.5 from 2.7% easing feared of tariff-borne cost increases.
• Initial Jobless Claims (May 10) is expected to come in at 228k, same as last week and slightly above its 227k 4-week moving average.
• Industrial Production (April) probably inched up by 0.1% after slipping by -0.3% in March.
• Fed speakers today: Powell and Barr.
• Important earnings today: Walmart, Sunnova Energy, Deere, Cava Group, Take-Two Interactive, and Applied Materials.

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