The Reflexive Rally Was Not Surprising
Authored by Lance Roberts via RealInvestmentAdvice.com,
The market rallied on Tuesday and Wednesday, with Tuesday’s rally one of the best trading days since 2022. However, that should also be unsurprising, since the best trading days tend to cluster with the worst market periods. As we noted in Stock Market Breadth on Monday:
“The single most damaging decision most investors make during periods of falling stock market breadth is selling. The data on this is unambiguous. Seven of the market’s 10 best days in any given 20-year period occur within two weeks of the 10 worst days, according to JPMorgan Asset Management research. The best days follow the worst days because fear-driven selling creates dislocations that are rapidly corrected. You can see this in the chart below, that the best and worst days are clustered together.”
In other words, while investors are always told to just “buy and hold” because they will miss the 10-BEST days if they don’t, investors should focus on mitigating the risk of significant capital losses during those periods.
This doesn’t mean you can effectively miss all the bad days; however, given that higher-volatility periods tend to cluster, understanding when to reduce exposure can significantly improve outcomes over time. Even if you miss the 10-best days along the way. That math applies with particular force in setups like the current one. Since 1974, according to data compiled by Clear Perspective Advisors, the S&P 500 has returned more than 24% on average following a market correction. Only 25% of the 48 corrections since World War II have progressed into full bear markets. In other words, there is a 75% chance this correction will not turn into a bear market. However, dismissing that 25% entirely is just as foolish for future outcomes.
This is why the rally this past week was not unexpected. Oversold conditions, exhausted sellers, aggressive short positioning, and algorithmic covering all tend to converge after sustained selling pressure. Goldman’s trading desk noted this week that the capitulation checklist is nearly complete, with the S&P now below all key moving averages and below critical CTA selling thresholds. When those conditions are clear, the snap-back can be sharp. But it’s a trap.
Why do I say that? Because that is what I have learned repeatedly over 35 years of managing money. The rallies that come off oversold extremes are seductive precisely because they feel like confirmation that the worst is over. They’re fast, they’re loud, and they draw in sidelined capital chasing performance. Sentiment indicators flip from extreme fear to cautious optimism in a matter of days.
Bottom line: If the bull case for this rally is ‘stocks were down a lot, and people were scared,’ that’s not a fundamental argument. It’s a positioning argument. It expires quickly.
And in the current environment, the macro headwinds haven’t gone anywhere. Even if the Iranian conflict is resolved on Monday, private credit stress remains, the impact of higher oil and gasoline prices is working its way through the economy, and questions remain about artificial intelligence.
But there is another reason to fade this rally.
Earnings Hit Still Coming
The difference between a durable recovery and a dead-cat bounce is almost always visible in the underlying fundamentals, not the price action alone. Right now, the fundamentals argue for caution.
Goldman’s own scenario analysis puts a moderate slowdown path at 6,300 on the S&P 500 and a severe oil-shock path as low as 5,400. Neither of those scenarios is priced into current earnings estimates. S&P 500 companies are still being modeled at roughly $309 per share in earnings for 2026, figures built on assumptions about GDP growth and energy costs that the past eight weeks have materially challenged. When earnings revisions begin in earnest, they tend to hit in waves. We’re likely in the early innings of that process, and it will impact forward returns. The reason is that the market trades off forward earnings expectations; if those expectations fall, the market reprices for lower earnings growth.
Add to that the technical damage. Breaking below the 200-day moving average is not a minor event. Historically, a clean break below that level without a swift recapture has resolved to the downside more often than not. The index now sits below all key moving averages, and the burden of proof has shifted. Bulls need to prove the trend has reversed. Sellers don’t need to prove anything.
“As shown in the comparative table below, understanding the difference between a sustained break of the 200-dma and one that wasn’t was critical to future returns.” – Break Of The 200-DMA
We are still within the first 4-weeks of the break of the 200-day moving average. The market rally this past week, following those five consecutive weekly declines, doesn’t mean the downside risk is over. If the market fails to climb above that now-critical resistance level, the potential for a retest of recent lows increases.
However, this doesn’t mean you get out of the markets entirely.
So, When Should You Start Accumulating
The one thing that bothers me most about the “Perpetual Purveyors of Doom” is that they repeatedly tell you for years that the market is going to crash. Eventually, they will be correct. However, what they don’t tell you is when to start buying the cataclysm. The voices are currently louder than ever.
However, the current market backdrop is nothing like the catastrophic events of the past, such as the financial crisis or the Dot-com crash. This is a well-needed correction after the massive post-“Liberation Day” rally last summer. Nonetheless, the damage done during declines is always troublesome, but it needs to be kept in perspective.
Yes, we certainly suggest using this rally to cash in and reduce risk. After consecutive weekly declines, a rally was inevitable. However, I am also not saying “sell everything” or “stay in cash indefinitely.” The market will eventually bottom and recover. The reason is that the market will eventually “price in” the risk and begin to look forward. The economy will adapt and begin to grow. As such, the question isn’t whether to own equities, it’s just a question of when and at what price.
There are four specific conditions I want to see before moving from a defensive to a constructive stance. None of them requires perfect clarity. All of them require meaningful evidence.
None of these conditions exists today. They may develop over the coming weeks or months. When they do, I’ll tell you. However, here is how to position for what is likely coming next.
🔑 Key Catalysts Next Week
The first full week of Q2 is book-ended by two events that will define the rate narrative for the next two months: the FOMC Minutes on Wednesday and March CPI on Friday. Everything else is secondary, other than what oil prices are doing.
The March 17–18 FOMC Minutes are the week’s first inflection point, but we already know the outcome. The Fed held rates steady at 3.50–3.75%, with only Miran dissenting in favor of a cut. However, the minutes will reveal how close the internal debate actually was. Given that the March meeting was the first to formally incorporate the Iran oil shock, the 15% global tariff regime, and the February payroll collapse into the Summary of Economic Projections, the minutes will be important to consider. In those projections, core inflation forecasts were revised higher to 2.7% for 2026, while GDP was upgraded to 2.4%. That combination, hotter inflation with resilient growth, justified the hold. But the question the markets need answered now is whether the spike in oil prices, which will eventually weigh on economic growth, changes that math.
Speaking of oil prices, Friday’s March CPI is the week’s anchor and arguably the most consequential inflation print of the year so far. February came in at +0.3% MoM headline and +2.4% YoY, with core at +0.3% / 2.8%. But March is the first month that fully captures the oil price surge toward $100 following the U.S.-Israel strikes on Iran. Energy-specific CPI rose 0.6% in February before the worst of the oil spike, which March will make materially worse. Food prices were already accelerating at +0.4% MoM. The core goods basket is where tariff passthrough resided, and RBC’s analysis flagged that declines in used-car prices had been masking the pressure in prior months. A hot March CPI could push rate cuts into December at the earliest, or off the table entirely. Any print above 0.4% MoM headline or 0.3% core will confirm those expectations.
Bottom line: The FOMC Minutes tell us what the Fed was thinking. The March CPI tells us whether they were right to hold. If inflation is accelerating while the labor market weakens, the policy trap is confirmed, and the market will have to price accordingly.
Investor Tactics For What Comes Next
Following five consecutive weekly declines, the market’s bounce this week could continue for a bit longer. This isn’t rocket science, and is something we repeat often. It is just a process to manage near-term risk.
Treat any near-term rally as an opportunity to rebalance, not to add exposure. Use strength to trim positions outside your target allocation and to reduce concentration in sectors most exposed to energy-cost pressure — consumer discretionary, industrials, and highly leveraged names.
Raise cash to a level that lets you sleep at night and act when opportunities arrive. That number is different for every investor, but the point is intentional: cash is a position, not a failure of nerve. Having it means you can be opportunistic when others are forced to sell.
Hedge risk that you want to keep. If you hold long-term positions, consider hedging them to reduce portfolio volatility.
Watch the 200-DMA retake attempt closely. A failed retake — where the market rallies back toward that level and then rolls over — is one of the clearest signals that the intermediate-term trend remains down. A successful retake on expanding volume materially changes the picture.
Stress-test your portfolio for oil above $100 through year-end. Goldman’s bear case is 5,400 on the S&P. That’s a decline from current levels that would test the tolerance of most retail investors. Know your number before the market finds it for you.
Don’t abandon fixed income. Duration has been painful, but investment-grade credit and short-term Treasuries are doing exactly what they should: providing ballast. A barbell approach — short-duration credit on one side, selectively opportunistic equity exposure on the other — remains the structure most likely to survive what comes next.
Again, this is nothing new, and we can sum it all up in just five words:
Defense over offense. Trade accordingly.
The one silver lining is valuation. As Morgan Stanley noted this past week, the S&P now trades roughly 17% cheaper than pre-war levels on forward earnings. That is approaching ranges historically associated with correction endings, provided the economy avoids recession, and the Fed doesn’t hike.
There is no guarantee of either, so caution remains a “trading position.”