Is This Still A Bear Market Rally?
Is This Still A Bear Market Rally?
That's been our view since last month. The market hasn't priced in the possibility that most of the Trump tariffs are here to stay, so we'll probably see another leg down when that reality sets in.
Why This Question Matters
We've got a source of alpha that works well during market rallies: Portfolio Armor's top ten names. Since December of 2022, our weekly top ten names have averaged returns of 17.03% over the next six months, versus 10.75% for the SPDR S&P 500 Trust (SPY). If this is a new bull market, it makes sense to start buying those top names again now, or placing bullish options trades on them. But if this is a bear market rally, it makes sense to wait.
With that in mind, let's review the whirlwind since "Liberation Day" and think about where we stand now.
1 | What just happened?
After selling off on Trump’s April 2 “Liberation Day” tariff announcement, the S&P 500 strung together nine straight up sessions (its longest run since 2004) and erased every penny of the tariff draw‑down before the streak finally broke on Monday. Even so, the index is still ~8 % below its February peak and has yet to clear its 200‑day moving average — a spot technicians see as first serious resistance.
2 | Why the bounce looked so convincing
| Tailwind | Detail |
|---|---|
| Tariff “pause” | On Apr 9 the White House granted a 90‑day rollback to baseline 10 % tariffs for most partners (but hiked China to 125 %), buying time for talks and immediately calming the market. |
| Earnings beat | With ~70 % of the S&P reported, Q1 EPS are tracking +13.6 % y/y vs. +8 % expected on Apr 1. Surprises plugged the valuation hole left by the tariff shock. |
| Fed on hold | The FOMC held rates at 4.25 – 4.50 % and signaled a patient stance, telling markets it will wait for clearer trade‑driven data before easing. |
| Positioning snap‑back | CTA/systematic funds that had de‑risked in early April bought back futures as volatility collapsed, while short covering in cyclicals amplified the move. |
3 | …but under the hood it still looks like a bear‑market rally
Breadth only mid‑cycle: barely 41 % of S&P members traded above their 200‑day moving average at Friday’s close, far from the 50‑60 % that normally marks the start of sustainable advances.
Valuations re‑inflated fast: the forward P/E is back to ~20.6× (10‑yr avg ≈ 18.5×), identical to the level on April 2, yet consensus profit growth for the next three quarters has fallen.
Guidance skewed negative: 56 % of companies issuing outlooks have guided below Street numbers, vs. a 51 % long‑run average.
Historical context: Goldman’s playbook reminds us that sharp, 10‑15 % surges are standard fare inside bear markets; the “pain trade” erupts when positioning is light and news flow looks “less bad,” but usually fades once the next macro shock arrives.
4 | What could flip the tape bullish—or bearish—from here
| Watch‐item (next 4‑8 weeks) | Bullish outcome | Bearish outcome | Timing |
|---|---|---|---|
| Tariff clock (pause expires Jul 8) | Concrete deals (or another extension) keep baseline at 10 % and let earnings visibility rebuild | China/EU talks stall → full re‑imposition; tariffs jump just as holiday‑order supply chains ramp | Headlines any day; formal decision late June |
| Breadth & 200‑DMA | >50 % of S&P 500 back above 200‑DMA and index itself closes >200‑DMA—signals fresh up‑cycle | Rally stalls under the trend line; breadth rolls back below 35 % | Could happen in days |
| Fed path | Clear data deterioration → September rate cut pricing sticks; real yields drift lower | Sticky inflation + tariff pass‑through keeps Fed frozen; front‑end yields stay >4 % | Next FOMC = Jun 17‑18 |
| Earnings revisions | Q2 pre‑announcement season (late June) shows raised margins in tariff‑exempt sectors | Guide‑downs broaden to tech, consumer; IBES ’25 EPS slips under $275 | Late June–mid July |
5 | How we can manage the recency bias/FOMO temptations
Anchor on the regime, not the rally.
We are still in an event‑driven bear market triggered by a policy shock; statistically, these don’t finish until either valuations reset or the policy shock is reversed. Neither has happened yet.Use objective triggers instead of gut feel.
Market internals: breadth >50 %, cyclicals outperforming defensives, VIX <20.
Macro: durable tariff settlement or a first Fed cut.
Until then, respect the possibility of another leg lower.
Continue to trade tactically, hedge strategically.
Add short exposure on the way up, as we did with Canadian names this week--and look for occasional longs with upcoming catalysts, as we did in the same post.
Use rallies to hedge. Remember, you can download our optimal hedging app by aiming your iPhone camera at the QR code below (or by tapping here, if you're reading this on your phone). Our app can help you find the least expensive hedges given your risk tolerance and time frame.
Bottom Line: This Probably Is A Bear Market Rally
Our instinct that the April‑May surge feels like a bear‑market rally lines up with the data: light breadth, lofty valuations, negative guidance, and a catalyst (tariff expiry) still looming. Could it morph into a new bull leg? Yes, but only if breadth, policy and the Fed line up in the next few weeks. Until we see those confirmations, it's best to treat strength as tactical rather than structural and keep risk‑management front and center.
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