Investors certainly had their resolve tested this week, with the tech-heavy Nasdaq declining 3.45% and the S&P 500 tumbling 3.1% and posting its worst week of the year to date. While the losses can sting, Fundstrat Head of Research Tom Lee continues to urge clients to maintain fortitude and to “stay on target.”
Head of Technical Strategy Mark Newton is similarly maintaining a proverbial stiff upper lip. “When you strip out the effects of technology, the breadth has actually been quite a lot more positive than we saw back in the middle part of January,” he told us at our weekly research huddle. “So yes, we have done a little bit of damage in the last few weeks, but the broader trends arguably are still intact. Honestly, we’re heading into a level where, in my view, we’re going to find pretty good support and start to turn higher.”
There’s no denying that the Trump administration’s tariff forays have weighed on the market’s mood, sending AAII (American Association Individual Investor) sentiment to levels that Newton described as “almost extreme fear levels.” To him, this seems like an overreaction. “A 5% drawdown is certainly not the end of the world,” he suggested, while reminding us that the last two times that AAII sentiment got this bearish were in 2022 after the market fell 25%, and 2009 after a 40% drawdown. “Nine times out of 10 when [investors get this fearful], it’s really getting close to a time you want to buy the market,” Newton added.
Lee also sees initial signs of a possible turnaround approaching. “The recent stock-market drawdown appears to have triggered a shift in rhetoric from Trump and his team,” he observed, citing this as “evidence of the Trump put returning.” He further noted that this week, the Trump administration made conciliatory statements about tariffs on Canadian and Mexican imports, which “signals some desire to reduce harsh financial market consequences.” In Lee’s view, this week’s weak jobs numbers could not only reinforce the Trump put but also bring the Fed put back into play, potentially “limiting the downside risk for stocks.”
Sector Allocation Strategy
These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the March 2025 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.
Chart of the Week
Last week, Fundstrat Head of Research Tom Lee urged investors to “stay on target,” rather than try to time the market with a tactical exit and re-entry. As he reminded us this week, buy-and-hold strategies tend to outperform such efforts, citing the rule of “10 best days,” – to wit, the stock market makes most of its gains in the 10 best trading days of any given year. Since 1928, the S&P 500 has averaged annual returns of 8%. But if one were to exclude returns generated on the 10 best days of each year, those returns transform into average annual declines of 13%. As our Chart of the Week shows, this rule has held up in the past decade. Average annual returns of the S&P 500 since 2015 have been 12%, but excluding each year’s 10 best days, the index has notched an average annual 10% decline.The bottom line is that “investors must remain mindful of the significant opportunity cost associated with remaining sidelined, even during periods of volatility,” he warned.
QQQ 0.55% has now pulled down into an attractive area of support and the 50% retracement level of the prior low to high range from last August intersects at 482. Unfortunately, when utilizing intra-day DeMark counts to attempt to fine-tune where QQQ might bottom, these are premature here and do make the case for 478-80 into early next week. Thus, while an oversold rally might attempt to happen at any time, next week looks more likely based on intra-day DeMark along with wave structure and Market cycles.
AAII data (American Association of Individual Investors) continues to show bearish sentiment being quite elevated for the second straight week and the negativity on both AAII, Fear and Greed and other retail polls shows bearish sentiment being the highest since 2022. Of course, this doesn’t imply that markets necessarily have to bottom right away, but suspect that this is close. Note, there is no evidence of capitulation meaning abnormal downside volume or high Equity Put/call data, and this is not always necessary before markets turn. Last week showed 57% Bears and 19% bulls, for a net negative spread of around 38% which is extreme. See this chart where the last time markets were at similar levels of fear was following the bear market of 2021-2022.
Semiconductors have been very hard hit lately and Semiconductors have underperformed both Tech Hardware and Software lately. NVDA has now undercut 113 and SOX, the Philly Semiconductor index, has broken down to the lowest levels since last Summer. While the chart looks ominous over the last year as a potential topping pattern, there is no proof of this being a topping pattern technically until/unless August lows are broken at 4290. Initial support lies at 4426 and should be important over the next 1-2 days this week in holding. However, failure to rally back above 4800 would result in a drop down to test this very level (4290 from 8/5/24) I suspect that SOX will find strong support at levels just below current- 4426 down to 4290, and am not expecting a technical breakdown. Thus, while NVDA looks subpar on a break of 113 in the short run, my thinking is there will be opportunity in March within the next 1-2 weeks.
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