Ceasefire or Not, the Bull Market Is in Trouble

VIEW IN BROWSER

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Why stocks are on shaky ground even with a rumored ceasefire
This Divergence signal spots buy opportunities in brutal downtrends
One healthcare stock is entering its strongest seasonal window of the year

Another day, another Iran war headscratcher…

Speaking from the Oval Office yesterday, President Trump said the “war has been won.”

He also claimed that the Iranians have agreed to “never have a nuclear weapon.”

Not only that, but he also said that the Iranian government had given his administration a “present” and a “very significant prize” that was “oil and gas related.”

If the war ends soon, and energy markets get back to normal, that’s great news. But we’re not popping the champagne corks yet.

As regular readers will know, here at TradeSmith, we take the headlines with a pinch of salt.

Instead, we follow the data. And as we’ve been highlighting in these pages, right now the data is warning that the bull market is in trouble.

Recommended Link

The Fed Chair Said 6 Words on Record That Should Terrify Every American Investor

The Fed did something they can’t undo and now they are trapped. Former $200 million money manager Jeff Clark says what’s happening will redistribute the wealth of an entire generation starting just weeks, not months from now. But most Americans won’t find out until it’s already too late to act. Get the full story here

The S&P 500’s warning is louder than any ceasefire rumor…

On Friday, the S&P 500 entered a Short-Term Health Red Zone – the first sell signal on the index since two weeks before the Liberation Day tariff crash last April.

Short-Term Health is TradeSmith’s volatility-based trend indicator. It tracks a stock or index’s normal range of movement and uses that to determine its trend.

Green means buy. Yellow means caution. Red means sell.

It’s our most sensitive indicator, designed to catch early trend shifts.

The last time it fired was two weeks before the Liberation Day crash last April. The S&P 500 went on to fall 15% over four trading days.

And on Feb. 3, 2022, the same signal fired at the start of a bear market that saw the index drop as much as 25%.

To be clear, it’s also fired ahead of less dramatic dips, like the volatility we saw in October 2023 and December 2018.

But with missiles still flying in the Persian Gulf, AI disrupting large swaths of the tech market here in the U.S., and stocks down more than 4% this year, we’re leaning cautious.

The sector-level data makes the case even more clearly. Right now, across the S&P’s 11 sectors, here’s what Short-Term Health is showing:

Utilities, Real Estate, Consumer Defensive, Basic Materials, Industrials, and Energy have all been in the Green Zone for a month or more. These are the "real asset" sectors – the ones that hold up when uncertainty is high and growth is under pressure.
Healthcare flipped yellow just over a week ago. Communication Services has been Yellow for three weeks.
But Technology has been Red for more than four weeks. Consumer Cyclical for four weeks. Financial Services just flipped Red last month.

The picture is pretty clear. Money is leaving growth stocks and moving into the kinds of companies that hold up when the economy gets rough – think utilities, energy, and the basics of everyday life.

As long as Technology, Consumer Cyclical, and Financial Services stay in the Red Zone – and the S&P 500 stays there with them – we’re leaning cautious.

That means tightening up your stop losses and trimming any underperforming positions.

But that doesn’t mean there aren’t pockets of opportunity for nimble traders.

Software stocks are setting up a rare trade…

While most investors are watching the headlines, veteran options trader Jeff Clark is watching something else entirely – a potential buy signal in the beaten-down software sector.

Jeff has spent more than 40 years trading options. He managed personal fortunes for roughly 100 of California’s wealthiest individuals before “retiring” and sharing his trading insights with newsletter readers.

These days, he heads up TradeSmith’s Delta Report advisory. It’s where he identifies high-probability options trades – often in volatile markets like today’s, which is exactly when options traders can profit most.

He’s also developed a proprietary software tool on the TradeSmith Finance platform – the Convergence/Divergence indicator – to help our users find these high-probability trade setups.

It tracks three proprietary moving averages – a type of widely followed trend line – for any given stock or ETF.

When a stock or ETF is going nowhere – drifting sideways without a clear direction – these trend lines bunch together in a tight cluster.

When they spread apart, it means a stock has been trending hard in one direction for too long and is vulnerable to snapping back. Jeff calls this a Divergence signal. The further the spread, the more overstretched the move – and the better the odds of a reversal.

Here’s an example of a Divergent stock in cybersecurity company Gen Digital (GEN):

GEN shares have been in a nasty downtrend since the start of the year, falling from $26 per share to just over $20 in three months.

That’s pushed the three moving averages far apart. It shows us that the downtrend is extreme and GEN shares are primed for a short-term reversal.

Jeff’s been using this signal to great effect in his Delta Report advisory so far this year.

He closed trades this year for gains of 61.8% on Figma (FIG) in 13 days, 128.2% on Novo Nordisk (NVO) in about a month, and 140.8% on Oscar Health (OSCR) in eight days.

For a real wake-up call on what’s happening in markets, I recommend you check out the presentation Jeff and his team have put together.

He’s calling this the “most dangerous market environment of his 40-year career.” And he’s identified more than 60 S&P 500 stocks showing the same technical pattern he tracked before the 2000 dot-com crash, the 2008 financial crisis, and the 2022 tech collapse.

He calls it “The Breaking Point.” And he’s positioned his subscribers to profit from it – on both the long and short side.

To see Jeff’s full breakdown of what he’s seeing – and how he’s trading it – catch his presentation here.

This healthcare stock just entered its strongest seasonal window of the year…

TradeSmith’s Seasonality tool analyzes historical price patterns going as far back as the data allows. It shows you recurring windows in time when a stock has tended to move up or down.

And right now, it’s highlighting a compelling setup on Encompass Health (EHC) – one of the country’s largest operators of inpatient rehabilitation hospitals.

EHC just entered a seasonal window running from March 25 to April 30 that has produced gains 100% of the time over the past 15 years, with an average return of 10.2% and a median return of 8.8%.

The seasonality window alone is powerful. But EHC’s technical condition is helping even more.

Seasonal Synergy is our confirmation filter for seasonal trades.

It checks whether a stock’s Relative Strength Index (RSI) – a momentum gauge that measures whether a stock is overbought or oversold – is below the optimal level for this specific seasonal window.

TradeSmith calculates RSI based on the historical conditions that produced the best outcomes within that particular window. For EHC’s March 25—April 30 pattern, the Optimal RSI threshold is below 47. And right now, EHC’s RSI sits at 35.73 – well below that level.

Think of it like a spring sale at a department store. In this case, EHC could be a clothing brand that tends to see strong sales during this time of year.

But this year, the store holds too much inventory… so the clothes are already marked down. The conditions for a strong sale – or in the market, a strong rally – are all in place.

With a 100% historical win rate and a stock entering the window in an oversold state, this is one of the cleaner setups in the market right now.

If you’re going to take this trade, the odds are on your side. As always for shorter-term ideas, though, use a smaller position size and put on a trailing stop for protection. Then, sit back and watch how it develops over the next five weeks.

Ceasefire or Not, the Bull Market Is in Trouble