Last week our weekly entitled “The Bull Market Remains Intact” (May 7, 2025) noted that technical indicators were turning favorable, particularly the NYSE cumulative advance/decline line which rose to an all-time high — a characteristic of a bull market. Normally, a new high in the NYSE cumulative advance/decline line is the technical confirmation that follows a new high in the indices, so this sequence seems inverted; nevertheless; a new high in the advance/decline line suggests the bull market remains intact and stock prices should move higher.
The advance/decline line continued to make new highs this week, but it was not the only positive change. Our 25-day up/down volume oscillator rose to 4.18. This was its second consecutive reading in overbought territory and the highest overbought reading since December 2023. The December 2023 reading was in line with the strong equity rebound from the October 2023 low. In short, the underlying breadth of the market is as bullish as it was in late 2023. See pages 10 and 11.
It is unusual for the 25-day up/down volume oscillator to reach overbought territory prior to the equity market making a new cyclical high. Much like the advance/decline line, this oscillator usually provides confirmation (or non-confirmation) of an advance after the market has made new highs. And to confirm a new high in the market the oscillator should remain overbought for a minimum of five consecutive trading days. It is possible that the oscillator could reach the five consecutive days in overbought this week. If so, it would imply new market highs in the near term. But even if it does not, this indicator measures the intensity of volume in advancing and declining shares and an overbought reading is confirmation that persistent volume in advancing stocks is driving stocks higher. This is a bullish characteristic.
Last week we also noted that the current rally materialized from a reading of negative 1.80, a level only halfway toward oversold territory. The last oversold reading in this oscillator was made at the October 2023 low. The lack of an oversold reading since then means the current advance is a continuation of the bull market that began in 2023.
Another positive this week was the 10-day daily new high/low indicator. The 10-day average of daily new highs rose to 103 this week and new lows are averaging 48. This combination, of daily new highs above 100 and new lows below 100, is an improvement from last week and shifts this indicator from neutral to positive. As a reminder, on April 11, three trading days after the S&P 500 hit a low of 4982.77, the 10-day new low index rose to an extreme reading of 823. This was the highest number since the September-October 2022 low when the 10-day new low level reached 882.
Last week the charts of the popular indices showed that each index was confronting important resistance at its 50-day moving average. This week the S&P 500 and the Nasdaq Composite jumped not only above the 50-day and 100-day moving averages, but also through their 200-day moving averages. The DJIA, hampered by weakness in UnitedHealth Group Inc. (UNH – $311.38), is still trading below the junction of its 200-day and 100-day moving averages and the Russell 2000, the perpetual laggard, is above its 50-day moving average but well below its longer-term moving averages. Nonetheless, the recent advance has lifted the S&P 500 to a small increase for the year and leaves it only 4.2% below its all-time high. See page 9. All in all, the equity market is acting better a bit sooner than we anticipated, but technical indicators have improved dramatically, and first quarter earnings season has been better than expected. These are the two catalysts we were looking for in the second half of the year to drive the market higher.
De-escalation
The catalyst for this nice improvement in market breadth this week was the fact that the US and China agreed to de-escalate the trade war and unwind most of the tariffs put into place in April. We find the media coverage of this US/China trade deal almost comical, describing it as “surprising”, a “no deal” deal, who blinked first, a huge win for China, and only a temporary reprieve. “Journalists” do not seem to understand that President Trump has two goals. First, various reports have identified China as a major source of fentanyl precursor chemicals, which are the ingredients needed to manufacture fentanyl. President Trump wants this stopped. Second, China’s consumer market has never been open to foreign trade and President Trump wants China “to open up.” President Trump imposed tariffs on China, which basically shut down trade between the two countries, as an opening salvo to get China to open to free (freer?) trade and to stop the flow of fentanyl. So, when the media says China wins because Trump blinked on tariffs, keep in mind that it is more complicated than tariffs. At the current time, it appears that China is agreeing to many of these requests. However, China has failed to meet its commitments more than once, so time will tell!
Meanwhile, revenue from Trump’s tariffs began to flow into the Treasury Department in April, and Treasury reported a record $16.3 billion in customs duties were received. That’s 86% more than the $8.75 billion collected in March and more than double the $7.1 billion received in April 2024. The reason President Trump plans to maintain a broad 10% tariff on nearly all imports is that tariffs are a good source of revenue. Do not forget that this administration inherited a massive budget deficit and is in desperate need of revenue.
Tariffs brought in revenue in April and although tariffs were supposed to be inflationary, headline CPI was 2.3% YOY in April, down from 2.4% YOY in March. Core CPI was unchanged at 2.8% YOY. See pages 4 and 5. In short, as the trade war is de-escalating, inflation is also de-escalating! Some economists are predicting that the impact of tariffs will take more time to show up in the data, but we disagree. These same economists overlooked the fact that stimulating an expanding economy in 2020 through 2023 would be inflationary. They were wrong. Economists are now predicting tariffs are inflationary when in fact they are often absorbed by the exporter or intermediaries. Economists are also overlooking the fact that oil prices are down which will eventually bring down gasoline, heating oil, and utility prices. This should more than offset any impact from tariffs.
The National Federation of Independent Business’ Small Business Optimism Index fell 1.6 points to 95.8 in April, but since this survey was taken before the US-China Geneva talks it could make the data moot. Nonetheless, the sharp jump in optimism that appeared immediately after the presidential election was mostly, but not entirely, erased by the end of April. See page 3. Consumer credit increased $10.2 billion in March, which was a seasonally adjusted annualized rate of 1.5% for the month. Both revolving and nonrevolving grew, although nonrevolving credit accounted for 80% of the increase. This increase in consumer credit was a welcome change from February, when all forms of credit fell month-over-month and were down year-over-year. The 6-month rates of change for credit remain negative, but the trend improved in March, which could prove to be a turning point. Although credit growth is expected to remain sluggish in the near term, financing rates fell in the first quarter of the year, and this could provide stimulus for credit growth in upcoming quarters. See page 6.
Gail Dudack
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