Despite Monday's dance to the downside on the back of Trump talking openly about firing Fed Chairman Jerome Powell, the S&P 500 enjoyed a pretty good week. If my calculator is correct, the venerable blue-chip index sports a gain of +4.6% for the week of April 21 while the much-maligned Nasdaq 100 gained +6.4%.

Although this may qualify as a little geeky, we should also take note that both of the aforementioned indices have now recovered a little more than one-half of the trade-war induced decline. From a technical analysis perspective, this is a good thing. It doesn't mean the market will be off to the races from here, but it can certainly be considered a positive.

Less than a week ago things weren't looking so hot. On Monday, stocks plunged again after Trump wrote that Powell's "termination can't come soon enough." This created, yep, you guessed it, more uncertainty - this time about the Fed's independence. And as has been the trend, traders voted with their feet (er, I mean, their sell programs) to express their displeasure.

With the indices moving back toward their lows, the mood was dour. More than one analyst could be heard talking about an inevitable retest of the lows, with several calling for further downside. It seemed like investors were spending their time trying to guess how low stocks could fall. Nearly everyone believed things could only get worse. Super.

The "Trump Put" Kicks In

And then it happened. The "Trump Put" kicked in. Contrary to all the bluster, Trump backpedaled on both China and Powell on consecutive days. On Tuesday it was China as Secretary of State Bessent talked about the need to de-escalate things with the world's second biggest economy. He suggested the current situation was unsustainable and would surely change. That was good for a gain of +2.6% for the S&P 500.

Then on Wednesday, Trump did a complete 180 on Powell, saying he never intended to fire the Fed Chair. (Oh, but he would like rates lower.) The President followed up on Bessent's remarks by saying he planned to be "very nice" to China. The hope for a light at the end of the trade war tunnel was good for another +1.6% gain in stocks. Nice indeed.

On Thursday, the mood continued to improve on the back of some decent economic data and surprisingly dovish Fedspeak. Orders for Durable Goods came in well above expectations, which served as a pushback to all the talk about the US already being in recession and/or that an economic collapse was nigh.

Is the Fed Also Changing Its Tune?

On the Fed front, Governor Waller said that while the Central Bank needs to stay data dependent, such an approach also risks being "late on policy actions." Then Cleveland Fed President Hammack said that although patience is necessary, the Fed could move in June - if data present a clearer picture of the economy's state.

So, just like that, both the Trump and Fed "Puts" were back in play. Which was good for another +2.1% move for the SPX.

The Key: Worst-Case Scenario Being Taken Off the Table

As the saying goes, it's not the news, but how the market reacts to the news that matters. As such, this week's rally suggests that the tone may be shifting a bit.

Recall that we've been of the mind that the market had been "assuming the worst." Never mind the fact that nobody knew what the final tariffs would look like or what companies would/would not be impacted - or even to what degree. No, until this week, it had been a "sell first and ask questions later" type of guessing game environment.

However, by the end of the week the tone was different. Our take is traders have decided that this week's news flow basically takes the worst-case scenario off the table. And since Wall Street had been busy taking their estimates for just about everything down, stock prices needed to be adjusted a bit. Thus, a correction of some of the correction appears to be happening.

From our perspective, the recovery of about half of this bad news panic decline makes sense. At least for now. Or until all things related to tariffs and threats become clearer.

Is The Door Opening for the Bulls?

To be sure, positive action in the stock market has been in short supply this year. In fact, the back-to-back +1% gains on the S&P 500 seen on Tuesday and Wednesday were the first since the election. And since every market analyst worth their salt knows that "follow through" is essential to any bounce during this type of environment, seeing a third and then fourth consecutive day of gains can be interpreted to mean that the bulls are trying to get back in the game.

Out Of The Woods?

But... (You knew that was coming, right?) It is important to remember that some of the best rallies in stock market history have occurred during bear cycles. And don't look now fans, but both the S&P and NDX finished the week smack into an area of important technical resistance. If I was a bear looking to make money on the short side, this is exactly the type of set up I'd be looking for before reloading the sell programs.

Cutting to the chase, we are probably not out of the woods here. Yes, the worst-case scenario may be off the table. However, the key question now becomes, is there durable improvement?

Yes, it's certainly possible that the trade war could have turned the corner. After all, bonds are acting better. Gold has reversed. The liquidation events seem to have dissipated. And the correlations among stocks seems to be falling.

However, there is no deal with China - or any other country for that matter - yet. Heck, Beijng is saying the two sides aren't even talking. So, until investors can get the feeling that this trade war is not going to send the economy, and in turn, earnings off a cliff, and the consequences (both intended and unintended) can be digested, we can't flash the all-clear signal.

Thought for the Day:

A positive attitude breeds success even more than success breeds a positive attitude. - Brian Wong

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES