5 stock-market signals that suggest the tariff-induced sell-off is over
AP Photo/Richard Drew
- The stock market has flashed a slew of buy signals amid the tariff-induced volatility.
- Bullish indicators suggest that the bull market in stocks is intact.
- A signal in the bond market hints that a recession may be less likely than many believe.
The stock market is flashing a handful of technical signals that suggest the tariff-induced sell-off that kicked off earlier this month may be over.
While the market was slightly lower on Friday morning, it followed a strong three-day winning streak for stocks. The benchmark S&P 500 has surged 13% since the Trump administration announced a 90-day pause on most of its tariffs.
The rally has been fast and furious, with 10% of that gain coming in a single day.
Investors are now left wondering if this is simply a bear market correction that will ultimately give way to new lows or if it's the beginning of a lasting recovery that will vault stocks back to their record highs and get the bull market back on track.
Commentators say it's probably the latter.
"There were several key developments this week that in our view, have raised the probability 'the low is in' to more than 90%," Fundstrat's Tom Lee said in a note on Friday. "In other words, the bull market is intact."
These are five bullish signals that flashed in the stock market this month.
1. Zweig Breadth Thrust
The ultra-rare Zweig Breadth Thrust indicator flashed on Thursday, suggesting big gains ahead.
The indicator measures overall participation among individual securities in the stock market's rally. Since 1945, the indicator has only flashed 18 times, with the most recent signal occurring in November 2023.
The Zweig Breadth Thrust Indicator has a perfect track record of predicting positive stock market gains in the six and twelve months after it flashes.
According to Detrick, of the 18 times the signal has flashed, the average forward 6- and 12-month returns for the S&P 500 are 15.3% and 24.0%, respectively.
2. Volatility collapse
Over the past two weeks, a collapse in the Cboe Volatility Index, or VIX, was dramatic enough to flash a "bear killer" signal in the stock market.
The signal occurs when the VIX closes above 50 and subsequently closes below 30. That happened last week, and it indicates, based on historical stock market data, that the bottom is in.
According to Jason Goepfert of SetnimenTrader, the stock market's forward returns are strong once the VIX flashes this signal.
The median 3-month, 6-month, and 12-month forward returns are 2.8%, 11.0%, and 17.9%, respectively, with a 100% rate of positive returns 12 months after the signal flashes.
"While sample sizes are small, we have generally seen throughout history that when the stock market volatility peaks above a high level, it has only occurred during bottoming phases after a decline," Goepfert told BI.
3. Death cross amid waterfall sell-off
A "death cross" is traditionally viewed as a "sell" signal in the stock market, but according to LPL Financial's Adam Turnquist, it can be a solid indicator of positive future returns.
Turnquist found that death cross signals that flash within one month of a waterfall-like decline in the stock market show strong forward-looking returns on average.
The death cross in the stock market flashed on April 14, within one month of the S&P 500's 19% decline.
Turnquist said that death crosses within one month of a 15% drawdown in the S&P 500 have resulted in a 12-month forward average return of 16%, and a win rate of 83%.
"When you have a death cross with a pretty severe drawdown, you tend to get much better forward returns, meaning you've already priced in a lot of the damage," Turnquist told BI last week.
4. High-yield bond spreads recover
High-yield bond spreads—essentially the yield investors are paid over a benchmark like Treasurys—are recovering following a tariff-induced spike earlier this month.
The BofA US High Yield Index Option-Adjusted Spread fell from 4.61% on April 7 to 3.75% this week. That represents a 50% recovery from its spike higher that began in late March.
According to Lee, this action suggests that fears of an imminent recession are receding.
"Confirms we are walking back from recession," Lee said.
5. Back-to-back 90% advancing days
The stock market experienced two back-to-back trading days of 90% of stocks moving higher on April 22.
That trading action highlights the strength of the stock market's breadth amid the ongoing rally, suggesting that it has staying power.
According to Lee, this signal has a solid track record of confirming that the stock market low is in.
The three other times this signal flashed were in March 2009, August 2011, and April 2020, all of which followed a bottoming out for the stock market.