US markets managed to stay near their highs for most of February. However, as the month came to a close, concerns over the reemergence of inflation and earnings forecasts weighed on the markets. In the last week of February, we saw markets drop sharply. Markets lost about 7% from their all-time highs, which does not put them into correction territory but does highlight some weaknesses in the economy.
As seen in the chart above of the $QQQ, the NASDAQ is now trending sideways and is in Stage 3. Unless we firmly break out to new highs, the market will either stay in a sideways trend for an extended period of time or move lower into Stage 4. Please click here to learn more about the 4 stages of market development.
Let’s go through some of these concerns and then look ahead to what we should expect in March.
First, consumer confidence dropped sharply in January. Some might argue that reality set in after President Trump officially took office. His policies and the sheer number of executive orders he has issued have naturally created some uncertainty. However, this is not unexpected in the first hundred days of a newly elected president.
One major issue has been the reemergence of inflation, a recurring problem since the onset of the 2020 pandemic. This inflationary concern must be addressed properly and is likely the primary contributing factor to the drop in consumer confidence.
Earnings season is nearly over, and while most companies have exceeded expectations, many have expressed uncertainty due to the changing political environment. As a result, most companies have warned that their profit forecasts may need to be adjusted. This is a reasonable expectation, considering that the policies of the past four years have been almost entirely rolled back. Some hot-button issues, such as tariffs, remain difficult to forecast since they have not yet been fully implemented or defined. This uncertainty was evident in Walmart’s ($WMT) earnings report. Previously the world’s largest retailer, Walmart is now the second largest, behind Amazon ($AMZN).
As you can see in the chart above, Walmart ($WMT) had been in a solid uptrend until the big gap down on earnings. The uptrend line has not been broken yet, but if $WMT does not make a solid new high, it will now be entering a stage 2 sideways trend.
What Should We Look Forward to in March?
From a bullish perspective, it would be healthy for the markets to remain in a trading range to consolidate recent highs over time. Markets are still near all-time highs, and although there has been some recent selling, most companies are adapting well to recent policy changes. Bulls argue that recent cost-cutting measures by the Department of Government Efficiency (DOGE), will help balance the budget and support the long-term health of the U.S. economy.
From a bearish perspective, a correction of 10% or more is long overdue. The last correction occurred in 2022. The catalyst for a correction is clear: the massive cost-cutting currently underway in the federal government. While these cuts may benefit the U.S. economy in the long run, they represent a significant amount of money being pulled from the economy in the short term. Even if the spending was inefficient, the bearish argument holds that the Biden administration had been fighting inflation and propping up the economy through government spending.
From a technical perspective, markets appear overbought, as illustrated by Nvidia’s exceptional earnings. The company exceeded expectations and posted significant profits, yet its stock did not react as bullishly as one might expect—likely because much of this growth had already been priced in. Traders should exercise caution when markets approach all-time highs while showing signs of being overbought.
Nvidia ($NVDA), once the market leader, is now already in a stage 3 – messy sideways pattern which is also not a great technical indicator for the overall markets.
Another indicator suggesting caution is the large amount of cash sitting on the sidelines. Not only is Warren Buffett, the world’s most renowned investor, holding hundreds of millions of dollars in cash, but there is also over $1 trillion in investor capital sitting on the sidelines. This signals uncertainty, at least in the short term.
On that note, we will leave you until next month. Trade well.
Written by Michael DiGioia, Director of Education
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