To The Moon

Introduction: The Current Market Plunge

As of April 8, 2025, global stock markets are grappling with a significant downturn, driven primarily by an escalating tariff trade war. Major indices like the S&P 500 ( $S&P 500(.SPX)$ ) have potentially shed 10%-15% from recent highs (assuming a drop from 5,000 to 4,250-4,500), while volatility, as measured by the VIX, may have spiked above 40. Fueled by fears of disrupted supply chains and rising inflation, this sell-off has left investors questioning: Is this the bottom, or is more pain ahead? To answer this, we must analyze the broader environment and outline a framework for spotting a potential "buy-the-dip" opportunity.

The Big Picture: A Trade-War-Driven Storm

The intensifying trade war dominates the current market environment, likely spearheaded by the Trump administration’s imposition of steep tariffs—potentially 10%-25% or higher—on key trading partners like China and the EU. Retaliatory measures, such as China’s hypothetical 34% tariffs on U.S. goods, threaten global growth and stoke inflationary pressures. Meanwhile, the Federal Reserve faces a dilemma: cutting rates to bolster growth risks fueling inflation (possibly at 3.5%-4%), while holding steady could exacerbate corporate strain. Adding to the chaos, hedge funds are deleveraging, with JPMorgan estimating a 5%-6% drop in net leverage last week and volatility-targeting funds poised to offload $25-$30 billion in stocks over the coming days. This confluence of factors suggests the market remains in flux, but opportunities may emerge for the astute investor.

Key Angles for Judging a Market Bottom

Identifying a "bottom" requires a multi-faceted approach, blending technical signals, macroeconomic cues, and behavioural insights. Here are the critical angles to consider:

1. Market Microstructure and Liquidity

• Watch for a shift in order books from overwhelming sell pressure to accumulating buy orders. A drying up of liquidity followed by renewed buying (e.g., ETF inflows or shrinking discounts) often signals capitulation.

• Option markets can also hint at a turn: a drop in put option dominance or a positive Gamma shift may precede a rebound.

2. Global Linkages and External Triggers

• Monitor the U.S. dollar (DXY) and safe-haven assets like gold and Treasuries. A peaking dollar or softening 10-year Treasury yields (currently ~4%-4.5%) could indicate risk appetite returning.

• Emerging markets (e.g., A-shares) and commodities (oil, copper) may stabilize first if global demand expectations recover, especially with policy support from China.

3. Behavioural and Sentiment Shifts

• Look for a divergence between panicked retail selling and stealth institutional buying (trackable via Smart Money Flow or ETF flows).

• Media narratives transitioning from apocalyptic warnings to cautious optimism often mark an emotional bottom.

4. Valuation and Fundamentals

• Assess forward P/E ratios (e.g., S&P 500 at 16-18 versus a historical mean of ~20) adjusted for tariff-induced earnings cuts. A drop below 15 could signal undervaluation.

• Dividend yields nearing or exceeding bond yields (e.g., S&P 500 at 4%) may lure capital back to equities.

5. Policy and Event Catalysts

• A Fed rate cut (25-50 bps) or trade war de-escalation (e.g., tariff exemptions) could ignite a rally. Watch upcoming CPI data (April 10) and the June FOMC meeting.

• Hedge fund deleveraging nearing completion—such as the $25-$30 billion sell-off concluding by April 11—may ease downward pressure.

Synthesizing the Factors: When to Act?

The interplay of these elements suggests the market is still probing for a bottom as of April 8. Short-term tactical opportunities could arise if the VIX retreats below 30, ETF outflows reverse, and the dollar softens by 5%-10%. A Mid-term strategic entry might emerge if the Fed cuts rates and trade talks yield progress, potentially stabilizing the S&P 500 at 3,800-4,000 (a 20%-25% correction). For long-term value seekers, a P/E below 15, paired with clear policy support (e.g., China’s trillion-yuan stimulus), could justify action. However, if tariffs escalate (e.g., 60% on China) and inflation spikes, the bottom may slip to late 2025.

Conclusion: Patience with a Plan

While the current downturn reflects genuine risks, it also sets the stage for selective opportunities. Investors should avoid chasing a falling knife and instead adopt a tiered approach: allocate funds across technical, policy, and emotional bottoms to mitigate timing risks. Defensive sectors (e.g., consumer staples) or policy-backed areas (e.g., infrastructure) may offer early stability, while options can cap downside exposure. The bottom isn’t here yet—likely not until the $25-$30 billion sell-off peaks and policy clarity emerges—but by tracking these factors, investors can position themselves to capitalize when the tide turns.

@TigerWire