This Is What Capitulation Feels Like | Weekly Roundup

This episode dissects the brutal market sell-off, exploring whether tariff-driven volatility signals true capitulation and outlining strategic considerations for navigating risk assets in this uncertain macro climate.

Market Sentiment and Potential Bottom

• The discussion kicks off with contrasting views on market timing amidst significant volatility. Quinn, previously bearish since December, suggests the current downturn might represent a bottoming process, indicating readiness to deploy capital.
• Jared Dillian concurs, advising that now is the time to close out protective put hedges, anticipating a potential opportunity to buy call options within about a week.
• Jared emphasizes the market's power, stating, "the markets cannot be bullied... This is going to continue until Trump capitulates and removes the tariffs..." suggesting policy shifts are necessary for relief.

The Tariff-Yield Conspiracy Theory

• A key point of speculation revolves around the idea that the tariff-induced market pullback might be an intentional strategy to lower bond yields, potentially orchestrated by figures like Howard Lutnick (referred to as Bessant in the transcript, likely a transcription error or nickname).
• The theory posits that driving down yields (e.g., 10-year Treasury yields towards 3-3.5%) facilitates government debt refinancing, even at the cost of equity market pain.
• Tony Greer acknowledges the plausibility, noting, "Get tens down to three and a half%... Roll over the debt... I sort of believe that." However, he also cautions this is "playing with fire," highlighting the risk of the strategy backfiring and causing a deeper reflexive downturn.

Analyzing the Trump-Bessent Policy Nexus

• Quinn elaborates on the potential influence of Howard Lutnick (Bessant) on Trump's recent policy actions, suggesting Lutnick is the architect behind the scenes.
• This perspective frames Trump's shift from a "stock market guy" to a "bond market guy" as a calculated move advised by Lutnick to deflate an overvalued market (22x forward P/E) before potential tax cuts and deregulation.
• Quinn points to recent Saudi oil production hike deals and Powell's cautious stance as evidence supporting this coordinated strategy, arguing a 12-15% equity correction might be seen as an acceptable cost for achieving lower rates and refinancing advantages.

Dollar Dynamics, International Markets, and Commodities

• Jared Dillian shifts focus to currency and global markets, noting the recent dynamic where the US Dollar strengthened while equities fell and bonds rallied – a shift from the previous pattern.
• While maintaining a long-term bearish view on the dollar (expecting a multi-year decline similar to the mid-2000s), he believes the initial leg down in the dollar might be concluding.
• Despite short-term pain likely driven by margin calls, Jared remains bullish on international equities outperforming US assets long-term.
• His immediate focus, however, is on the sharp commodity sell-off. He highlights the significant drops in copper and oil, suggesting these moves are overdone, "I think the commodity uh correction is way overdone."
• He also notes a technical sell signal (DeMark 13 sell) appeared on the BCOM (Bloomberg Commodity Index) just before the collapse.

Oil Market Technicals and Strategy

• Analyzing the oil market's sharp decline, Jared observes that historically, large gap-downs in oil (like those following OPEC announcements) don't typically lead to immediate V-shaped recoveries.
• He anticipates a period of consolidation and a slow crawl higher, suggesting the technical damage will take weeks to repair.
• Tony Greer expresses less direct interest in trading oil itself, viewing it more as a "speedometer" for broader market health. He prefers focusing on natural resource stocks rather than tech, seeking sectors showing relative strength, but finds oil currently unattractive as it risks breaking down further.

Spotlight on Homebuilders: A Potential Trend Change?

• Tony Greer identifies homebuilders as a sector showing surprising resilience amidst the broad market sell-off.
• He points to significant rallies (e.g., 3-sigma moves) in stocks like NVR, D.R. Horton (DRH), PulteGroup (PHM), and Lennar (LEN), along with the ITB (iShares U.S. Home Construction ETF).
• Tony interprets this strength as a potential leading indicator, stating, "Like to me that's a trend changer there... when builders change trend they keep trending."

Gold and Silver: Contrarian Sentiment Signals

• The conversation turns to precious metals, with Tony expressing a bearish short-term view on gold, citing anecdotal evidence like mainstream newsletters publishing "starter packs for investing in gold" as potential signs of a top.
• Quinn echoes this sentiment with a story about a friend's 10-year-old student buying gold.
• Both Tony and Jared share a strong aversion to silver, viewing it as a poor substitute for gold exposure often favored by retail traders seeking leverage.
• Tony emphatically calls it the "Silver is the sucker bet of the [ __ ] commodity market...", warning against narratives surrounding shortages or manipulation.

Interpreting Powell's Latest Remarks

• Quinn provides a summary of Fed Chair Powell's recent comments, characterizing them as largely neutral.
• Powell stressed patience, reiterated the Fed's view that policy is "moderately restrictive," and acknowledged the potential growth-dampening effects of a trade war.
• While noting the Fed has "plenty of room to react," Powell indicated they need the next six weeks leading up to the next meeting to assess the impact of ongoing events, stating, "it's just too soon to comment given how much is in flux."
• The takeaway is that the Fed isn't signaling an imminent dovish pivot but remains watchful of growth concerns.

Debating Intermeeting Rate Cuts

• Market chatter regarding potential intermeeting rate cuts is discussed, but the speakers express skepticism.
• Jared believes the S&P 500 would need to fall significantly further (perhaps another 10%) before the Fed would consider such an emergency measure.
• Tony strongly argues that an unexpected rate cut now would likely be interpreted as a panic signal, potentially triggering more selling, "If they did an emergency rate cut today I think the S&P would go 4,700 offered on the spot..."

Market Mean Reversion and Rally Potential

• Jared emphasizes the S&P 500's tendency towards mean reversion, suggesting that even after significant declines, powerful counter-trend rallies are possible.
• He notes that the market could retrace a large portion (60-80%) of the down move, potentially reaching levels like 5800, "and still be in a downtrend."
• This highlights the potential for sharp bear market rallies following periods of capitulation, offering trading opportunities but requiring awareness of the prevailing primary trend.

The December 2018 Analog and the Fed's Role

• The panel draws parallels to the December 2018 market correction, where Powell initially maintained a patient stance despite market declines, only pivoting after the Nasdaq hit a 20% drawdown (bear market territory).
• The current situation feels similar, with Powell holding firm despite market stress.
• This leads Tony to suggest the catalyst for a market turn might not come from the Fed this time, "I don't think that Powell holds the answer in when the equity market turns." The implication is that a resolution might need to come from the fiscal side (e.g., Trump/Lutnick policy adjustments).

Jobs Report: Data vs. Price Action

• The latest jobs report, featuring a relatively strong Non-Farm Payrolls (NFP) number, is analyzed.
• Jared expresses surprise that bonds didn't sell off more aggressively on the news, attributing the muted reaction to overwhelming market fear about tariffs, "I think the market is so panicked about tariffs that the good data like didn't even help..."
• He also downplays the slight uptick in the unemployment rate as a mere rounding effect.
• Tony reinforces the idea that in the current environment, price action and sentiment are dominating fundamental data.

Trading Strategy: Navigating Bounces

• The discussion addresses the critical question for traders: should an eventual bounce be sold into (as a bear market rally) or trusted as the start of a recovery?
• Jared recalls the October 2022 CPI print, where a surprisingly positive inflation reading triggered a massive 5.5% single-day rally in the S&P 500, which marked the ultimate low.
• However, the panel debates whether such violent single-day moves signal a true bottom or just thin liquidity typical of bear markets, suggesting sustained, multi-day buying might be a more reliable indicator of a durable rally.
• Tony leans towards selling rallies initially, viewing the first retest of key resistance (like the 200-day moving average) as a probable shorting opportunity.

The Importance of Risk Management and Discipline

• Tony emphasizes the criticality of disciplined risk management, especially in volatile conditions.
• His approach involves strictly adhering to pre-defined risk parameters, avoiding becoming a "bag holder," moving stop-losses to break-even as soon as feasible, and accepting small losses quickly to prevent them from escalating.
• He stresses the importance of preserving capital: "always knowing that you got to live to trade another day..." This disciplined approach is key to surviving sharp market swings.

Knowing When to Exit: Avoiding the Final Flush

• Building on risk management, Quinn highlights the importance of exiting positions before reaching maximum emotional distress ("squealing like a pig").
• Getting stopped out slightly early, even if the broader directional view was correct, prevents being forced out during the most violent phase of a move, often right before a reversal.
• Tony adds the concept of recognizing when a trade simply isn't working as expected ("the absence of" positive price action) and cutting it loose, even if it's just stagnant, as another crucial risk management facet.

Gold Miners: Relative Strength vs. Inherent Risks

• The group revisits gold miners, acknowledging their significant year-to-date outperformance and relative strength, even holding up reasonably well during the recent sell-off.
• Jared notes their historical negative correlation to the broader market might be returning.
• However, Quinn expresses caution about the timing for broader base metals, despite a long-term bullish view based on underinvestment.
• Tony finds the miners' relative strength tempting but remains hesitant due to the inherent volatility and risks associated with the sector, especially if gold prices reverse lower.
• Jared mentions his rule is never to touch natural gas, highlighting the difficulty of trading certain commodity-linked assets.

Tax Policy Concerns: Growth Implications

• Jared voices strong concerns about the details emerging around potential Republican tax plans.
• He highlights proposals to eliminate income tax for those earning under $150k while raising the top rate for millionaires, arguing this structure is highly progressive and counterproductive for growth.
• "This is the opposite of progrowth," he states, suggesting the combined impact of these tax proposals and tariffs could be detrimental to the economy and market sentiment, despite potential corporate-side incentives.

Uncertainty Around the Tariff "Offramp"

• Regarding how the current tariff situation might resolve, Jared reiterates his sentiment-focused approach.
• Rather than predicting specific catalysts (like Trump reversing course or Powell cutting rates), he focuses on identifying when the market reaches a point of "maximum pain," based on historical cycles and observable sentiment extremes.
• He admits frankly, "when you say what is the offramp... I have no idea. I really don't know."

Bitcoin's Surprising Resilience

• The conversation concludes with an analysis of Bitcoin's performance.
• All speakers express surprise at its relative strength, holding above $80,000 despite a 20% drawdown in the Nasdaq.
• Jared notes he was looking for a pullback to $70,000 that hasn't materialized.
• Tony attributes the resilience partly to strong, consistent institutional inflows via ETFs, suggesting institutions are acting as dip buyers: "it's holding up because the institutions are saying 'Okay like we're a buyer of this thing...'"
• Quinn acknowledges the support from corporate buyers like MicroStrategy and GameStop but questions its sustainability, suggesting Bitcoin could still succumb if the broader risk-off environment persists for too long.
• The overall chart pattern, as Tony notes, looks like a consolidation after a pullback, potentially coiling for another move.

Bond Market Signals Remain Murky

• Revisiting interest rates, Quinn notes the 30-year yield's behavior is crucial; its recent weakness is more constructive than its earlier stability.
• Tony finds the bond market generally unhelpful for signals recently, admitting it "tripped him up."
• The only clear technical pattern he sees is a potential Head and Shoulders (H&S) top in 10-year yields, a bearish pattern suggesting a possible move towards 3.60%, though conviction remains low without further economic weakness.

Conclusion

The discussion highlights extreme market stress driven by policy uncertainty, emphasizing sentiment analysis and risk management over predicting specific outcomes. Bitcoin's relative strength amidst the chaos provides a key data point for Crypto AI investors tracking cross-asset correlations and potential market divergences.