Three Red Lines for the Stock Market

Three Red Lines for the Stock Market

“Your screen is a sea of red. Maybe your palms are sweating. Maybe you’re frozen, just staring at the numbers, thinking about your portfolio and 401(k).”

If that’s your plight, Paradigm trading pro Enrique Abeyta sympathizes. In a single day yesterday, the S&P 500 sank 4.8%. Nothing like that’s happened since the 2020 COVID crash.

Hard as it might be to do, Enrique urges you to set aside the tariff talk for a few moments. “The reason for the turmoil doesn’t matter,” he says. “What matters is what happens next.

“Because in moments like this, your brain doesn’t process numbers. It processes threats. You don’t feel like a rational investor; you feel like prey. That’s biology.

“And that’s why people make the worst decisions in the middle of a sell-off.

“But here’s what three decades in the markets have taught me: Every panic feels different, but they all act the same,” Enrique continues.

Whether it was during his time as a hedge fund bigwig or as a newsletter editor, the pattern was identical.

“Every major BEAR market of the last 30 years — the 2022 post-COVID hangover, the 2020 COVID period, the global financial crisis of 2008–09, and the internet bubble of 2000–01 — saw major snapback rallies happen,” Enrique says.

These rallies are a gift — your opportunity to bag substantial gains — or at the very least trim your losses.

What are the signs to look out for? “We want to see real PANIC selling in the stock market,” Enrique tells us.

“We know this happens when 90% of the shares traded on the New York Stock Exchange are trading lower versus higher. This is a powerful indicator that panic is set here and investors are selling irrationally.”

Here’s a chart of this indicator going back five years — with a red line showing that 90% threshold.

“This is one of the key signs that we will be looking for in a short-term tradeable bottom in the stock market,” Enrique says.

“Now, this doesn’t mean THE bottom. Rather we are looking for an opportunity where the market will trade higher between 5–10%.

“This can be seen as an opportunity to exit losing positions. It also can be seen as an opportunity to take profits on anything you buy once you see the bottom.”

Here’s another red line to watch — the VIX.

“The CBOE Volatility Index (or VIX) is a financial benchmark designed to capture the expected volatility in the S&P 500,” Enrique reminds us. “Think of it as a measure of how crazy people think the moves are going to be in the stock market. It is also another good contrarian indicator of panic.”

Here’s a chart of the VIX. Like the last chart, it goes back to 2020. It too has a telltale red line — in this case at the 35 level.

“The last time we breached this level was back in August of last year,” says Enrique. “This set up both a tradeable bottom and a sustainable recovery to new highs.

“The previous time we hit this level was back in early 2022. This did NOT set the bottom for a recovery to new highs, but it did set the bottom for a great tradable opportunity.

“It does not have to be EXACTLY at the 35 level. Back in 2022, it got close several times and those created tradeable (and profitable) opportunities.”

One more red line — this one from the options markets. This is a ratio of call options versus put options.

“Call option buying shows investor optimism,” Enrique says. “The vast majority of the time, there are more calls being bought than put options and this number is below 1.

“Very occasionally, though, investor pessimism is so high that there are more puts being bought than call options. When this happens, it’s another contra-indicator and strong sign of a tradeable bottom.”

The red line on this chart, also going back to 2020, is at 1.

Notice the spikes over 1 at times the stock market is struggling. Often it suggests an imminent turnaround. “We can see this during the correction in the second half of 2023 and the market bottom in late 2022,” Enrique says. This indicator is most useful in conjunction with the others.

So far, it hasn’t hit the red line. Once it does, “it will be a good sign of an opportunity.”

Again, these are not signs that the market will necessarily soar to new all-time highs. But they are opportunities to generate substantial short-term gains.

And you’ll need opportunities like these because Enrique believes the company that led the market higher throughout 2023–24 — Nvidia — is set for a 50% crash.

Not because of tariffs but because of a new invention from Elon Musk that will compete directly with Nvidia.

Now, here’s the opportunity: “I’ve identified a company that will be the biggest winner of Elon’s new tech,” says Enrique. “By investing in this partner company today, you will not only be protected against the market-wide crash…

“But you’ll also have the chance to make money in the process, as Elon’s new invention sends shares of this company to the stratosphere.”

Give Enrique’s up-to-the-minute research a look at this link.

The Day After the Day After “Liberation Day”

Yeah, so the market’s down big today. Again. A respectable March jobs report isn’t anywhere near enough to overcome the ongoing tariff jitters.

Let’s tackle the job numbers first: The wonks at the Bureau of Labor Statistics conjured 228,000 new jobs for the month — way more than the typical Wall Street economist’s expectation of 131,000.

However, the February and January numbers were revised down. For the first quarter of this year, average monthly job growth was only 152,000 — barely enough to keep up with population growth, and a sharp drop from 289,000 in the fourth quarter of last year.

The official unemployment rate ticked up to 4.2%. It’s been oscillating between 4.0–4.2% for nearly a year.

The DOGE-driven job cuts don’t show up in this report: Federal government payrolls are down by only 4,000 for the month out of a workforce totaling 2.4 million (excluding the Postal Service).

For whatever it’s worth, overall job growth has continued nonstop for four years and three months — the longest streak on record except for the nine years and five months that ended with COVID lockdowns in 2020.

On to the butcher’s bill in today’s markets…

At last check the S&P 500 is another down 3% to 5,232 — and in danger of cracking beneath 5,200, a level briefly touched during the market’s swoon last August.

The Dow has broken decisively below 40,000 for the first time since last summer. And the Nasdaq is in danger of breaking below 16,000 for the first time in nearly a year.

“Mr. Slammy” — the nickname for the mysterious forces that emerge in the precious meals markets now and then — finally showed up for gold today. The Midas metal is down $75 as we write to $3,039.

But that 2.4% decline is nothing compared with the 6% loss registered by silver, now back under $30. The gold-silver ratio — literally the gold price divided by the silver price — is now over 100 for the first time since 2020. Relative to gold, silver looks like a screaming bargain.

Hot money flooding out of stocks and gold is flooding into bonds, pushing yields lower. The yield on a 10-year Treasury note is under 4% for the first time in six months.

Under the circumstances, Bitcoin is holding up remarkably well at $83,577.

Crude is crashing another 6.7% at last check to $62.44 — a level last seen (for a nanosecond) in May 2023.

Chalk it up to the OPEC+ nations upping production at a time when nearly everyone’s worried about a sharp contraction in global trade.

Absent those factors, oil should be screaming higher given that Washington is closer to launching a war against Iran than at any time since 2007.

Is America Really That Important to China?

As dawn broke on the U.S. East Coast, the Chinese government announced new tariffs in retaliation for Donald Trump’s big announcement Wednesday.

Beijing is imposing a 34% tariff on imports from the United States — equaling Washington’s 34% tariff on imports from China. (Actually, Trump previously imposed a 20% tariff on Chinese imports, so the actual total is 54%.)

In addition, China is restricting exports of seven types of rare earth elements — while stopping poultry imports from two major U.S. producers.

There’s a line of thought among many analysts that the primary aim of the Trump tariff regime is not a revival of U.S. manufacturing as much as containing China’s industrial power.

That might be the point of the steep tariffs on other Asian nations. “To skirt existing tariffs,” says CNN, “some Chinese and multinational companies have shifted production to other parts of Asia. But Trump’s new tariffs on other Asian nations announced Wednesday will hurt China, too: Vietnam faces levies of 46% and Cambodian goods will be tariffed at 49%.”

"It's an all-round blockade against China," hedge fund manager Yuan Yuwei tells the Reuters newswire. (He says he’s buying gold and selling Chinese stocks.)

Zhiwu Chen, a finance prof at the University of Hong Kong, says the tariffs will make it impossible for Beijing to achieve its target of 5% economic growth. “This new tariff increase is definitely making things worse."

But on the flip side… “The U.S. market is not as important [to China] as it once was,” Australian economist Warwick Powell writes on his Substack page.

“The surplus China has with the U.S. represents less than 5% of its total trade volume in 2024.”

What’s more, Chinese exports to the United States “represent less than 3% of its GDP,” tweets internet entrepreneur Arnaud Bertrand.

Hmmm… If China’s economy could withstand Xi Jinping’s idiotic “zero COVID” policies from 2020–22, it can probably withstand a sharp contraction of its exports to America.

Also it’s possible if not likely that other nations targeted by U.S. tariffs will opt to grow their trade with China simply out of spite — buying the Chinese products Americans can’t or won’t continue to buy.

No guarantees that events will play out this way; the aforementioned Enrique Abeyta sees a more salutary outcome and you’ll hear more from him on this subject next week. Regardless, it’s something we’ll be watching.

Experts Warn About the Fragile Power Grid

Don’t take it from us that the U.S. power grid is in sad shape, even as AI is taking electricity demand to unprecedented levels. Take it from the American Society of Civil Engineers.

Every so often the ASCE issues a report card on the energy sector’s infrastructure. The previous grade of C- issued in 2021 has now been downgraded to D+

Supply and demand are increasingly out of whack. On the supply side, ASCE cites a shortage of distribution transformers and a lack of transmission capacity — issues we’ve been pounding away at in these virtual pages since 2022.

On the demand side, “consumers and businesses are growing increasingly reliant on data storage facilities, artificial intelligence and electrified products such as EVs, to name just a few examples of advancements adding immense strain” to the grid, as the report puts it.

“An increase in electric vehicles and a rise in data centers will demand 35 GW of electricity by 2030 alone, up from 17 GW in 2022.”

Result: “Utilities will need to double existing transmission capacity to connect new renewable generation sources.”

Reminder: After 60 years of steady growth, the power grid’s capacity didn’t grow at all between 2010–2023.

Among the Paradigm editors, our Enrique Abeyta is the one who’s most plugged in — if you’ll pardon the expression — to the profit opportunities from the coming buildout/overhaul of the grid.

If you’re not familiar with Enrique’s research, there’s no better way to get acquainted than his brand-new entry-level newsletter Breaking Profits. Charter subscribers get three free reports — all of them geared toward AI and one with a pick uniquely poised to profit from the AI electricity squeeze. See what Breaking Profits is all about at this link.

Luigi Mangione and Boeing: A Study In Contrasts

Space is limited today for reader replies to our issue-length indictment of the health care system on Wednesday. We’ll try to include more on Monday, but we’ll have one of our regulars weigh in today…

“There are certainly a lot of things I can say in agreement with Wednesday's issue. But to pick just a few; people see the treatment of Luigi, the assumption of guilt, the terrorism charges, the potential death penalty, and they can easily compare that to the treatment of Boeing.

“The corporate executives get a finger wag from the Biden Justice Department after they were explicitly told that further accidents would result in prosecution for their negligence. They probably still remember all the Boeing whistleblowers who kept turning up dead. They can plainly see that corporatists getting hundreds of people killed to save a buck has no discernable punishment compared with one young man allegedly lashing out resulting in charges that far exceed what he would face had the deceased been mere plebeians.

“It's the fast track to people saying, ‘What have I got to lose?’ and opting for the French solution that Marx romanticized. Since I haven't heard anything about Trump's DOJ looking into charges where Biden declined on Boeing, I can only assume the two-tier justice system will continue, and class resentment will continue to accrue.

“It's certainly no accident the health care sector is so afflicted with bloated charges: As a patient, flying to a different country isn't always feasible, and the other two options are to pay up and be saddled with debt, or to take the Canadian way out and say, ‘Guess I'll die.’ A TV someone could live without (I certainly do) and is an expense of want. Medical care is an expense of need, people don't go for open heart surgery because they felt like it on a whim.

“All the best on this wild ride, Dave.”

Dave responds: Hate to break it to you, but Boeing is looking to back out of the sweetheart plea deal offered last year by the Biden Justice Department.

A few days ago, The Wall Street Journal reported that “the aerospace giant is seeking more lenient treatment from the Justice Department, which under the Trump administration is reviewing numerous pending criminal cases that haven’t yet gone to trial or been approved by courts.”

And the beat goes on…

Have a good weekend,

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets