Watch the Red Line Lows

CAMS View from the Corner

April 22, 2025

Over the previous couple of weeks, while having general in-house market discussions, we have entered into an occasional conversation relative to the general citizenry’s perception of stock market behavior of late.

Our underlying curiosity arises in light of the large down days that have shown themselves in recent days/weeks, sprinkled around days that have been positive to generally flat. 

Regardless of the end result for X trading day, most trading days have exhibited rather large trading ranges, where, regardless of a positive or negative close, the day was filled with volatile price action.

This type of pricing behavior can have most believing, or sensing, that the stock market “goes down every day” as a general mental backdrop.  The large down days stack up, and with those notable days it is easy to assume the market is relentlessly moving lower and lower.

The opposite of this also presents itself, per our casual observation of people when in highly volatile market environments.

For example, conversely to our current market environment, we have noted, along the timeline, how an uptrending market, with notable up days being widely reported on, can instill in the general citizenry’s perception that the stock market simply “goes up every day” when in fact that was not the case.

In that type of market environment the masses take note of the sizeable up day reporting as though it is nearly every trading day, while the down days, or flat days, do not register in the general mindset.

Recollecting, there have been numerous instances over the years and decades where such a belief was in the collective consciousness while the underlying reality was the stock market had not moved higher in weeks, and in some instances, in a couple of months or so. 

Underneath all of this is we collectively become a bit hardwired to the direction volatile environments are presenting. 

That is, if the markets are lathered up in downside volatility, we note the reported down days as continued proof of such, while minimizing, in our consciousness, the flat or up days.  Hence, “the market just keeps going down every day” type of perception develops.

As offered, the converse of this is true in notable upside environments as well.

Our Current-Day Reality

Regardless of our outset curiosity about the general collective perception of our current stock market environment, reality offers collective stock market participants put in an attempted bottom for price action back in early April.

We offer this as an attempted bottom, or low point, until further evidence can prove that was in fact the low price level of this downturn.  Pricing action and behavior will tell the full story, given some time. 

There is a plethora of tools to assist in deciphering the likelihood of whether we have seen a low point, but it is price action that ultimately tells the bottom line story.

Under this pricing view, we can reduce it down to simplicity via the definition of trends.  That is, for a downtrend to remain in place, we need to see a series of lower lows continue to present themselves. 

As we stand currently, as a general description for the stock market, we have not seen lower lows put in via pricing since early April.  Importantly, it is too early to offer, with confidence, that the lows have been established. 

Below, our red line insertion will play a helpful role in determining if the recent bottom can hold and, in turn, factually offer a bottom is in.

Click For Larger View:  https://schrts.co/zTrcVsGy

Above is a two-year chart of the equal-weight S&P 500 index. 

We chose to present the equal-weight version of the S&P 500 because we are interested in a broad view of the stock market.  In the construction of this index, all 500 companies play an equal role in the price performance of the index. 

The traditionally reported S&P 500 is a weighted index, which results in X companies playing a larger role in the performance of the S&P 500 according to the price performance of the companies and the weighting they are assigned in the index construction. 

As a consequence, this is not as accurate of a messenger of the behavior of the full index of 500 companies that the equal-weight version offers.

Within the chart we placed a red horizontal line to draw attention to the low point dating back to the early part of this month. 

This red line must hold in order to label this market behavior as a true bottom.  This will take some time to determine as pricing often challenges previous lows, or general areas of such, before we can ascertain the prior lows are indeed holding.

If our red line is penetrated and continues lower from there, then bottoming price action discussions are out the window, as market participants will be offering that the downtrend is in place and is continuing.  This would offer continued pricing behavior of a lower low being displayed, which defines downtrending price action.

Prior to the red line low point, we can see pricing put in a cliff-dive-type drop over the previous few days.  This was after a somewhat methodical ebb and flow of price moving lower.

It is not abnormal for a radical counterpricing move to occur after such a drop.  These are often labeled as “bear market rallies,” which historically occur after price has been trending hard south.  Bear market rallies are known to offer tremendous short-term upward performance but often do not hold. 

Our small red arrow denotes the rapid launch off our red line low point. 

After the rapid ascent off the low point highlighted by our red arrow, we can see price is falling lower again and looking as though a test of the prior low point is coming. 

Questions from here arise, such as will it in fact test the low point, and if it does, importantly as described, can it hold. 

We are approaching very important pricing behavior to monitor.  To this point, through the lens of early downtrending pricing behavior, everything is going according to the historical textbooks if you will.

That is, a methodical ebbing and flowing of price on a downside basis, which morphed into a cliff-dive descent.  This was then followed by a rapid bear market-type counter rally only to turn over into a comparatively gently descending testing of the previous low areas.

For our part, we have been, as well as continue to be cautious with our investment positioning in light of this overall storyline.

We are well aware of the power of the previously described bear market countertrend rally and how such rallies can easily fool participants into believing all is good again.  In light of this, we are watching current pricing behavior closely to see if this downtrend will continue, via a lower low, or if the current low point can hold. 

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis