May Outlook: Market Volatility, Historic Reversal, and Signals for the Months Ahead
- Brad Tremitiere CIO
- May 14
- 6 min read
Where Do We Go From Here?
The last month in the market has been nothing short of interesting. Several historic moves unfolded, generating compelling data points and technical signals. However, parts of the market and broader economy still need to show improvement before we can confidently forecast new highs.
Historic Reversal
April’s market activity was, quite frankly, historic. Rarely do we witness a month that begins as bearishly as April did, only to reverse sharply and close on such a bullish note.
Focusing on the S&P 500, the index fell as much as -13.84%, or 776.81 points, from its March close at the lowest point in April. To put this into perspective, there have been only 12 months since 1970 with a larger intra-month percentage drop. Most of those drops occurred during extreme market events, such as the October 1987 crash, the September 11 attacks in 2001, or the COVID-driven selloff in March 2020.
Early April’s selling pressure was largely driven by the announcement of President Trump’s reciprocal tariff plans. The market’s reaction was sharp and difficult to quantify, especially when compared to previous extreme events.
However, sentiment turned just as rapidly. After the Trump administration announced a 90-day delay to the proposed tariffs—coupled with encouraging economic data, solid earnings reports, and clearer signals on global trade—the S&P 500 began a powerful rebound. From its April 8th low to the April 30th close, the index surged by 15.18%, or 734.02 points. While the S&P still finished April down -0.76%, it was a historically rare performance: never before has the index dropped more than -12% intra-month and ended down less than -1%.
The closest comparable month was August 2011, when the S&P declined by -14.76% during the month and managed to recover enough to close down only -5.68%.
The Nasdaq Composite’s performance was even more remarkable. From the March close to its intra-month low in April, the index dropped -14.54%, or 2,515.26 points. Unlike the S&P, the Nasdaq not only recovered all its losses but closed the month with a gain. From its low, it rallied 18.01%, or 2,662.31 points, finishing April up 0.85%. The only month with a better performance was October 1998, when the index fell -19.88% before rebounding by 30.53% to close the month with a 4.58% gain.
Data provided by eSignal Software
These types of massive intra-month reversals are extremely rare. At best, they suggest major market bottoms; at worst, they reflect peak stress in the financial system. As I mentioned in my previous note, I believe the early April drop represented a point of maximum market stress. While the strength of the rebound has been encouraging, I’m not yet ready to call for new market highs.
Zweig Breadth Thrust Signals Strong Momentum
On April 24, the advance/decline data from the New York Stock Exchange triggered the 14th Zweig Breadth Thrust (ZBT) since 1970. We previously discussed this indicator in 2023, when it was activated following the regional banking crisis triggered by the failures of Silicon Valley Bank and New York Community Bank.
The ZBT is based on a rapid improvement in market breadth. Specifically, it is triggered when the 10-day moving average of advancing issues on the NYSE rises from below 0.40 to above 0.615 in 10 days or fewer. For this to happen, advancing issues must significantly outpace declining issues for several consecutive sessions—a strong indication of broad-based buying.
What makes the Zweig Breadth Thrust so compelling is its historical reliability. Over the past 13 signals since 1970, nearly every occurrence has been followed by strong market performance over the following year. Six and twelve months after each signal, the S&P 500 has historically delivered average double-digit gains, and every instance has resulted in a positive return. While there’s always a chance this time could be different, history suggests that’s unlikely.
New Highs and Uptrend Participation Still Lagging
One short-term breadth signal that has yet to fully confirm the market’s recent strength is the number of stocks hitting 20-day new highs. In previous market thrusts since 2009, a key characteristic has been that at least 50% of S&P 500 components reach 20-day highs. As of May 2, however, only 45% of stocks had done so—falling just short of this threshold. We’ll need to see continued short-term strength to build confidence that the rally off the April lows can sustain itself.
Another technical headwind involves the percentage of S&P 500 stocks currently in uptrends. Since late November, this number has been cut in half—from 76% to just 34%. The last time we saw participation this weak was near the market lows in 2022. While we’re now in a similar range based on historical context, these levels typically require a period of consolidation or “choppy” action before regaining upward momentum. As such, this data suggests the market may still need more time before it’s ready to make a serious attempt at new highs.
The Federal Reserve
Over the past few weeks, considerable attention has been given to the ongoing tension between President Trump and Federal Reserve Chairman Jerome Powell. While we're not here to take sides in such disputes, it's difficult to ignore that the Fed once again appears late in adjusting its policy stance.
As we've mentioned in previous notes, one potential solution to this recurring issue would be to eliminate the Fed’s control over the policy rate entirely and instead allow it to float in tandem with the 2-Year Treasury Yield. Doing so would provide the U.S. and global markets with a more transparent and real-time benchmark for monetary policy—one based on actual market conditions rather than the opinions of academic policymakers.
Last Wednesday, the Fed held its target rate steady at 4.25%–4.50%, citing ongoing concerns about inflation driven by tariffs. However, if we use the current 2-Year Treasury Yield as a proxy for where the Fed Funds Rate should be, with the yield sitting at 3.79%, current policy is 45 to 70 basis points too tight. This suggests the Fed is once again behind the curve—continuing its pattern of being too slow to hike and too hesitant to cut.
While opinions on Chairman Powell may vary, it's critical to recall that during the summer and fall of 2021—when year-over-year inflation was running at 5% to 6%—the Fed dismissed it as “temporary” and “transitory.” Even more concerning, the Fed kept rates at 0.00% to 0.25% until March 2022 and didn’t fully end its COVID-era quantitative easing program until June 2022. In our view, this mismanagement was so egregious that it has now led to an overly stubborn resistance to cutting rates, even as economic conditions weaken.
Unless the Fed begins to align its policy more closely with market signals—particularly the 2-Year Yield—and shifts away from its overly academic framework, it will remain the single greatest risk to market stability.
What to Expect Ahead
We’ve seen encouraging momentum off the April market lows, but numerous unresolved economic concerns remain. As mentioned in our previous note, we expect the market to remain volatile in the coming months as it works to establish a more durable foundation for sustained upside.
Tariffs
The tariff situation remains highly fluid—positive developments one day, setbacks the next. We’re still within the 90-day reciprocal tariff pause, so the focus now shifts to whether policymakers can finalize new trade agreements before the mid-July deadline. Timely resolution is critical to maintaining investor confidence.
Unemployment
So far, unemployment figures have generally met expectations, even as government-sector jobs continue to be cut. It's essential that private-sector job growth remains strong to offset these reductions. Any signs of weakening in private payrolls would be a cause for concern.
Seasonality
We’ve long believed in the saying: “Sell in August and come back in late October”—a more accurate (though less catchy) version of the old adage “Sell in May and go away.” Interestingly, July has emerged as one of the strongest market months over the past 15 years. Still, summer months tend to bring heightened volatility. We now need to bridge the gap between this traditionally weaker half of the year and the more favorable six-month period that begins in October.
Conclusion
In the months ahead, we continue to expect elevated market volatility and a broad trading range. If progress is made on the tariff front and the Federal Reserve adopts a more dovish stance, market performance could increasingly lean toward the bullish side. However, significant challenges remain, and these are likely to contribute to ongoing choppy, wide-ranging price action.
Based on our analysis, a more definitive and sustainable market bottom appears likely to form in the 4th quarter. It’s important to note that this prospective low doesn’t necessarily have to fall below the April trough—it simply represents the point from which the market may begin a more constructive long-term uptrend. We believe this final low could mark the foundation for a healthier and more durable rally. Stay patient.
Chief Investment Officer - Partner
Financial Advisor
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