Volatility Returns With A Vengeance

Defense First
My investment system is titled: A.M.P.D.
A= Advanced (a.k.a. Early) Entry
M = Market Conditions
P = Psychological Analysis
D= Defense First

D stands for defense first.
Why? Because great investors know that playing good defense is just as important as playing good offense in the stock market.

Retail Stocks Are Weak
At the end of every week, I like to look back at what happened and then look ahead at what most likely will happen going forward. The market fell hard this week. The bearish catalyst occurred on Thursday after Walmart beat earnings but warned that it would not be immune from tariffs. That sparked a wave of selling in retail stocks and the selling spilled over to other sectors by Friday’s close. The XRT which is a popular retail ETF, sliced below important support this week and looks like it wants to head lower. Many retail stocks sell imported goods and they are very sensitive to tariffs.

Flirting With Resistance
The S&P 500 (SPY) and Nasdaq 100 (QQQ) have gone virtually nowhere since December. Remember there are only three ways the market can move: Up, Down, & Sideways. Right now, the major indices are going sideways. They both rallied right up to resistance (recent record highs) this week then rolled over after sellers showed up and quelled the bulls’ efforts.

Weaker Action Beneath The Surface:
Meanwhile, the mid cap (MDY) and small cap (IWM) indices are much weaker on a relative basis. In fact these indices, which make up most of the stocks in the market, are below their post election levels. Meaning, they have lost ground since the election rally in November 2024. That’s not healthy action.

Volatility Spiked
After a relatively calm start to 2025, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite took investors on a rollercoaster ride from Monday, February 17, through Friday, February 21. Volatility spiked, headlines swirled, and the bulls and bears slugged it out in a market that’s starting to feel more like a prizefight than a leisurely bull run.

The Elephant In The Room = It’s All About The Fed

The Fed remains the elephant in the room.
The chatter on X was all about the Fed.
“Rate cuts are dead,” one user posted, echoing a growing sentiment that the central bank might pause its dovish pivot.
I’ve been saying it for months: Watch The Fed.
We know the popular saying, Don’t fight the Fed, but don’t blindly trust it either.
The market’s still digesting last year’s rally—up over 20% in 2024—and any hint of tighter policy sends jitters through the tape.
Remember, the market “stopped” going up after the December 2024 Fed Meeting.
Since then, the market has been “choppy” to put it nicely. Clearly, the market is watching the Fed closely.

Tariffs and Tantrums
Trade policy is another big elephant in the room.
Midweek, reports surfaced that the Trump administration, now a month into its second term, was mulling steeper tariffs on Chinese imports—potentially up to 60%. The tariff talk reignited fears of a trade war, a ghost from 2018-2019 that markets still remember.

Weak Finish, Sellers Are Getting Stronger
Sellers showed up on Friday and sent stocks sharply lower.
This usually bodes poorly for next week.
Next week we have earnings from AI and tech giant Nvidia which will be front and center on my radar. I also want to see if the bulls can show up or if the selling continues.

3 Things In Focus:

The market is focused on three big things.
First, inflation’s stickiness is clashing with lofty expectations from 2024’s AI-fueled rally. Second, policy uncertainty—tariffs, Fed moves, geopolitics—is muddying the waters. Third, valuations are stretched: the S&P’s forward P/E sits at 21, well above its historical average of 17. Growth needs to deliver, or gravity will take over.

Bottom Line
For me defense is key until growth stocks and the major indices can get back in gear. Stepping back, the major indices are only a few percentage points below record highs and that is impressive considering the “damage” beneath the surface. Bottom line, the bulls still have the upper hand—uptrend intact, earnings solid—but the bears are circling and getting stronger.

If support breaks going forward, buckle up.
For now, this week was a shot across the bow.
The market’s telling us that a defensive stance is warranted until the bulls regain control.