Inside Markets — Near-Term Outlook

The sell-off in US equities entered its third week yesterday with the Mag 7 index closing in bear market territory, down -20.3% from the all-time high set in December. We wrote about record crowding in Mag 7 stocks several times in December and again for Barron’s on February 18 (see recent media appearances). Crowded positioning in Mag 7 stocks was our biggest cause for concern as DeepSeek’s accomplishment (recognized on 1/27) kicked off a momentum factor unwind. The momentum factor undergoes periodic corrections (unwinds) that usually fall in the 10%-16% range. As of yesterday’s close, the momentum factor was -14.3% below its January high. We should be in the 8th or 9th inning with deep oversold levels, light positioning and extreme bearish sentiment aligned with an imminent relief rally.

The lows preceding a relief rally are usually retested in the first two weeks. Successful retests often make new intraday lows before reversing late in the day. These are capitulation events that signal the end of a correction or bear market. If a relief rally is imminent and the retest follows this template, the best opportunity to add exposure would be sometime later this month/early April.