B-Wave Bounce Loading
RLT Newsletter 3.12.26
Right now, the market is defined by a strange contradiction. Everyone seems to be short and hedged to the gills. The cost of puts is among the most expensive we have seen in history, even though SPY and QQQ are hardly down at all.
The one-month call/put skew is currently at levels seen during the 2025 tariff panic and the 2024 Japanese Yen carry trade blowup. Meanwhile, SPY is only about 4.5% off its highs. This dynamic may actually be why the market isn’t breaking down in a sustained way. Instead, it continues to grind lower in a choppy fashion, allowing those expensive options to slowly decay before a larger drop develops.
The Fear vs. Reality Gap
Think back to November when the Fear and Greed Index dropped to 5. That was just two points above where it sat in April 2024 after a 20% correction. However, when it hit that extreme reading on November 20th, the market was only down about 5%. The fear of a correction has been present for a long time, yet the actual “crash” has not arrived.
Under the surface, however, the damage is much worse than the indices suggest. While SPY is only down 4.5% from its January 28th high, it is difficult to find a major name with a similarly small drawdown:
MSFT: Down roughly 27% (Topped last July)
META: Down about 20% (Topped last August)
AMZN: Down about 20% (Topped last November)
AAPL: Down about 12% (Topped last December)
TSLA: Down around 20% (Topped last December)
AVGO: Down roughly 20% (Topped last December)
GOOGL: Down around 13% (Topped February 3rd)
AMZN Daily Chart
The Rotation Narrative Unravels
Outside of tech, we are seeing real weakness in financials. Banks have been diving. Goldman Sachs (GS) has broken its 200-day SMA and now sits 20 percent off its highs. The XLF ETF has also just closed below its 100-week SMA and, arguably looks ready for a bounce. A quick scan of the Dow (DIA) shows similar damage in names like HD, AXP, JPM, and NKE.
Late last year and early this year, the prevailing narrative was that the tech selloff was simply a healthy rotation. Investors pointed to Financials (XLF), Materials (XLB), Consumer Discretionary (XLY), Industrials (XLI), and Consumer Staples (XLP) as evidence that the broader market was holding up well while Big Tech cooled off.
However, we are now losing those names too. We are seeing a simultaneous loss of strength across those cyclical sectors while the Trillion-Dollar Titans that drive the index remain weak. This raises a simple question: Where exactly is the long term bullish fuel supposed to come from if we don’t see some kind of broader pullback first? Without a clear leadership group to pick up the slack, the case for a sustained bull market from these levels becomes very difficult to make.
XLF Daily Chart
Finding the Bottom
Market breadth is reaching interesting levels. Only about 28 percent of Nasdaq 100 stocks and 31 percent of S&P 500 stocks are currently above their 50-day SMA. Historically, when breadth reaches these zones, we often see at least a short-term bottom.
Nasdaq 100 Stocks Above 50-Day Average
With traders heavily hedged, breadth nearing support, and SPY approaching its 200-day SMA, I believe a short-term bounce is nearing. My view will be proven wrong if we gap down decisively below the 200-day SMA and buyers fail to step in. If we see panic and accelerating selling instead, the market has further to fall.
Otherwise, my base case is a short-term bottom followed by a “B-wave” rally. I don’t expect a rocket ship to new all-time highs. Instead, I expect many stocks to make lower highs while those expensive puts expire worthless over the next month or two.
The Bitcoin Signal: Relative Strength
I would be remiss if I didn’t also mention the “strength” in Bitcoin right now. While it has been range bound for the last 35 days, BTC has continued to grind higher even as SPY grinds lower. If the equity markets were ready to waterfall lower, we would likely see Bitcoin following suit. This divergence supports my main thesis that we get a tradable bounce soon, followed by another drop later this year.
As you know if you have read my recent work on Bitcoin, I still believe we eventually follow through to new lows, likely under the 200-week SMA at the very least. The Realized Price is currently around $54,400. In every previous cycle low, we have undercut that level by at least a small margin.
If Bitcoin breaks out above the $75,000 level, I will assume we are in the B-wave bounce that could take price into the $80,000 to $100,000 region. I am long BTC for that possibility, but I will be much more aggressively long once we get a drop to the $50,000 range or potentially even lower.
I currently have three counts: Green, Blue, and Red. Two of them suggest the low is in for a B-wave bounce, while the Blue count suggests we see one more slight low first. Either way, I think some kind of bounce materializes from here. During the 2022 bear market, we saw two 45% pushes from the lows over a 60 day period. A similar move here would take Bitcoin right into the bottom of the 100-week SMA around $87,000 around the first half of April.
Bitcoin Daily Chart
The Midterm Cycle
Seasonality offers conflicting signals right now. Ryan Detrick recently noted that over the past 20 years, the S&P 500 has bottomed for the year around March 12th on average. If that held, the lows would be in today.
However, this is a midterm election year, and those behave differently. As Benjamin Cowen pointed out in a reply, when you look at the last 100 years of midterm data, the S&P 500 tends to bottom much later, closer to late Q3 around August 19th.
I am leaning toward the Q3 timeline. I think it is highly unlikely that this week represents the low for the month, let alone the year. Ideally, I want to see SPY move down to the 200-day SMA, perhaps wick below it into the anchored VWAP, and then begin a “B-wave” bounce.
B-waves are notoriously difficult to trade because they are messy and produce lower highs or even deceptive higher highs. The key is securing entries near the “A-wave” low and actively managing risk before any potential “C-wave” decline begins.
SPY Daily Chart
