False News Triggers 7-Minute U.S. Stock Rally, Highlights Market Sensitivity

On Monday, a false news report triggered a brief but significant rally in U.S. stocks, lasting just seven minutes. This sudden surge, though short-lived, provided valuable insights into the market's potential for a bottom and served as a real-time test of market conditions. The false news, which spread rapidly online, caused a temporary spike in stock prices before they eventually retreated. This event highlighted several key points about the current state of the market.

The false news report suggested a significant change in economic policy, which initially caused a surge in stock prices. This rapid increase was followed by a swift correction, as investors realized the news was not credible. The market's reaction to this false information underscored the sensitivity of investors to policy changes and the potential for sudden shifts in market sentiment.

The brief rally also served as a test of the market's resilience and its ability to recover from sudden shocks. Despite the initial surge, the market quickly returned to its previous levels, indicating that the underlying fundamentals of the market remained stable. This stability suggests that the market may have already priced in many of the negative factors affecting it, and that a bottom may be in sight.

However, the market's reaction to the false news also highlighted the potential for further volatility. The rapid spread of misinformation and the market's sensitivity to it could lead to more sudden and unpredictable movements in the future. Investors should remain cautious and prepared for potential volatility, even as the market shows signs of stabilization.

Analysts believe that in the short term, the unpredictable nature of the current administration's policies could lead to a period of market stagnation. However, for a sustained recovery, the narrative that tariffs could trigger an economic recession needs to change. Potential triggers for this change include concessions from the administration on trade policies, similar concessions from other countries, or intervention from the central bank.

The market's reaction to the false news also revealed a key insight: buyers are ready to make significant purchases at any sign of tariff relief, while sellers are less likely to panic and sell off their holdings even in the face of worsening tariff conditions. This suggests that the market may be preparing for a rebound.

Currently, there are several signs that the market may be nearing a bottom. Investor sentiment has reached extreme pessimism, similar to levels seen during the 2008 market bottom. Institutional investors are flocking to U.S. Treasuries for safety and are heavily buying put options. Hedge funds are also aggressively reducing leverage.

Given the extreme tension among investors, any trigger for a rebound could result in a significant rally. Historical data shows that after similar two-day declines, the market typically performs well in the following month. However, such rebounds are not guaranteed to be sustained. Bear markets often see dramatic short-term rallies that leave little trace in the long-term downward trend. For instance, the "dead cat bounce" in November 2008 saw the S&P 500 rise 27% over the next two months, only to plummet nearly a third by March 2009 before truly bottoming out.

For a genuine market turnaround, the narrative that tariffs could spark an economic recession needs to change. This could be triggered by one of three potential factors: concessions from the administration on trade policies, similar concessions from other countries, or intervention from the central bank. However, the central bank is likely to maintain its policy independence and may not take further action beyond lowering interest rates in response to economic slowdown. Additionally, the upcoming earnings season could bring more warnings from CEOs about the impact of tariffs, potentially triggering further sell-offs.

Overall, current prices have already factored in a significant amount of negative news. Bold investors may start cautiously re-entering the market, but they must recognize that if tariffs persist and ultimately lead to an economic recession, the stock market could face further declines.