- Coiled Spring Capital Macro Report
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- Coiled Spring Capital MR 3/16/25
Table of Contents
Introduction
We know our readers appreciate our "Hammer Time" series, where we analyze potential reversal setups following corrective phases in the stock market. The term refers to a specific reversal structure forming across indexes and key instruments—but not all hammer reversal patterns are created equal.
One of the most common questions we get is about the durability of these reversals, the expected time frame for follow-through, and how to trade them. Unfortunately, there’s no one-size-fits-all answer—each situation is unique. The simplest way to assess a hammer reversal is to look for confirmation: continued upside with no immediate or decisive break below the reversal low.
Let’s examine the last bear market in 2022. During the peak-to-trough decline, we saw four major hammer reversals. These patterns tend to be most significant in mature declines—typically after several weeks of relentless downside action—often leading to sharp, short-term rallies.
In the chart below, the first circle highlights two major hammer reversals occurring just weeks apart. Both sparked quick rebounds, but neither held, failing within weeks. This is key: the faster a reversal fails, the more ominous it can be. Notably, the second hammer in late February triggered a strong rally into March, only to ultimately reverse and forge new lows. Given March’s historical seasonality, could we see a similar rally and failure this time? More on that later.
The second circle marks the third hammer reversal, which may have misled investors into believing the bottom was in. However, its immediate failure signaled further downside, culminating in a fresh low just four weeks later.
The third circle shows a hammer reversal that finally marked the true bear market low.
The takeaway? Stay open-minded to all possibilities. If we are in the early stages of a new bear market, history suggests that Friday’s reversal will ultimately fail, leading to a deeper low—potentially as soon as next week. How the market trades from here will provide crucial clues about the broader trend ahead.
If we analyze the lower time frames, the current setup closely mirrors past market behavior.
The SPX had broken below the 200-day moving average, reversed at the 61.8% Fib retracement (using the October '21 lows), and is now oversold per RSI with a deeply depressed MACD—an almost identical setup to what we are seeing today.
Looking back, the ensuing rally from this setup failed at the 50-day moving average twice before ultimately rolling over. As we highlighted in our last report, how the market reacts to any rebound here will provide key insights into the strength of the broader uptrend.
Technical analysis is just one piece of the puzzle when interpreting the market’s message. While price action carries significant weight in our assessment, it must be reinforced by other factors to increase conviction. Though we can't predict with absolute certainty whether we’re entering a bear market, the possibility warrants serious consideration.
In our 3/12 report, we highlighted the likelihood of a market reversal at the 61.8% Fibonacci (Fib) level, and Friday’s rally validated that view.
Here is the excerpt from that report:
What stood out, however, was the market’s resilience despite a dismal University of Michigan consumer sentiment report, which revealed growing concerns about job security and income prospects. Given that consumer spending is the backbone of the economy, this deterioration in sentiment is a red flag worth monitoring.
Yet, a stock market rallying on bad news often suggests that much of the negativity is already priced in. This doesn’t guarantee the market won’t roll over again, but it does indicate that the immediate downside may be overstretched.
A key driver behind the recent selloff has been the growing concern that SPX earnings estimates remain too optimistic. We've repeatedly highlighted this as a risk, and the recent trend of downward revisions is becoming increasingly widespread.
This should come as no surprise, given that during Trump’s previous presidency and the ensuing tariff war, earnings estimates saw minimal growth in the following year.
This places even greater importance on the duration of any tariffs. Are they merely a negotiating tactic, and how long until Trump concedes? The longer these tariffs remain in place, the more they will weigh on the earnings growth trajectory.
For those trying to predict the market’s direction beyond short-term swings, this question remains unanswerable. If even professional investors struggle to assign probabilistic estimates to future earnings, that uncertainty will continue to pressure valuations and asset prices.
Could the Fed cushion the blow by cutting rates? Certainly—which is why this week’s FOMC meeting could have significant implications for the near-term market trajectory. As it stands, Fed Fund Futures are pricing in 2.5 rate cuts by the December FOMC.
We don’t expect any changes to the current Fed Funds rate, but the messaging could shift. Recent softening in macro data has given the Fed enough cover to reconsider its rate-cut trajectory. Any dovish signals—whether through the Fed Dot Plot or forecast revisions—could lift the stock market, potentially reviving the notion of a “Fed put” in place of the perceived loss of the “Trump put.” However, if the Fed maintains its hawkish stance without offering any concessions, markets could take another leg down.
While the stock market appears set for a short-term rebound, the magnitude of that bounce remains the million-dollar question. As noted earlier, how the market reacts at key resistance levels will provide critical insight into whether this is merely a correction within a broader bull market—or the start of something much more concerning.
Let’s review.
