Coiled Spring Capital MW 5/7/25

The FOMC delivered a clear message today: more patience will be required before considering additional rate cuts. Interestingly, that aligns closely with our current view of the market setup. As we outlined in our 5/4 report, we removed our tactical long bias and shifted to a more neutral posture.

This doesn’t mean the market can’t continue higher — but after an 18% rally off the April 7th lows, the risk/reward is no longer asymmetric. The setup has become more balanced, meaning we now need more information before making a judgment on continuation versus reversal. In a macro-heavy, headline-driven environment, violent swings in both directions are common, particularly as news from the White House filters through. This volatility is a key reason why we decided to pull back our long exposure.

Since the weekend, the major indexes have retreated 2–3% from our target areas. Importantly, this pullback has been shallow and on light volume — a bullish signal, as sellers have failed to capitalize on obvious technical levels. In other words, the bears have been given opportunities but have yet to show up in force.

Powell’s initial comments today were interpreted as hawkish, causing a brief dip, but the market quickly reversed after news that the Trump administration would roll back certain global chip curbs. The resulting doji candle reflects indecision — which mirrors our current stance: cautious and neutral.

At present, the market is stuck between our target resistance zone and the "Liberation Day" gap. It will likely need a catalyst to break free from this range. Potential triggers could include long-awaited trade deals or additional tariff pauses (as Bill Ackman recently suggested). Both would likely be received positively — at least initially. However, given the strength of the recent rally, it's worth questioning how much good news is already priced in.

More on that to come.

Following the FOMC, Fed Funds Futures pricing for three rate cuts this year retreated slightly but remains relatively firm.

While short-term rates eased slightly, the 2-year yield continues to consolidate just below its downtrend line (DTL) and appears poised for a potential move higher. The extent of any breakout will largely depend on developments around tariffs and inflation. For now, stabilization in yields remains a critical component for any sustained stock market rally.

In our 5/4 report, we specifically recommended selling into target resistance levels and tightening positioning. So far, that guidance remains unchanged. However, the longer the market trades sideways without a clear resolution, the more constructive the setup for a move higher becomes. Remember, overbought conditions can be resolved through either time or price. It's possible the market simply needs time to digest recent gains while awaiting greater clarity from the White House on trade developments. Should a favorable resolution emerge, it could spark a strong bullish reaction — something to keep in mind if you find yourself growing increasingly bearish.

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