Analyst: “Technically, the market does not look healthy right now”

As stocks searched for direction yesterday, and ultimately closed with a slight loss, I called up Randy Watts, chief investment strategist and portfolio manager at LA-based investment advisor William O’Neil + Co., to sound out his views on where things stand nearly two months into a tariff-related market slump.

I’ve spoken with Watts often over the years, and like how he combines thoughts about market fundamentals (like earnings) with technical elements chart-watchers consult for clues on price moves.

Here are some highlights from our interview, edited for concision and clarity.

Sherwood News: How big a deal are the tariffs, and how do you see them impacting the market?

Randy Watts: If you talk to company managements about the supply chain, the constant changing of the tariffs and the rules is paralyzing American business and making it impossible to allocate capital. So even if we don’t have a recession, we are still slowing the economy because people are unable to make capital spending decisions.

Sherwood: I just wrote something about how some of the Mag 7 earnings estimates are really rolling over. Meta, Apple, Amazon — these stocks that have been so instrumental to the rally over the last few years — how important is that for the broader market?

Watts: First of all, I think earnings estimates are still too high for the year and need to come down. I don’t think the market can have a long-term sustainable rally without technology at least participating.

Sherwood: What’s your big-picture view at the moment? Where do you think the market stands?

Watts: Technically, the market does not look healthy right now.

We are waiting for a follow-through day, which is a day where the market goes up 1.7% or more on higher volume than the day before, but that’s after it has held its previous low for four days. So that big up day [April 9, when the S&P 500 jumped 9.5%] didn’t qualify as a follow-through day because the market hadn’t held the low for four days.

If you go back and look at the tech bubble and the great financial crisis, there were a bunch of days like that, where the market was up a ridiculous amount and then you made a lower low.

Having that extreme day where you’re up 10%, that’s actually not a true sign of market health. That’s a sign of volatility and instability.

Sherwood: What would be something that would give you more confidence that the market might have found its footing?

Watts: One of the things that gets us bullish and bearish is the number of technical setups in the market. Oftentimes we’re looking for a saucer or a cup-and-handle pattern. And right now you do not have a lot of stocks that look great technically. So, we’re still very cautious and telling clients to be cautious.

Sherwood: It sounds like you’re not at all convinced the bottom is in.

Watts: We are not convinced the bottom is in for a sure thing. We think earnings estimates are still too high and we’re not seeing the broad technical setups on individual stocks that we normally like to see at the start of a new bull market. So we’re continuing to tell clients to be cautious.

Sherwood: My experience covering the markets has been pretty Fed-centric since 2009, when I started. Do you think the Fed will come into play this year?

Watts: I believe the Fed will be forced to cut later in the year, and I think we’ll get two to five cuts. I think that’s coming. I also think the market, later in the year, can do better on Fed easing.

There are only two investment rules I believe: one is stop loss, and the other is “don’t fight the Fed.”