Just three weeks ago, we published the report The Fed Can’t Save This One: Why Bonds May Break The Stock Market. Here we asserted that the next move for the market was likely a bounce.  

“While we see the potential for another leg lower in this bear market, we should see a sizable bounce first.”  

Since the April 7th low, the S&P 500 is currently +16% higher, and in our target zone of 5600 - 6050. Now that we have reached our target zone for this bounce, we are shifting back into a defensive posture, using this bounce to raise more cash and layer back into our hedges.  

U.S. Government bonds are suggesting something is broken as there are no meaningful buyers right now. When growth and inflation decelerate, the safety of a fixed yield in treasury bonds is historically where investors have flocked for 30 years. However, they are not getting bought, which is keeping yields high. Most concerning is that this is happening at the same time we are seeing an alarming deceleration in growth and inflation projections, led by a struggling consumer.  This is not normal behavior, and will continue to put pressure on the economy, as the U.S. still must refinance $9 Trillion of debt this year.

There are two things we are watching closely right now. The first is that if the bond market refuses to go higher, we will remain in a defensive posture, especially if growth and inflation continue to decelerate. The second is the technical setups in the broad markets, which we outline in detail in this report. These technical setups help us to not only manage risk but to also capture the upside. Our 210% cumulative return and 27.6% annualized return has been partly achieved through accurate broad market analysis, such as detailed below. 

The 60/40 Stock Portfolio Isn’t Working – Why That’s a Problem 

Due to advancements in technology, globalization and demographics, the last thirty years have been marked by a low inflationary environment. This backdrop led to a 30-year bull market in bonds.  Bonds thrive when inflation is going down or only going up a small amount. A fixed yield is desirable in this environment and has been for a very long time. This type of secular environment also is the reason investors sought the safety of a fixed yield when prices were dropping sharply, creating the inverse correlation we are all so familiar with between bonds and stocks. 

This is clearly shown in the chart below. Note as the PMI for Manufacturing began to drop, signaling a slowdown in economic activity, stocks soon followed, leading to drawdowns between 15% - 57% in the S&P 500. During these periods, you can see how government bonds moved inversely to these drops in both economic activity and stocks. 

When growth decelerates, as shown by PMI manufacturing, stocks tend to correct. This pattern has led to bonds going higher every time since the year 2000, as investors seek a safe fixed yield.  However, since 2022, this correlation broke and remains broken through early 2025.  

This relationship was considered an axiom in portfolio management and even led to the 60/40 portfolio concept for long-term buy and hold investors that many still adhere to. However, something changed in 2021, which has persisted into today, which is also shown in the above chart.

For the first time in over 30 years, growth, stocks and bonds went down together. In 2022, inflation, as measured by the YoY increase in the CPI, rose to levels we had not seen since 1981. An inflationary environment like this, where prices are sharply moving higher, erodes the value of a fixed yield. Investors tend to sell bonds when inflation is high or expected to move higher.

U.S. Inflation, as measured by the YoY CPI, peaked at 9.1% in June of 2022, the highest reading since 1981. Since then, inflation has subsided, which should be beneficial to bonds.  

The current narrative is that what happened in 2022 was a one-off issue, due to a meaningful disruption of the supply chains, as well as excess money pumped directly into global economies as a reaction to the disastrous COVID lockdown policies due to and everything should return to normal. This is reflected in the sharp drop in the CPI, which just posted a 2.4% reading, down significantly from the 9.1% peak in June of 2022.   

While still off from the FED’s 2% target, the sharp decrease in inflation should support the long-bond trade. However, as stated before, bonds continue to test critical support, unable to get a meaningful bid.  

Signs the Consumer is Under Pressure 

The other element that dictates bond yields is economic growth. As shown above, when growth starts to fade and the economy weakens, a safe, fixed yield tends to be what investors flock to. Recent data suggests that the economy is fading, which is being led by a struggling consumer.  

The U.S. Index of Consumer Sentiment just posted a reading of 52.

Consumer Sentiment is worse today than in 2008 and 2009 and was barely surpassed by the COVID panic. Source: YCharts 

For reference, this is the type of reading we tend to see when in a recession. This is lower than any period in 2008 – 2009 and was surpassed at the COVID low with a reading of 50. The consumer feels horrible about the economy and their prospects in it, more so than some of the worst moments in modern markets.  

One of the best pieces of data to show how tough it is for the average consumer can be found in recent Buy-Now-Pay-Later (BNPL) loans. These loans were typically designed for discretionary spending; however, according to LendingTree, 25% of all BNPL loans are being used to buy groceries. Furthermore, 41% of respondents have been late on their BNPL loans in the last year, up from 34% last year.  

Keep in mind, the interest on some of these BNPL loans can be as high as 36%, depending on the creditworthiness of the borrower. These are not loans one wants to take on, especially for groceries, which signals the levels of desperation in pockets of the economy.  

The same can be seen with credit cards. There is an alarming rise in delinquency payments that are 90 days or more past due, which recently reached a 14-year high and are still climbing.   

With the potential of tariffs looming, we could see more pressure being put on the consumer in the near future. The Yale University Budget Lab recently announced that they estimate the cost of increased tariffs to the average American household will be an additional $3,800 this year, which is the equivalent of a 2.3% rise in prices.  

What This Should Mean for Bonds 

Consumers continue to exhibit signs of struggle, which are starting to show up in key earnings reports. For example, Walmart sees per share profit over the next year coming in as much as 27 cents below analyst projections. This realization sent company shares down more than 6% in midday trading.   

We are now seeing clear signals that growth is expected to slow down, as the consensus is expecting a recession. JPMorgan is now suggesting a 60% chance of recession in 2025 and that U.S. real GDP will likely decline in the second half of 2025.  This is all happening in a very tough to model environment with chaotic levels of uncertainty. 

Yet, with inflation coming down, a struggling consumer, and increased expectations of a global recession, U.S. government bonds, the tried-and-true haven for this type of environment, are still not finding any buyers.  

This is not normal market behavior. If we truly are seeing the correlation between bonds and stocks breaking, it will be a major inflection point in market dynamics.  This will force proven risk models to be revised in real time. It is still too early to call, but since our last report, the correlation between stocks and bonds remains concerning, suggesting something larger is playing out  

With $9 Trillion in debt to refinance, the lower bonds go, the higher yields will go until we find buyers. This means we will have to borrow just to service this debt. Considering that we now spend more on debt than defense, this would be a shock to both the economy and the stock market. If the bond market goes into a disorderly selloff, which is eventually what happens when it does not believe a country can pay off its debts without inflation, we could see the Federal Reserve have no choice but to step in to perform some type of yield curve control for the first time since 1941.  

Levels and Technical Setups to Watch for the S&P 500 

Anyone who has been following the I/O Fund’s broad market analysis over the last 6 months should not be losing sleep over the current bout of volatility. We offered consistent warnings as far back as October of last year in our report titled, Nvidia, Mag 7 Flash Warning Signs For Stocks. 

“The warning signs are high, and my firm remains defensive until these signals reverse, or the market corrects.” 

Following this analysis, we moved to 50% cash at the start of the year and even up to a 100% hedge position in February. Preparing our research members for this in weekly webinars was key as the market proceeded to retrace nearly all the bull market gains from 2024, officially entering bear market territory 

However, in early April, we began removing our hedges and buying targeted A.I. stocks for the coming bounce. How the market corrects after this bounce is over will be telling on what is to follow. There are two scenarios that I am currently tracking:  

• Red: This is my primary expectation and what we are game planning around. This bounce is a correction within a larger downtrend. Once this bounce completes, the market should drop in a more direct 5-wave pattern. We would then see a retest of the April lows, and likely head toward the 4655 – 4335 region, which would set up a buyable low.  
• Green: This count would have us completing a larger correction within a bigger uptrend. If the coming drop is a messy/3-wave pattern that makes a higher low, we could be setting up for one more swing high into later this year, with targets between 6300 – 6500.

The most likely path for the S&P 500. The current bounce is coming to an end. How we correct from here will determine the rest of 2025. 

If we zoom in, the bounce appears to have more room to run. The pattern is pointing to the 5700 – 5800 region, which should hit no later than mid-next week.

We are in the final swing of the April 2025 bounce, which is targeting the 5700 region. 

Regarding the current bounce, there are warning signs that have us shifting into a more defensive posture. For one, several major indexes, which have a history of leading the broad market, are not joining the S&P 500 in this final move higher. Transportation stocks, Small Caps as well as my Financial Conditions index are all making lower highs while the S&P 500 pushed higher.

Key markets are not participating in the last swing of the April 2025 bounce. These markets tend to lead, suggesting that the bounce is running on fumes.  

Seeing these divergences on a larger scale was one of several warnings the I/O Fund used to jump into a defensive posture early this year. We are now seeing the same patterns develop on a smaller time scale, which has us maintaining a cautious stance.  

Levels and Technical Setups to Watch for the Bonds 

If we look at TLT, the ETF that tracks long dated government bonds, it is flat to down since the S&P 500 topped in February. Furthermore, the pattern appears to be testing the $85 - $82 support region. If this region breaks, we should see TLT drop to $71 - $58, pushing yields well over 5% and past their 2022 high. If this does play out, it should be the last drop before a multi-month bounce takes place.  

On the other hand, if TLT can hold the $95 - $82 support region, it will need to breakout over $97.50 to confirm that the low is in for bonds. This would set up a multi-month relief rally into the +$100 region. This would be the ideal scenario, as it would suggest that the correlation between bonds and stocks is realigning. It would also suggest that the bond market, in light of all the problems the U.S. treasury market is facing, is willing to look past this due to the growing concerns with economic growth.

The two most likely Elliott Wave counts for TLT. If we break below $82, then rates will spike to new highs. This will be a problem for equities. 

Conclusion: 

Uncertainty filtering into earnings, a weak consumer, growth slowing down, coupled with bonds not providing the much-needed counter relief they historically provide, are signs that this market has not found its footing yet.  

Most certainly, the tech sector has many years of exciting developments ahead of it, especially in AI – an area where our firm has consistently been early and will continue to be. However, macro is in the driver’s seat and takes precedence for our investment strategy in the near-term. We will remain defensive until we get signs that a low is in, or we hit the targets outline in the next drop. When we do resume buying, it’s not unheard of to see a dozen or more trade alerts in one week.  

If you went into this sell-off fully invested without any risk management plan, or if you are sitting on outsized losses and not sure what to do, we encourage you to attend our upcoming weekly webinar for premium members. Next Thursday, April 17th, at 4:30 ET. In this upcoming webinar, we will discuss our game plan regarding the remainder of 2025. We will list buy targets for great AI names as well as go over how we plan to raise cash and further hedge our portfolio if this bear market continues into 2026. 

The I/O Fund is a leading tech portfolio with annualized return of 27.6% -- which would rank us as #2 in the United States if we were a hedge fund. Learn more here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

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• The Fed Can’t Save This One: Why Bonds May Break the Stock Market in 2025
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