The Danger Is Still High, Here’s Why

After a face-ripping rally Wednesday, markets took a breather yesterday. Futures were pointing lower, which, frankly, wasn’t all that surprising given how sharply things ripped higher.

But while some have pointed to a bottom, the reality is the danger is still high. Look no further than how the rally failed at the downtrending resistance line.

Credit: TradingView

Key Points

• Funds cut long exposure but remain heavily short—volatility risk is elevated.

• EU and China show willingness to negotiate; a U.S.-China deal could boost markets.

• Sentiment among retail traders signals darker times ahead, be wary.

How Are Funds Positioned?

One interesting signal to watch is we’re seeing a sharp drop in net leverage, meaning funds have yanked back on long exposure, but gross exposure remains high, which tells us many are still heavily short.

What does all that mean?

A lot of traders got caught offside Wednesday, and that rally likely caused some real pain in short books.

Tariff Talk Deals on the Table?

The European Union signaled they’re ready to make deals and are pulling back on retaliatory measures. That’s a positive development.

With a 90-day window and a cooperative tone, it looks like the EU and U.S. might find common ground—at least for now.

Meanwhile, China is keeping the door open for dialogue, with one caveat: negotiations must be based on mutual respect.

The key phrase here is “no retaliation—unless talks break down.” President Trump’s tone yesterday was noticeably more diplomatic, and it’s becoming clear that higher tariffs are being used more as leverage than a long-term policy.

Bonds, Currencies, and Commodities

In the bond market, we saw a decent bid overnight, with the 10-year yield dropping into the upper 4.2% range.

The U.S. dollar is also weaker, trading in the mid-101s, while both the euro and sterling are holding up well.

Over in Japan, the yen is catching a bid after a surprise beat in PPI data. Some traders are looking at the yen as a potential tail hedge—a safety net for if things get messy again.

Commodities? Broadly higher across the board. Crude oil is lagging a bit, likely due to its beta sensitivity to equities pulling back from overnight highs. But in general, the tone is risk-on, just with a little digestion after the recent move.

What Does Sentiment Reveal?

For intraday traders, so far, this pullback is orderly but if key support doesn’t hold, we could be in for a retest of lower levels in short order.

Interestingly, retail traders seem more concerned about missing out on the next upside than worrying about further downside. That fact alone should stand out to you as a reason to be worried about more declines on the horizon because the majority have to be wrong to signal the pendulum shift.