/ January 20 / Weekly Preview
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Monday:
N/A
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Tuesday:
N/A
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Wednesday:
N/A
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Thursday:
Core PCE Price Index (0.2% exp.)
Personal Income (0.4% exp.)
Personal Spending (0.5% exp.)
Initial Jobless Claims (212K exp.)
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Friday:
N/A
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Monday:
N/A
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Tuesday:
Netflix, Inc.
3M Company
U.S. Bancorp
Fastenal Company
D.R. Horton, Inc.
United Airlines Holdings, Inc.
Interactive Brokers Group, Inc.
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Wednesday:
Johnson & Johnson
The Charles Schwab Corporation
Prologis, Inc.
Kinder Morgan, Inc.
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Thursday:
Procter & Gamble Company (The)
GE Aerospace
Abbott Laboratories
Intel Corporation
Intuitive Surgical, Inc.
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Friday:
SLB Limited
Ericsson
A Bullish Rotation Amid Geopolitical Drama
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U.S. equity markets are selling off this morning as geopolitical tensions flare up again amid Trump’s push for Greenland. Despite the “Sell USA” headlines visible in various publications around the world, we would argue that recent developments have been constructive and bullish as far as the market’s internals are concerned.
Last week, we’ve seen a mixed performance at the index level, with SPY putting in a negative performance while both small and mid caps stocks outperformed. In fact, the extension of IWM vs SPY on a relative basis has now reached a historically high deviation, with 2017 and 2021 serving as precedent. Our analysis portends that when deviations between the small cap index and the S&P 500 exceed 1.2 standard deviations (as is the case right now at 2.24), returns for the cap-weighted index tend to be very good over the next 3-12 months.
It also means that the market has become slightly euphoric, especially since positive breadth and good participation is linked to lots of stocks trading at their relative best levels. This translates into a sentiment index which sits at the top of its historical range, as shown in the study below. The issue is not persistently positive sentiment (as that is required for a continuation of a bull market) but rather the reversal from these conditions is what we need to be on the lookout for.
Of course, since both IWM outperformance as well as positive sentiment are manifestations of expanding breadth, what we’re witnessing is a true capital rotation from mega-cap tech to many other sectors, particularly materials, industrials, and transportation. We’ve noted before that a rotation to more defensive sectors was in the cards for the market (especially given AI valuation issues), and we’re now seeing this trend run its course. Based on the study above, we would expect this to continue in the next month or 2, but subside later on in the year.
The Equally Weighted S&P 500 (RSP) now also sits at record highs, as equally weighted indices are also beneficiaries of strong breadth. This surge continues to close the performance gap with the cap-weighted index, as Tech has generally performed worse (see 3-Month relative returns stats below).
Another key point in today’s market - the U.S. Dollar, relative to a basket of major currencies, remains stable and in a technical uptrend. Narratives of dollar debasement and dedollarization remain false, despite geopolitical concerns and questions about the Fed’s independence.
Understanding this backdrop, we’ll get to the next major catalyst, which are corporate earnings and economic data. Early labor market indicators paint a picture of a still‑stable economy with signs of cooling momentum. For now, the interpretation is one of sustained growth and a degree of Fed dovishness which should be supportive.
Q4 earnings season commenced with mixed results from major lenders, as Wells Fargo, JPMorgan, and Goldman Sachs became a drag on index performance last week. This was countered by robust forecasts and expansion plans from Taiwanese semiconductor giant TSMC, which sparked a rally in chip and memory-related stocks. Nvidia, Broadcom, Micron all outperformed at the end of last week.
According to Lipper data, U.S. equity funds experienced the largest weekly inflows in over three months. Notably, bond funds also saw inflows, while capital rotated away from the safety of money market funds.
While earnings and headlines will be the main catalysts for this week, it’s worthwhile to cover technicals as well in order to put the market action in context.
With momentum slowing, the market is in a controlled and consolidative state, with key milestones approaching. The primary longer and shorter term uptrend remains intact, keeping the bulls firmly in control at the moment. The 20-DMA has been successfully tested repeatedly, while breadth has improved greatly, as mentioned. Institutional investors have been reasonably bullish, with a slight accumulation pattern noticeable in Dark Pools (55% over the week). GEX is currently neutral (0%) and will slip into negative territory most likely at the end of the session today.
Immediate resistance resides at the psychologically important level of $700, while further out we get $718 as a ceiling (R1). If earnings reports are positive (or rather - better than feared), we could get there in a short amount of time.
To the downside, the key level remains the 50-DMA, in the vicinity of the M-Trend, at $680. These have acted as dynamic support floors through recent pullbacks. We would only get worried in the case of a decisive breakdown that would signal a loss of short term conviction.
From a volatility perspective, things might get rocky, since GEX will flip negative. However, the options market is not nearly as concerned as they could be, with 1-Month options premiums trading on the low side of their historical range (lower chart).
All in all, the technical profile of the market remains constructive, but range-bound.
Our Trading Strategy (Sigma Portfolio)
We have just rebalanced the Sigma Portfolio on Friday, with a focus on increasing diversification on the equity portfolio side. A sensible Factors correlation mix was targeted, increasing small and mid cap weighting relative to December.
The next directional move will likely hinge on the market’s ability to clear resistance above 7000 or to test deeper support levels that define the current trend structure.
On the economic release front, we are watching advance GDP, jobless claims, and core inflation proxies — Personal Income and Spending. We are also very much looking forward to the numbers posted by Netflix later this evening - to give us an indication of discretionary spending at the margin during the holiday period.
For now, we are comfortable with our current allocation, though we are very much looking forward to the rebalance of the Enterprise strategy tomorrow.
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