/ December 22 / Weekly Preview
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Tuesday:
Durable Goods Orders
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Wednesday:
Initial Jobless Claims
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Thursday:
Markets Closed
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Friday:
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Soft Landing Hopes For 2026
Admin Note: this will be our last newsletter for 2025; we’ll do one more portfolio rebalancing session and focus on improving the Guide function for all instruments; we will resume analysis on January 3’rd 2026.
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Q4 has offered investors a choppy market, with near 0% returns up to the last two sessions of last week when indices broadly rose. Sitting at just +1.79% gains for the quarter, Q4 results are lagging a stellar Q2 and Q3, though they do round up a fantastic year where SPY is up +16.4%. Perhaps such a consolidation is in the best interest of investors longer term, since it allows for a “digestion” of recent optimistic earnings, analyst upgrades and 2026 outlook.
Seasonally speaking, the latter half of December tends to include stock market gains, as the period also encompasses the well known “Santa Rally”. So will Santa pay us a visit this year and make up for a dull Q4 tape? The answer seems to be “yes” so far.
Importantly, the actual “Santa Rally” window has not actually commenced, as it is statistically measured as the last five trading days of the year plus the first two of January. Historically, that seven-session period has averaged a gain of roughly +1.3% and ended higher almost 80% of the time, according to analysis from the long-running Stock Trader’s Almanac. In the past 10 years, we’ve seen SPY performance in the range of +4.8% and -2.6%, with 60% positive returns.
Given the recent sloppy and weak trading in the market, it is unsurprising to question this seasonal statistic. Goldman Sachs notes that, barring any major negative events, stocks tend to grind higher due to factors like year-end window dressing, share buybacks, and performance chasing. Additional tailwinds include a stronger 2026 economy, deregulation, AI-driven gains, and the underlying expectation that corporate fundamentals will improve.
Mainly, the “Santa Rally” is powered by supply and demand dynamics, since it is primarily a technical phenomenon. After a choppy and volatile start to December, market conditions improved by the week’s end as employment and inflation data bolstered expectations for additional Fed rate cuts.
U.S. stocks rallied on renewed strength from mega-cap and AI leaders after the UAE committed $100 billion to the industry. OpenAI is seeking up to $100 billion from sovereign wealth funds, further boosting potential capex. Given the UAE’s prior investment, they should continue to support funding into the future.
Reuters also noted the shift in tone as last week wrapped up: “we’re beginning to see some stabilization… for the Christmas year-end rally to resume,”
On our end, the higher risk equity focused strategies (Millennium Alpha and Vision) have jumped considerably, as Tech stocks came roaring back to life.
However, more is needed from a broad market perspective. We are looking for a healthy and broad rally, not only for yet another leg up in Tech. As of this writing, breadth is not yet uniform and conviction remains selective.
Deriving sentiment from the top 1000 stocks by volume, we’re seeing a very neutral disposition, with a score of 54 / 100, which sits slightly below the historical average of 60 / 100. The good news is that there is now less concentration and positioning risk.
Roughly 55% of stocks are trading above their 50-DMA’s, and while recent trends have stabilized in terms of market breadth, the overall upside participation looks shaky. While levels are healthy, this is not the kind of participation that makes rallies durable without interruption.
There have been no Sell Signals recorded recently, but SPY did not re-enter a new Buying Regime either.
We did get a fresh short term buy signal on Thursday, however, as the rebound and recapture of the 50-DMA did create favorable conditions for a risk-on allocation.
Overall, we’re seeing increased risks that this latest rally may be short lived, similar to the sprouts of intermittent performance that have characterized this latest quarter. To make the rally durable, we should see increased participation, increased liquidity and stronger sentiment heading into 2026.
Yields should also remain contained and, ideally, there should be no surprise or shock to force de-risking into the holiday season.
For now, the market has behaved as we had anticipated last week — namely rangebound.
After a four-day sell-off through midweek that breached the 20- and 50-day moving average support, investors bought the dip, reversing earlier losses and driving the market to 6,835 on Friday. The rebound maintains the broader uptrend, but the market is now testing a zone where momentum previously stalled, making this week pivotal for whether the year-end rally can continue. Volatility has decreased, as the VIX has dropped into the mid-teens, indicating increased complacency.
Short-term support / pivot stands at $674 (M-Trend), while technical upside resides at $712. GEX is positive on all timeframes, and Dark Pools investors have been more inclined to buy rather than sell last week.
As markets enter the final week of trading before year end, the Fed’s soft landing narrative becomes a key theme in financial media as projections are being made for 2026.
First of all, there should be a resurgence of economic activity to justify increasing forward earnings expectations and valuations. Wall Street now anticipates the 493 bottom S&P 500 stocks will add more to earnings in 2026 than they did over the previous three years. That’s notable because those same stocks grew earnings at under 3% on average over the past three years, yet they’re projected to average more than 11% annual earnings growth over the next two years.
The outlook sounds even better for more economically sensitive stocks (real estate, small caps, unprofitable tech). Over the past three years of economic expansion fueled by monetary and fiscal stimulus, small- and mid-cap firms failed to generate significant earnings growth. Next year, however, assuming the Fed achieves a soft landing, these companies are projected to see their earnings growth rates jump by roughly 60%.
All of this is contingent on the Fed’s objective for lower inflation without a recession. However, the falling inflation we’ve seen recently tells a different story.
If economic growth were on the cusp of resurgence, consumer sentiment, also manifesting as retail sales, would be rising continuously. Instead, we’re seeing dramatically lower consumer sentiment in 2025 (-35% YTD), while nominal retail sales have stalled since the summer months. When inflation falls due to weaker demand, economic activity slows: producers cut prices to move excess inventory, and employers curb hiring and wage growth. Discretionary services lose pricing power, and banks tighten lending standards. These developments signal a reduction in household spending power, not a robust expansion, and it’s not the outcome we would like to see in 2026. it’s also precisely why the Fed cut rates in December, with financial markets near all-time-highs.
Periods of flat retail sales growth were pre-recessionary warnings in the past.
Our Trading Strategy (Sigma Portfolio)
The Fed’s soft landing narrative will hold the key for 2026. If everything goes according to plan, small caps, unprofitable tech, banks and real estate (most economically sensitive stocks and sectors) should easily outperform.
As fundamentally minded investors, we’re aiming to distinguish between inflation caused by organic demand and artificial inflation shocks that come from a temporary supply / demand imbalance. Unfortunately, most economic data points to weakness of the economy, suggesting demand destruction is prevalent.
If the Fed’s narrative proves incorrect, downside risks increase significantly due to the fact optimistic assumptions are currently priced in. If valuations begin to re-price, the market action is not going to be pretty… at all.
For now, we are looking to diversify. As per usual, we’re following the general allocation direction found in the Enterprise Strategy, and in our next Portfolio Rebalancing we’ll introduce stock picks from all of our equity models. Generally, we’ll be looking for fundamentally sound companies, and less speculative names. Healthcare is a strong contender among sectors, as are utilities.
With this being the last newsletter of 2025, I would personally like to thank you for supporting our small research platform! It means the world to us, and we would not be able to fulfill our mission for broadly accessible smart investing without your contribution! Several exciting updates will come in 2026, as well as better documentation, user guides and even webinars!
I wish you all a Merry Christmas, joyous holidays with your loved ones and a Happy and Prosperous New Year!
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Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this blog post. I currently do not own or plan to own any position, long or short, in the securities mentioned.
I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this blog post myself, and it expresses my own opinions. I do not have a business relationship with any company whose stock is mentioned in this blog post. The information in this blog post is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.