/ August 25 / Weekly Preview
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Monday:
New Home Sales (0.63M exp.)
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Tuesday:
CB Consumer Confidence (96.4 exp.)
Durable Goods Orders MoM (-4% exp.)
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Wednesday:
N/A
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Thursday:
Corporate Profits QoQ
Initial Jobless Claims (230K exp.)
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Friday:
Core PCE Price Index MoM (0.3%)Personal Income MoM (0.4% exp.)
Personal Spending MoM (0.5% exp.)
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Monday:
N/A
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Tuesday:
Bank Of MontrealMongoDB, Inc.
Okta, Inc.
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Wednesday:
NVIDIA Corporation
CrowdStrike Holdings, Inc.
Snowflake Inc.
Veeva Systems Inc.
Agilent Technologies, Inc.
HP Inc.
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Thursday:
Dell Technologies Inc.
Marvell Technology, Inc.
Autodesk, Inc.
Affirm Holdings, Inc.
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Friday:
Alibaba Group Holding Limited
Risky Business
Admin Note: This week, we are trailing parallel computing for our backtests; you can now queue up up to 3 Market Study tasks and they will run at the same time!
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After the market succumbed to selling pressure most of last week, Friday was a day of redemption and rally. Jerome Powell’s speech at Jackson Hole turned sentiment around and the S&P 500 returned to record highs. Powell’s tone was interpreted as dovish by most investors, confirming that a September rate cut is definitely on the table.
More exactly, Powell’s statement that stood out was this:
“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.
Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.
Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.“
Several Wall Street analysis chipped in with their interpretation, with Krishna Guha of Evercore ISI calling it a “clear pivot to risk management.” In Fed parlance, that would mean awareness of economic risks and a subtle signal of “dovishness without overcommitting”.
In technical terms, Powell fueled the bulls, especially in risk-based sectors (unprofitable tech, small caps, homebuilders, bitcoin, regional banks — and otherwise “lower quality” companies). The dollar fell as yields dropped sharply.
Technicals point to a primarily bullish trading environment. GEX (especially in the medium term remains positive), the market remains well above the 20, 50, and 200 DMAs, with the top of the current trend channel rising toward $660 on SPY.
The 2 moving averages provide downside support (with the 20-DMA tested last week), while upside resistance stands at recent all-time highs.
Positive Medium Term GEX denotes a bullish environment;
Though several faster oscillators tend to suggest an overbought technical state, one of the recent metrics that we’re developing is not yet pointing to a short term market top.
In the chart below, we ran a Measure-Trace backtest on SPY’s distance to its 50-DMA, signaling instances where the measure was lower than -1.3 standard deviations (lower translates into an overbought state in this study, while spikes in the metric align with sell-offs). This indicator has a very good track record at predicting sell-offs up to a 2-week interval, with only 35% of signal instances being positive while triggered. At the moment, such a signal has not triggered.
Despite the selloff during the week, volatility remained subdued and the VIX closed near 14 into Friday’s close, consistent with a risk‑on term structure.
The rally broadened with small caps and cyclical pockets outperforming on Friday, and the Russell 2000 ripping +4% as yields fell. The equal‑weight (RSP) has begun to show short‑term relative improvement versus cap‑weight (SPY), though not yet at levels that would indicate a reversal in performance just yet.
Spike in Market Breadth visible in the rightmost histogram line;
Even though RSP still trails YTD, it is an encouraging sign of incremental broadening.
To be sure, risky stocks are rallying on the belief that the Fed will be there to bail the economy out should there be any persistent downturn. As we’ve mentioned several times, the current setup argues for an outperformance of small caps and yield-exposed companies as long as there is continued economic growth.
A rotation from mega caps to small and mid caps would certainly make sense form a valuation perspective. At the top echelon of US companies, there are only a handful of stocks not exhibiting near record Price-to-Sales ratios (AMZN, GOOG and LLY). All of the other stocks have very little room to rally based on 5-Year historical precedent (NVDA and TSLA are unlikely to hit record valuations again due to the maturing product cycle).
In conclusion, chances of overpaying for these mega caps are high. For longer term investors, valuations play an important role in determining portfolio outcomes. Fundamentals, revenue growth, earnings power, free cash flow, margins, and debt govern valuation over time.
Since 2022, the average Price-to-Sales ratio for a top 20 stock in the S&P 500 has risen nearly 75%, in contrast to the benchmark ETF which only appreciated by 43%.
Of course, such valuations would entirely make sense given sustained and growing EPS growth. Elevated P/S reflects bullish expectations that when you pay over $3 per $1 of sales, you expect future growth to justify it. Now, the average valuation for a stock in the top 20 is 9.42, way above the historical average.
But if EPS growth slows (as it seems to be the case now on a Year-on-Year basis), valuations must adjust downward. In other words, the market is currently “priced for perfection,“ which leaves a lot of room for disappointment, at least in the mega cap space.
Current earnings projections for 2025 suggest a nearly 20% increase in EPS for the full index constituents.
The only issue is that for the rest of the market - the non growth, non mag-7 stocks - average EPS has remained anemic over the past few years. Not surprisingly, iShares Russell 2000 ETF (IWM) - more representative for the market at large - has also kept a nearly flat performance profile.
Retail Sales, Real GDP, CPI % change year-to-date
As such, since our automated models remain bullish and there’s really no major red flag in any of the metrics that we track, we need to rotate and allocate capital in the areas most likely to generate outperformance. In our view these are small and mid cap stocks, with high exposure to the economic cycle. The other part of the market (liquid, quality names) seem to have run their course so far and if a continued bull market is in the cards - the other parts of the indices should rally as well.
From a seasonal perspective, Q3 2025 ie performing near the top of the historical pattern, with only a couple of weeks to go until the historically weak part.
Our Trading Strategy
For now, our approach has been working, though maybe not as well as we would have prefered. The Sigma Portfolio is still outperforming its benchmark this year due to our recent additions (HALO, SLAB, SITM, BKNG) and posting a 9.5% annualized return so far in 2025.
At the moment we are following the rotating capital flows and experimenting with the best signals our new Measure-Trace system can produce. Whenever we find something notable, we will keep you posted!
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!
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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.
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The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.