/ July 07 / Weekly Preview
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Monday:
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Tuesday:
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Wednesday:
FOMC Minutes
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Thursday:
Initial Jobless Claims (235K exp.)
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Friday:
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Monday:
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Tuesday:Aehr Test Systems
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Wednesday:
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Thursday:
Delta Air Lines, Inc.
ConAgra Brands, Inc.
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Friday:
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Speculation Ramps Up Ahead of Q2 Earnings Season
Admin Note: our analysis system incorrectly classified 07-03-2025 as a market holiday date and did not update the database;
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Q2 finished on a strong note last week. Easing geopolitical fears, falling oil prices, and a reaffirmation of the Fed’s dovish tone each played a role in fueling risk appetite, especially on the part of retail investors. The S&P 500 rose 3.4% in the final week of June to close at new record highs and eclipsed the returns of Gold in the closing days of the quarter.
While Gold looked to maintain its lead among the main asset classes at the start of April with a +10% surge, the trade flattened out during the next months and it was equities which came up on top. The bond market has also shown signs of resilience, despite long-term treasuries (TLT) coming in 4’th with a -3.14% loss.
There were a couple of key drivers for the price action in the equity market:
Mega-Cap leadership, especially in the tech sector, fueled by continued AI optimism and strong momentum;
A full blown retail-investor driven speculative frenzy; non-profitable tech, meme stocks, penny names, and cryptos saw outsized gains in a sign of rising risk appetite;
Modest institutional flows, driven more by tactical positioning, rebalancing and short-covering; there was relatively little broad conviction buying;
Relatively narrow breadth when it comes to hitting fresh all time highs; only 22 stocks in the S&P 500 managed to achieve this;
All Equity Factors rose for the Quarter, with Growth Stocks (IVW), Mega Caps and Nasdaq related stocks leading;
Non Profitable Tech (ARKK) and a top 3 cryptos average up over +30% on the quarter;
Signal Sigma Vision, our most speculative model, absolutely ripping during the quarter, up +58%;
Dark Pools Buying for the quarter (3M average) stands at 47% among the top 100 tech names; institutions leaning on the distribution side of the ledger;
Technically speaking, SPY is now hitting against resistance at $625 (M-Trend). The overall disposition remains clearly bullish, with a “Golden Cross” now forming near the S1 support cluster ($577). A Golden Cross happens when the 50-DMA crosses over the 200-DMA, and re-establishes a bull market.
While not infallible, this technical signal is generally seen as a bullish long-term indicator. Historically, Golden Crosses tend to precede extended rallies when supported by improving breadth and strong macro momentum.
Subu Trade shares historical results after Golden Cross formation on the S&P 500 (we’ll soon get access to this type of custom analysis ourselves on Signal Sigma!)
While returns are broadly positive especially at the 9 month and 12 month marks, near term returns are far more mixed and imply a good deal of volatility. This particular instance of the Golden Cross occurs on limited volume, as well as narrow leadership, so we have even more reasons to assume mixed returns in the short term.
While the strong finish in Q2 is fueling FOMO and risk appetite for investors, we would argue that the internal structure of the rally is slightly problematic. Markets are increasingly stretched in the short term and sentiment is again trending toward extremes. Volatility has become suppressed, increasing the probability of a sharp, sentiment driven reversal — especially in overbought areas of the market.
Furthermore, as Q2 earnings season is fast approaching (starting next week) seasonality tends to point to weaker returns. Late July, August and September are historically volatile periods of the year, especially with markets in an overbought state.
The options market is also seeing a balanced risk-reward proposition in Energy (XLE), Healthcare (XLV) and Utilities (XLU), while shunning risky areas like Communications (XLC) and Tech (XLK);
SPY’s put-call ratio is around 0.79, reflecting an imbalance toward calls over puts. This is happening despite the looming July 09 tariff negotiation deadline and despite totally different market conditions than were present in the previous rally.
For instance, the screenshot below captures the stark difference between 2020 and the present day — though the market feels like it’s trading in the same way.
In 2020, we had stimulus checks, 0% interest rates, a surge in the Fed’s balance sheet and rising inflation. Now we have none of that. Yet, even with monetary and fiscal policy absent, the market is rallying with seemingly the same reckless abandon.
A part of market professionals are clearly noticing this issue. Medium term options positioning suggests a preference for the defensive sectors as well, with Tech (XLK) and Basic Materials (XLB) scoring low on this metric.
Our Trading Strategy
With many metrics starting to flash “Extreme Overbought” and SPY hitting some technical limits, it’s high time to start taking some profits, especially in the tech / growth side of our portfolio. Raising some cash also makes sense at this juncture, as it’s probable a better buying opportunity will surface in August - September.
This does not mean “sell everything and go to cash”. It simply means we are following a process which has worked over time. At this juncture, controlling potential drawdowns becomes more important than chasing potential returns, so our bias over the next period would become defensive.
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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