/ February 10 / Weekly Preview
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Monday:
N/A
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Tuesday:Various Fed Speakers
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Wednesday:
Inflation Rate YoY (2.9% exp)
Core Inflation Rate YoY (3.1% exp.)
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Thursday:
PPI MoM (0.2% exp.)
Initial Jobless Claims (215K exp.)
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Friday:
Retail Sales MoM (0% exp.) -
Monday:
McDonald's MCD
Incyte INCY
ON Semiconductor ON
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Tuesday:Shopify SHOP
Allison Transmission ALSN
Super Micro Computer SMCI
Zillow ZG
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Wednesday:
CVS Health CVS
Cisco Systems CSCO
Albemarle ALB
AppLovin APP
Fastly FSLY
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Thursday:
Datadog DDOG
Moody's MCO
Roku ROKU
Airbnb ABNB
Applied Materials AMAT
DraftKings DKNG
GoDaddy GDDY
Palo Alto Networks PANW
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Friday:
AMC Networks AMCX
Fragile, Vulnerable, but Ultimately Resilient
Last week, equity markets were roiled by tariff news and started on the back foot, only to stage a recovery by Friday’s close. As our analysis over the weekend revealed, the main driver of volatility and turbulence remains Fed policy in response to inflation, which, in turn, impacts high valuations. The issue with high valuations, of course, is that they are prone to reversions for increasingly random reasons.
Money flows throughout the week were mostly positive for SPY, with every day (except Friday) recording bullish option volumes in the short and medium term, especially in response to the sell-off on Monday. This confirms our impression of an expensive but resilient market that is currently in consolidation mode. Market makers and companies themselves are dip-buyers here, which prevents any sell-off from becoming too ugly. The market ended the week successfully retesting the 50-DMA, and setting up for a grind higher this week.
On Wednesday, the BLS will release the latest inflation data, in what will probably be the most impactful data release for the week, at least for the bond market. Inflation is expected to remain steady, at 2.9%, with hope for core inflation to cool to about 3.1%. With recent developments in the Treasuries market being very positive, we would look to the response here as the catalyst for higher stock prices in the near term.
From a technical perspective, a benchmark ETF like TLT has managed to put in a temporary bottom and it remains to be seen if it’s able to hold and consolidate around current prices. The best case scenario for stocks is a gradual recovery in the bond market, allowing lower yields to take some pressure off economically sensitive companies.
Besides tariffs and volatile sources like energy and food prices, the main driver of inflation is the labor market. All of the data that we have looked at recently points to a normalized environment. The latest data point to support this is the number of multiple job holders as a percent of those considered employed.
People don’t need to hold multiple jobs in a “rosy” economic environment. They only do this in response to financial stress, in order to make up for various “gaps” in their budget. As we see in the chart below, this metric has reached the top end of the pre-pandemic and current economic cycle highs, leading us to believe that the Covid “free lunch” is well and truly over.
Normally, such a disposition in the broad population should translate into lower inflation ahead. The Fed is well aware of this, yet the last FOMC decision was to leave rates on hold, at 4.25% - 4.5%.
As a reminder, the Fed has a dual mandate: full employment and price stability. The Fed specifically addressed those two mandates in its announcement to pause rate cuts at the last meeting. Furthermore, those two mandates are crucial to economic stability and, ultimately, the financial system. Full employment and stable inflation should support stronger levels of economic activity, providing stability to the financial system through increased credit use with lower default rates.
However, the Fed’s record of forecasting future economic growth rates is abysmal. We would rather work with objective (if automated) systems, like the Atlanta Fed GDPNow estimate, to understand the Fed’s approach. With real GDP for Q1 believed to come in rather hot, at above 2%, it’s understandable that the Fed wouldn’t need to cut rates anytime soon.
We are also watching the crypto market as a proxy for risk-taking appetite when liquidity is constrained. The theory here is that the most speculative of assets get deflated first, in the event of market stress. We’ve even designed a dedicated crypto watchlist in Signal Sigma V2, containing the most important digital assets. In the aggregate, the crypto market has fallen below the December lows, putting in a “double-top” technical formation.
Besides inflation data on Wednesday, there are a host of “interesting” companies reporting earnings results this week. However, the most influential ERs are behind us at the moment, with more than 60% of S&P 500 companies having reported so far.
As we’ve seen with the DeepSeek announcement, major volatility can arise from anywhere and for any reason. The Trump administration can always create shockwaves on a whim, but this is still very early in the presidential cycle and our belief is that the market is still “adapting” to his leadership style.
Dealer Gamma positioning suggests bonds have the advantage when it comes to volatility events. A high GEX-to-Volume reading, as we’re getting with TLT, means that market makers will become dip-buyers. This has the tendency to provide liquidity to the traded instrument and suppress more meaningful downside.
Our Trading Strategy
For now, we’ve made all of the necessary adjustments to our portfolio. We expect the equity market to grind higher over the next couple of weeks, especially since our read is that actual inflation readings will come in at the lower end of projections. This should boost the treasury market, which in this case should also help risk assets out-perform.
With equities not exactly overbought at the moment and sentiment decidedly “Neutral”, there is room for continued, if unspectacular gains. Seasonally speaking, February is a month of consolidation, with losses more frequent in the latter half. As long as the consolidation doesn’t “break anything”, we have every reason to maintain our allocation at target.
That’s the explainer for today’s newsletter article, which sums up our view on the market: Fragile, Vulnerable, but Ultimately Resilient.
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