/ February 03 / Weekly Preview
-
Monday:
EU Inflation YoY (2.4% exp)
ISM Manufacturing PMI (49.8 exp.)
---
Tuesday:JOLTs Job Openings (7.88M exp.)
---
Wednesday:
ISM Services PMI (54.3 exp.)
Fed Speakers
---
Thursday:
Initial Jobless Claims (214K exp.)
---
Friday:
Non Farm Payrolls (170K exp.)Unemployment Rate (4.1% exp.)
-
Monday:
IDEXX Laboratories IDXX
NXP Semiconductors NXPI
Palantir Technologies PLTR
---
Tuesday:Alphabet GOOGL
Advanced Micro Devices AMD
Chipotle Mexican Grill CMG
Electronic Arts EA
Estee Lauder EL
Ferrari RACE
Gartner IT
MPLX LP MPLX
PayPal Holdings PYPL
Pfizer PFE
---
Wednesday:
Walt Disney DIS
Capri Holdings CPRI
Uber Technologies UBER
Yum! Brands YUM
Alpha and Omega Semiconductor AOSL
Arm Holdings ARM
Ford Motor F
MicroStrategy MSTR
Skyworks Solutions SWKS
---
Thursday:
Amazon.com AMZN
Eli Lilly LLY
Huntington Ingalls HII
Ralph Lauren RL
---
Friday:
N/A
Unexpected, Exogenous Events
Even though markets are tanking this morning in the aftermath of President Trump’s tariffs on Canada, let’s start with some good news. As we wrap up the first trading month of the year, it turns out that both of the “January Barometers” are positive for 2025. SPY was up +0.83% in the first 5 days and +2.92% for the full month. This bodes well for the remainder of the year, when looking at the historical precedents of both metrics.
Stocktraders Alamanac notes:
“A positive JB builds upon a positive First Five Days (FFD) and lessens the concerns that our Santa Claus Rally (SCR) failed to show. This will be just the fourth time since 1950 that our January Trifecta went down SCR, and up FFD and JB.
Focusing on just the positive JB alone has a solid track record. Up Januarys are followed by up years, 88.9% of the time (40/45 years), with an average S&P 500 gain of 17.0%. 14 of 18 of the last post-election years followed January’s direction. When January is positive in post-election years, 8 of 9 full years were up with an average gain of 17.8%. 2001 was the exception. January was up 3.5%, but the full year was down 13.0%.
Let’s remember that the January Barometer exists because of the Twentieth “Lame Duck” Amendment to the Constitution. The Amendment’s passage in 1933 created the January Barometer. Since then, it has essentially been “As January goes, so goes the year.” January’s direction has correctly forecasted the market’s major trend in many subsequent years.“
For those not familiar with the last statement, US presidents and vice presidents took office on March 4 following an election. The amendment changed this to January 20 at noon.
Understandably, part of the enthusiasm of electing a new leader translates into financial market optimism around the same period. However, while a positive January tends to coincide with a positive year return, February tends to be less optimistic.
While the first part of the month has a tendency to be positive as momentum carries over from the inauguration, weakness is expected toward the second part of the month, where returns eventually turn negative.
This year has had a ho-hum vibe to it so far, despite the positive headline numbers. If we average the major S&P Sector ETFs in an equal weighted manner, we can identify a consolidation pattern taking shape over the last 3 months. The previous all-time-highs from early December have not been surpassed to date in 2025, leading to some deflation in investor enthusiasm.
Speaking of deflation, one of the indicators we are frequently watching to assess the direction of monetary policy is the US live inflation reading provided by Truflation. Not only has this index topped in mid-January, but now we are getting a significant gap-down.
With investors worried that Trump’s new tariffs on Canadian imports will raise costs for U.S. companies and consumers (increase inflation), this drop looks like a welcome respite.
Exploring the market reaction further, the current sell-off is primarily in reaction to uncertainty (investors hate uncertainty). Tariffs tend to raise the cost of imported inputs. U.S. firms that rely on Canadian raw materials (for example, in the auto, energy, and manufacturing sectors) may see higher input costs that they often pass on to consumers. This can squeeze profit margins and, in turn, slow economic activity.
Whether or not the specter of a full-blown trade war with Canada and Mexico has been at least partially priced in by now is up for debate. Contrary to last week’s bout of volatility caused by the DeepSeek announcement — which came out of the blue and is a textbook definition of an “exogenous event” — tariffs have been part of Donald Trump’s campaign rhetoric for the past year. Sure, it’s always surprising to see a politician actually implement campaign promises. But this administration looks determined to make an impact fast.
In any case, analysts Goldman Sachs have argued that such tariff measures are already largely priced in and that the long-term effects may be muted. During his first term, President Trump used tariffs aggressively as a tool to reshape U.S. trade policy. In practice, these measures produced a mixed—but mostly one‐off—impact on prices rather than setting off a sustained inflationary spiral.
In the 2017 - 2021 period, tariffs were mainly placed on 2 key industries:
Steel and Aluminum (25% tariff on most imported steel and a 10% tariff on imported aluminum)
Chinese imports ($370 billion of goods, ranging from 7.5% to 25%)
Prices of goods directly affected by tariffs rose roughly in line with the tariff rates. However, the overall impact on consumer inflation was modest because the effect was mostly a one-time price-level increase and because companies eventually adjusted their supply chains. Overall, inflation during Trump’s first term was unspectacular, as can be seen in the chart below.
The US-Canada trade conflict can be decently summed up by analysing a stark asymmetry: while U.S. exports to Canada are a small part (~2%) of the American economy, Canadian exports to the U.S. make up nearly 18% of Canadian GDP. This imbalance means that Canada is likely to suffer more, making it the more vulnerable party in this particular situation. It’s likely that the US will eventually get its way and Canadians will “relent” - whatever that exactly means.
As mentioned before, investors hate uncertainty. In this case, uncertainty translates into potential spiraling retaliatory measures from Canada and Mexico and selling is an attempt to price in other trade wars in the medium term. Even if one believes that the U.S. economy can eventually adjust, the prospect of a period of slower growth, higher inflation, and disrupted supply chains is enough to prompt a rapid repricing of risk.
According to the options market on Friday’s close, the short term skew in SPY (difference between implied volatility of OTM Puts vs Calls) was unusually high, especially compared to all other sector ETFs. In other words, market makers were concerned about a decline in the short term (3 days). At the medium term expiration (around 55 days) - skew is more or less in line with all of the other ETFs.
Furthermore, dealer gamma exposure is net short for SPY in the short term, creating an environment where volatility is exacerbated. In this case, we would not be surprised by a sharp down-move. As is the case with skew, gamma exposure becomes positive in the medium and long term, cushioning volatility. You can add our options analysis template watchlist here, and our video walkthrough in this article.
In this technical context, holding short term support levels becomes key - otherwise, selling might cascade into lower price levels. We are looking at the 50-DMA as a primary (if superficial) level for bids. Failing that, the 100-DMA becomes the next target, and “real” downside resides at the $550 - $560 area, where various levels of support exist.
The transaction volume increase suggests that a large number of dip-buyers might be in for more than they hoped for - corroborating the negative gamma observation from earlier. If these buyers were speculators, they might aggressively sell in the short term.
Our Trading Strategy
With our automatic strategies hitting the brakes from last week, we were slow to react, as the market “did nothing wrong”. While it’s far too early to predict the impact of Trump’s tariffs on economic growth and inflation, we can say that it’s not yet time to “buy the dip”. There are still a number of buyers left to be shaken out.
To put things into perspective, a 200-DMA retracement on SPY at this point would only “reset prices” to July 2024 levels. Investors have been conditioned to believe that financial markets only go higher and any other outcome than profit is unlikely. In the worst case, the Fed will be there to bail them out. Such speculative activity needs a dose of reality from time to time, and technical retracements are inevitable.
In the medium and long term, our view aligns with that of the options market and the historical precedence of tariffs. Namely that all will work out fine. But right now, the dip might just “keep dipping”.
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!