Yet Another Shake-up

Last week, we’ve seen another example of bullish and extended markets get a sharp downturn in the face of an “unexpected, exogenous event”. 2025 has already had 3 of these moments so far - the DeepSeek reaction in tech stocks, an inflation and Fed rate pause scare, and now a new coronavirus variant discovered in bats that prompted a -1.7% slide in the S&P 500 on Friday.

“Another coronavirus feared to be powerful enough to spread through humans has been discovered in China. In scenes eerily reminiscent of the beginnings of Covid, researchers at the infamous Wuhan Institute of Virology detected the new strain living within bats.

HKU5-CoV-2 is strikingly similar to the pandemic virus, sparking fears that history could repeat itself just two years after the worst was declared over. The new virus is even closer related to MERS, a deadlier type of coronavirus that kills up to a third of people it infects. Virologist Shi Zhengli, known as ‘Batwoman’ for her work on coronaviruses, led the discovery, published in a top scientific journal.”

Of course, we could blame the soft economic data released on Friday as well for the bloodbath in equities. The preliminary February S&P Global US Services PMI fell to contraction territory (i.e. below 50), the final University of Michigan Consumer Sentiment report for February dropped to 64.7 and existing home sales declined 4.9% month-over-month in January.

So… none of that was good news. The real problem was a clash of that batch of data with a “hot” stock market that had just notched fresh all-time highs on Wednesday. The breakout was brief, as the news (which also occurred on options expiration day) sent SPY tumbling towards 50-DMA support.

The coronavirus and growth concerns may or may not be of real concern. The market will have plenty of time to digest this info in the coming week, which also sports a highly anticipated earnings release from Nvidia (NVDA) after the close on Wednesday.

However, a distinct deterioration in momentum is becoming apparent. Take the struggles of the highly influential Tech sector (XLK), for example, which has traded in a range for the past 3 months, unable to really break out.

Or the broadly negative trend signals at the daily and (most concerning) at the weekly level for major S&P ETFs. With defensives like Staples (XLP), Utilities (XLU) and Real Estate (XLRE) topping out the sectors leaderboard sorted by the Stochastic Oscillator, the market appears to be in “rotation and consolidation” mode, rather than “screaming to record highs” mode.

Automatic strategies like Enterprise have picked up on this and issued a perfectly timed sell signal on Wednesday, followed by an overall reduction in portfolio volatility on Thursday — moving to ~40% cash ahead of Friday’s downturn.

In the options market, 1 month premiums for major ETFs (especially SPY) have spiked to a combined 23.3% on Friday from 13.85% on Wednesday. Premium measures the percentage difference in Implied Volatility versus Realized volatility, derived from the options market. As such, SPY has a 1M Realized vol of 3.54% and a 1M Implied vol of 6.20%, translating into a more than 100% premium. If there’s any doubt about it, the options market is “concerned about downside” at this point. SPY is also now trading in a negative GEX environment, meaning that market makers will amplify prevailing price moves (both to the upside and downside).

Given the deteriorating breadth and sentiment which has not exactly bottomed yet, we would suspect that this rotation / consolidation phase still has room to play out.

Our Trading Strategy

Most likely, the market will faced increased selling pressure in the weeks ahead. While support levels should be able to hold (50-DMA or 100-DMA), we might be looking at an extra -1.5% to -2.0% downside in the broad market.

None of this should send us panicking into the safety of cash just yet. As we’ve suspected, 2025 is turning out to be a more difficult year to trade than 2024, with frequent, sharp drops testing and fraying nerves. Furthermore, the deterioration in momentum is also testing the patience of short-term, leverage based investors (speculators), which have been instrumental in building up this rally from a supply-demand perspective.

Careful position management is key at this point, as well as adjusting allocation using a soft touch. The trades we’ve executed in the Sigma Portfolio on Friday translate into exactly that: adjusting individual positions so that risk-reward becomes beneficial.

The only silver lining is that with lower prices, the overall reward to our $640 year-end Price Target becomes more reasonable. Given that there are around 310 days left to achieve that target, the CAGR works out to 7.93% - a definitely investible number. But NVDA still needs to beat on Wednesday.

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