Entry Point
With the average stock trading lower than just before the election and Treasury yields pricing at a higher terminal level, it's time to get interested again. We seem to have blown off the froth of exuberance with anything AI or quantum-related. Bitcoin suffered its usual risk-off haircut after trying to beat the $100K level. Hints of a softening in the Trump tariff approach have been leaked.
Turnaround Tuesday should live up to its name today.
As I write this, earnings season looms large. The reports should be good, given the surge in 4th quarter GDP and the AI-related cap-ex burst. Credit card data shows that consumers are still spending. Tomorrow's CPI reading should steadily rise, but expectations are well-prepared. Bond yields are digging in their heels at the 4.75-80% level.
Sector rotation should help broaden the market after the false start seen in 2024. The average stock chart shows a double bottom pattern (chart below). For this pattern to definitively turn, the yield backup must reverse. That will depend on a bond rally that reverses the negative sentiment that currently pervades Wall St based on the more harmful elements of the Trump agenda. I see the overblown concerns about these policies as an opportunity for bond term-extension trades. The worst-case fears have been priced in just before the new administration takes power.
S&P 500 Equal Weighted vs Index
Why the optimism? It comes from a perusal of the sentiment indicator I prefer to use - the AAII weekly survey (below). I notice that we are deeply oversold in a trend that has been shifting towards the negative for some time now. It should turn higher on 'good news' as the 'bad news' is well disseminated.
AAII Bull/Bear Ratio
The volatility surge has been well contained relative to previous shocks over the past two years:
3 Month Volatility
The effects of the higher dollar on commodities have run their course, allowing copper to set up for a seasonal run into the 2nd quarter with a double-bottom pattern in place. The dollar chart looks toppy here after a parabolic run.
Cu/Au
U.S. Dollar
M&A deals, Fund flows from money markets and renewal of IPOs will likely be supportive elements after a couple of years of quiescence. The bull market has suffered from a narrow leadership and a Fed that is hard to fathom. Both these elements are reversing their trends, albeit in a choppy fashion. With the help of falling inflation on the cost side and steady demand, earnings are set to surprise positively. Although the market is expensive relative to history, it can remain as long as earnings backfill these levels. Despite what we all want to believe, valuation is not a market timing tool.
Notably, the banks now enjoy a positive yield curve and the potential for regulatory relief. Any market rally worth its salt should begin with a rip in those stocks. The Financials, in relative terms, have corrected to trend and look poised for a move here. For the second year in a row, I say, 'Banks, thanks!'
Remember, dear reader, the bull market is getting a bit ragged after the easy money of the past two years. Enter - but at your own risk!
Financials vs S&P
Risk Model: 2/5 - Risk Off
The Model dipped into sell territory last week but should reverse again this week as volatility levels subside. The Copper/Gold ratio signals a bottom, as shown above. Any confirmation that the global economy has bottomed is still a guess. Still, a relief rally in the currency market and commodity prices is overdue after two years of a hostile Fed.
