3 Things You Need to Know: Market Catalyst Report

Risk Off Regime?

Key Drivers Last Week:

1. Fed's Hawkish Stance:

   • Markets adjusted to higher-for-longer rates after the Fed's revised outlook.

   • Technical triggers:

     • 10-year yield crossed 4.50%.

     • U.S. Dollar Index (DXY) rose above 107.

2. Market Volatility:

   • Stocks sold off midweek; VIX spiked to 28.

   • Driven by speculative activity and technical pressures.

3. Bounce-Back Rally:

   • Friday catalyst: Cooler-than-expected PCE data and dovish remarks from Fed's Goolsbee.

   • Year-end "performance chasing" by fund managers is adding momentum to stocks.

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Economic Data & Inflation:

• Strong U.S. data this week supports the bull case.

• But higher yields and persistent inflation remain risks.

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Key Levels to Watch:

• 10-Year Yield: Under 5.0% is critical for maintaining the bull thesis.

• Rising yields:

  • Shrink equity risk premium.

  • Increase borrowing costs (for consumers, businesses, and government).

  • Make fixed income a more attractive alternative.

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Valuation Concerns:

• S&P 500's forward P/E of 22 demands strong Q4 corporate earnings in the coming month to justify valuations.

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Bottom Line:

• Bull case intact, but heavily reliant on yields staying below 5.0% and solid corporate earnings ahead.

• Rising rates and sticky inflation could derail the rally—proceed with caution.
  Market Regime: REFLATION

  • What it means: A "risk-on" environment where policymakers support or tolerate accelerating economic growth.

  • Portfolio focus:

    • Risk assets over defensive assets.

    • High beta > low beta; cyclicals > defensives; growth > value.

    • SMID caps > large caps; International > US; EM > DM.

    • Spread products > Treasurys; short rates > belly > long rates.

    • High yield > investment grade; industrial commodities > energy > agricultural; gold > FX > USD.

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  Key Regime Indicators:

  1. Global Liquidity:

     • Signals a modest medium-term decrease in global liquidity.

  2. US Economy:

     • Next 3-6 months: Growth up, inflation up (INFLATION regime).

     • Next 6-12 months: Outlook (growth down, inflation up).

  3. Macro (3-month outlook):

     • Bullish: Stocks, Bitcoin.

     • Neutral: Commodities.

     • Bearish: USD

     • Overall: Low probability of sustained risk on environment. Get ready for a risk off regime switch.

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  Positioning Insights:

  • Investment Advisors: Overweight stocks, neutral bonds, underweight cash.

  • Speculators: Neutral stocks, underweight Treasurys, overweight USD, neutral commodities.

  • Systematic Funds: Neutral stocks.

  • Market-Neutral Hedge Funds: Overweight risk assets.

  Valuation Check: Risk asset valuations align with major bull market peaks, signaling medium-to-long-term crash risk.

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  Bottom Line:

  • Near term: Caution on sustaining risk-on regime; mixed outlook for bonds and commodities.

  • Medium-to-long term: Elevated crash risks in risk assets due to positioning and valuations. Adjust portfolios accordingly.

  Upcoming Market Catalysts

  Economic Calendar:

  • Monday (12/23): No reports.

  • Tuesday (12/24):

    • Durable Goods Orders

    • New Home Sales

  • Wednesday (12/25): No reports.

  • Thursday (12/26):

    • Continuing Claims

    • EIA Crude Oil Inventories

    • Initial Jobless Claims

  • Friday (12/27):

    • Advanced International Trade in Goods

    • Advanced Retail Inventories

    • Advanced Wholesale Inventories

    • EIA Natural Gas Inventories

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  Earnings Calendar:

  • Monday (12/23): No reports.

  • Tuesday (12/24): No reports.

  • Wednesday (12/25): No reports.

  • Thursday (12/26): No reports.

  • Friday (12/27): No reports.

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  Bottom Line:
  A quiet week for earnings, but watch for Tuesday’s durable goods and housing data and Thursday/Friday's inventory and claims reports for potential market impacts.