Forget the MAG 7: The Real Money Is Elsewhere in 2025

Why stagflation and liquidity constraints are reshaping markets: this is where the money flows next.

Looking ahead can be valuable, but it can also be risky if you don’t know what you’re looking for. Nick Tomaz from The Economy Tracker put it perfectly on The Macro Show: "I find it helpful to have a yearly and quarterly plan for what is "supposed" to happen. That way if action diverts, I know that I am wrong or missing something early rather than hope and wait."

That’s exactly how predictions in markets should be treated as a template. The way we build those templates is critical. Step one is understanding that markets can do whatever they want.

Traders need to think in terms of positioning, relative performance, probabilities, and liquidity.

Let’s start with probabilities. For those who have followed me since 2018, you might remember my favorite saying from The Stock Trader’s Almanac: “As January goes, so goes the year.”

Why is this one so important to me?

Here is the backtest.

A positive January historically means big things, we’re talking 16.8% average gains and an 89% chance the year ends in the green. But hey, I’m not clairvoyant, so I’ll save the end-of-January talk for, well, the end of January. Let’s move on.

Now, let’s talk about the January Trifecta:
1️⃣ Santa Claus Rally
2️⃣ First 5 Days
3️⃣ January Barometer

This year? Mixed bag so far. The Santa Claus Rally wasn’t feeling festive for the S&P 500 (large caps didn’t show up), but small caps and micro caps? They were partying.

Could this be a hint that SMID caps are ready to take the wheel in 2025?

On the flip side, the First 5 Days Indicator was positive, so there’s that.

According to The Stock Trader’s Almanac, when the First Five Days are “up,” the full year followed with gains 40 out of the last 48 times. That’s an 83.3% hit rate, with an average gain of 14.2%.

Not bad, right?

But let’s not get ahead of ourselves, the real juice in the January Trifecta comes from the January Barometer. That’s where the big signals show up.

I’ll circle back on this when January 2025 closes its books.

Stay tuned.

Positioning

Alright, let’s talk positioning: yes, I know, I’ve been beating this drum nonstop lately, but it’s important.

Here’s where we’re at:

The dollar? It’s set up to fall. Dealers (commercials) are short, while speculators and hedge funds are very long dollars (and vice versa for currencies against the dollar: meaning bullish for EUR, GBP, AUD, NZD, CAD…).

This is the classic “one side of the boat” scenario, too many people piling on one side, and eventually, that boat is tipping over.

But here’s the catch: lopsided positioning can stick around for a while. That’s why AAO is staying ready for two scenarios:

1️⃣ The dollar could keep climbing in the short term (we’re prepared for that).
2️⃣ A reversal will come, it’s just a matter of when.

What I’d like to see is some of these currencies make a move against the dollar before we lean too hard into a bearish dollar outlook.

And don’t forget: if the dollar keeps flexing, it’s only a matter of time before it starts choking U.S. liquidity.

When that happens, the Fed or Treasury will have to step in, whether it’s the Fed ending QT or the Treasury pulling out a Mar-a-Lago-style exchange rate move.

Liquidity

Let’s talk the repo market. Right now, it’s just hanging out, sitting $100–200B above the chaos zone we saw in March 2023 (shoutout to the regional bank drama).

Here’s the math: since mid-2022, the Fed drained $3T from the system, but $2T from the reverse repo facility came boomeranging back. Net-net?

It is down $1T. Banks went from a $4T cash buffet in 2021 to cruising with $3T now. Not bad, but we’re edging closer to dicey territory.

And when liquidity gets tight, that’s when the funky stuff starts. SOFR rates are spiking, repo facilities are getting interesting, it’s all giving off serious 2019 “plumbing issues” vibes.

For now, the Fed’s keeping it chill with balance sheet reductions, no panic pivots… yet.

If you’re looking for when they might call it quits, mid 2025 seems like a good bet, unless a debt ceiling fight shows up and flips the whole game board.

Relative Strength (So far…)

Here’s where we’re at:

As of today, oil is up 6% YTD, natural gas is up almost 9%, and the energy sector is leading the SPDR S&P sector ETFs with a 3% gain. Energy is doing its thing.

What does this say about the market environment? It’s big. Last year, the reflation trade flexed hard, copper jumped 46%, cocoa nearly doubled, coffee shot up over 70%, and natural gas skyrocketed more than 100% from February to the end of 2024.

Here’s my take: stagflation is creeping in. You can already see it putting pressure on stocks. I’m not ready to call 2025 a bad year for stocks just yet, but there’s mounting evidence to step back from the MAG 7 and start looking elsewhere. I think 2025 will be all about money flowing into different areas.

Where I’m looking:

• Commodities

• International stocks

• U.S. sectors like:

  • Gold Miners (up 7% YTD already)

  • Airlines

  • Oil and Gas (XOP up 5% YTD)

  • AMLP (just added to the long-term portfolio)

  • Metals and mining

This isn’t about panic; it’s about adjusting to where the momentum is shifting. 2025 might be a rotation year. At the moment relative strength continues to flow in to commodities and these other areas.

On this chart you can see it is flowing out of bonds and in to commodities.

Breaking out of the pennant pattern.

Also Commodities are starting to outperform stocks as I have highlighted recently.

Keep an eye on it if this trade is going to happen. It is now or never.

One more thing… Bonds.

This is hands down one of my favorite macro charts. It tells the story:

• Bond yields hit their long term cycle bottom in the 1940s.

• Then came the stagflation of the ’70s, followed by the blow off top in 1982.

• What followed? A nearly 40 year downtrend in yields that finally ended in 2020.

Since then, yields have been grinding higher, as you can clearly see.

Chart: Sam Gatlin

Now, if there’s ever a year where bond yields might take a breather, it’s this one. But as I’ve said over and over, any dip will likely be short lived in this environment where inflation is sticky.

And let me double down on the same thought I’ve had for the past five years: bond yields could finish the year higher once again and I would not be surprised.

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This year is shaping up to be about navigating rotations, managing risks, and being ready to pivot as the macro environment evolves.

Stay nimble, watch for shifts in liquidity and positioning, and follow the strength. If these trades are going to play out, the time is now.

Against All Odds Research

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