The REAL Santa Rally, Systems, Trade Ideas!: Your Weekly Preview: Regime Change (You are here)

Dec 16, 2024

∙ Paid

What happened?
Yields on the 10 year Treasury (TNX) rose over 20 basis points last week, driven by hotter than expected inflation data.
- Context: Back on Nov. 15, when TNX touched 4.50%, it triggered a sharp two-day stock sell off.
- Why it matters: At 4.38%, yields are edging close to this critical level again, raising the risk of volatility in equities.

Despite the spike in rates, the S&P 500 (SPX) held up relatively well.
- Drivers: Money rotated into mega cap tech, with AAPL, AMZN, GOOGL, META, and TSLA hitting fresh highs. (This could be a theme in to year end. DON’T BE AFRAID TO HOLD THESE IN TO THE END OF THE YEAR AS FUNDS PUMP THEM.)
- Trade offs: The rally in tech has narrowed market breadth, echoing a recurring theme of concentrated leadership.

Inflation uptick: Last week’s inflation surprise remains a focal point for markets.
Labor market surprise: Weekly jobless claims unexpectedly jumped to 242K (vs. 222K est.).
- What it means: Too early to draw conclusions, but something to watch for in upcoming data.

Why bulls are staying optimistic:
- Seasonality: The market is entering a historically bullish stretch.
- Technicals: Charts suggest a constructive setup in the near term.
- Performance chasing: Fund managers may look to close the year on a high note, supporting equity flows.

Yields: Will TNX break 4.50%, or will stocks maintain their resilience?
Economic data: Upcoming inflation and labor reports could challenge the "strong economy" narrative.
Market breadth: Watch if leadership continues to narrow or broadens out.

Stay tuned for more updates as the week unfolds…

What it means:
REFLATION is a risk on environment where policymakers support, or at least do not restrain, nominal economic growth that is accelerating or surpassing expectations.
- Portfolio positioning priorities:
  - Risk assets > Defensive assets: Favor equities, credit spreads, and commodities over Treasuries or cash.
  - Cyclicals > Defensives: Lean into sectors like industrials and materials.
  - High beta > Low beta: Emphasize more volatile growth-oriented stocks.
  - EM > DM: Emerging markets show greater appeal compared to developed markets.
  - Short rates > Long rates: Shorter duration bonds are more attractive than long bonds in this environment.

Global Liquidity:
- Modest improvement ahead: Leading indicators suggest a slight increase in global liquidity over the medium term, supporting risk assets in the short term.
GRID Model Outlook:
- STAGFLATION regime likely: Bottom-up data points to a "growth ↓ and inflation ↑" scenario dominating over the next 3–12 months in the US.

3-month composite outlook:
- Neutral for commodities: No strong directional signal yet besides softs are in a bullish signal.
- Bearish signals for:
  - Bonds: Elevated risks of drawdowns.
  - US Dollar: A weakening trend could add upside volatility to global markets.

Investor behavior:
- Advisors: Overweight equities, neutral bonds, underweight cash.
- Speculators: Neutral on equities, underweight Treasuries, overweight the US dollar, and neutral on commodities.
- Systematic funds: Overweight equities.
- Market-neutral hedge funds: Elevated gross exposure to risk assets.
Valuation warning: Current valuations for risk assets are consistent with levels observed at major bull market peaks, highlighting a medium-to-long-term crash risk. For now stay long but be aware of where we are. This most likely wont materialize for a couple months.

Risks: Elevated valuations and bearish macro signals suggest caution in the next two months despite the current REFLATION regime.
Opportunities: Favor cyclicals, short-duration bonds, and emerging markets in the near term.
What to watch (Environment): Key inflation data, liquidity conditions, and any shifts in positioning sentiment over the coming months.

Our signal system is 100% ready to go! Also, the REAL dates of the Santa Rally and a few trades around it.

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