The REAL Santa Rally, Systems, Trade Ideas!: Your Weekly Preview: Regime Change (You are here)
"Failure to prepare is preparing to fail..."
1. Yields Surge on Inflation Data
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.
2. Stocks Show Resilience Amid Rising Yields
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.
3. Mixed Economic Signals
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.
4. Bull Thesis Intact for Now
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.
What to Watch This Week
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…
Market Regime Brief: Reflation in Focus
1. Current Market Regime: REFLATION
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.
2. Macro Indicators
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. Intermediate Time Frame
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.
4. Positioning Insights
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.
Outlook Summary: Caution in Inflation
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.
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