Monday marked a decidedly inauspicious start to a week that has the potential to be one of the more consequential stretches in recent memory for a market that’s torn between competing narratives, some bullish (e.g., still decent data stateside, a dovish Fed, “hope” for a trade truce) and some bearish (e.g., decelerating global growth, a lack of concrete progress in the Sino-US dispute, DC gridlock).
You could scarcely have conjured a more foreboding series of headlines if you tried – Caterpillar misses, cites China; Nvidia delivers disconcerting guide down; US criminally charges Huawei. All of that before the “real” headline risks come calling, starting with Apple earnings and proceeding apace to the Powell presser, Liu He wheels down in Washington, payrolls and ISM.
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And it’s not like we’ve got much in the way of a margin for error. Monday’s stumble notwithstanding, January is on pace to be the best start to the year for stocks since 1990.
(Goldman)
As you can see, that’s even better than January of last year, when the S&P was busy blowing through multiple analysts’ year-end price targets on the back of tax cut optimism and generalized euphoria.
“There has been an increase across risk appetite/ sentiment indicators, which were close to their most bearish readings since the 90s – most have now normalised”, Goldman writes, in a Monday note, referencing the following visual.
(Goldman)
Most of this is obviously down to the Fed’s dovish pivot, but as SocGen muses, “January is the strongest month historically for reversal strategies.”
“For example, selling the prior month’s ‘winners’ and buying the ‘losers’ during January has a hit rate of over 70% in Europe”, the bank’s Andrew Lapthorne wrote yesterday.
(SocGen)
“So, investors have a dilemma: On the one hand the economic narrative is becoming increasingly bearish, so sitting out this ‘dash to trash’ makes sense, on the assumption the start of the year ‘risk-on’ flurry fades”, Lapthorne adds, before reminding you that on the other hand, “Value stocks had become extremely ‘cheap’.”
For their part, Goldman thinks it might be a good idea to play for a rise in volatility stateside given everything that’s on the calendar this week.
Specifically, the bank writes on Tuesday that “over the past three months SPX has moved more than 1.6% in 90% of rolling four-day periods (intraday) and has moved more than 3.2% in 51% of four-day periods.”
Why does that stat matter? Well, because despite the myriad macro and micro catalysts that have the potential to trigger outsized moves, SPY straddles for the next four days are only pricing in 1.6%.
(Goldman)
The bank gently reminds you that any bout of renewed volatility has the potential to be exacerbated by low liquidity, something everyone with any sense has spent the last four months pounding the table on.
“SPX futures top-of-book depth has improved over the past week, but remains below its 25th percentile relative to the past year”, Goldman goes on to warn, on the way to cautioning that “the low liquidity that has been a factor in the increased volatility of the past few months has not yet reversed.”
In any event, take all of the above for what it’s worth and hold your breath for Apple and/or the next Trump tweet and/or the next indictment.
