Week of January 5
New Year same old me
Recap of last week
Didnt trade last week as volumes were dead.
On recent events in Venezuela. Venezuela is irrelevant to the global economy. What is special about them is oil reserves in which they are on par with Saudi Arabia. However oil requires infrastructure and CAPEX to access. And invading a hostile country and taking over is not a weekend long process. Look at when US tried to occupy Iraq.
This is a very significant global event to be sure. But a very INSIGNIFICANT event for markets. So let me not waste your time by pretending to be an expert on Venezuela (like many are this weekend).
On China-Taiwan. This is point blank, not a risk to markets whatsoever. Trust me Xi Jinping isn’t sending some fraud Furu a headsup on Whatsapp before launching the battleships on Taiwan. Could it happen “one day?”. Yes certainly. So could North Korea launch a nuke, or aliens invade but I file it under extremely low probability miniscule odds and not worth worrying about.
Next move for markets
Up. Markets remain in a precarious place, perched under the mega resistance of 6900-6950 in SPX. This has been proven to be heavy supply everytime it has been touched. In October, November, and December. I would curb your risk/bullish enthusiasm until this level is cleared with strong volume and a real breakout. Until that happens I maintain that risk remains to the downside.
As we can all see, everytime SPX approaches this resistance it gets smacked down hard. Bulls will say higher lows are being made and this is valid. I however place a greater importance in the longer term trend which was vertical from the April bottom. And now momentum has clearly slowed. This provided with my earlier research shared regarding the presidential cycle make me err on the side of caution here. To refresh everyone’s memory here.
Midterm years are the worst average return out of all 4 years of a Presidential cycle. For further perspective, pre election year (year 3) averages a whopping 3x average return of what we see in midterm years. Historically, we are entering a bad year of equity returns. Meanwhile positioning remains close to the upper bound, bulls are everywhere bears are close to extinct and this all gives me extra pause. For the longer term book, which you should always be thinking about, a level of interest where I would be a big buyer would be 6000/6200 in SPX. Or time on the calendar wise closer to the actual midterms has historically been a bottom for the S&P. I do not think 6900 presents a good risk/reward for long term swings, and you need to be very careful at these prices in my opinion.
AAII bears have officially collapsed, going back to 2024 levels. This survey is not the end all be all, it is only one data point. But the same sentiment is echoed across many positioning lookbacks that I track.
NAAIM has pulled back a bit from recent highs. Although it remains in the 80th percentile. Given we enter some turbulent times as midterm elections approach, I look to be a little more discerning in buying dips this year. I wouldn’t be jumping all over 3% dips like in 2025, and maybe might be looking for more, 10% or a 15% pullback this year. If we might see say 6000 SPX this year, you don’t want to blow all your capital buying 6700 or 6800 for example. Now we are not trading anywhere near these levels yet, but its something to keep in mind.
To further expand on the “slowing momentum” of the SPX as we witnessed in 4Q last year. Alot of people are jumping for joy for the SPX on a +16% year (18% including dividends). On paper that looks great, but if you compare the S&P to other major global indices, it actually underperformed significantly. The AI boom is global (as seen in South Korean and Japanese stocks), Europe is having a resurgence, and US is actually the global laggard.
The S&P 500 is a super tanker. It doesn’t switch from bull market to bear market with the click of a button. A transition into a bear market, or just poorer returns begins with a loss of momentum or a decrease in slope of the uptrend is another way to put it. These are all warning signs. I am not calling for a bear market, just saying the risk/reward profile is not as appetizing as we have seen in recent times.
Another reminder of full positioning. The BofA bull/bear indicator is still on an active sell signal. One thing investors struggle to understand is bottoms are a moment in time and tops are a process. They are not direct opposites of each other. Tops are usually caused by a catalyst, that triggers/exacerbates an unwind whilst positioning is extremely long. Usually everyone max long is not enough in and of itself to cause a top. Think of it like a pile of dry wood, tinder, and hay. Its at risk of burning but just lays there until someone sparks a match. We are at risk of “burning” right now but there isn’t yet a catalyst. Maybe one never comes and positioning slowly corrects itself, that is a possibility. But the risks are extremely high right now with everyone max long.
A growing divergence to become aware of. The SPX, and analysts broadly are pricing in a growth acceleration in 2026. Due to a myriad of policy decisions, K shaped economy, rising asset markets. This however has not reflected in the economic data. Hard data has been surprising to the downside consistently now since October. The green line is the economic surprise index. As you can see, in the short term the lines can go their seperate paths but in the long term they converge together. So watching this very closely.
Lastly, lets check in with valuations. We remain in nosebleed territory. This is not bearish in and of itself. But this helps me decide on pulling back on the aggressiveness. I am OK with missing some potential upside here, to also miss out on any potential downside here. In the end its a bet. I am betting any down move would be much more ferocious than another rally would be from here.
In the ultra short term (<1 week), I expect the market may bid due to some big uncertainty being removed regarding Venezuela. Trump has been floating an idea of an invasion for a while and now that he did it the market can price it in. The market may also look forward in the future to lower oil prices and inflation which could mean easier monetary policy.
This week is also the beginning of the CES in Las Vegas. This is a big tech conference, with the highlight being NVDA/Jensen presenting monday. As we recently learned AI micro is now macro. Anything he says could pump NVDA/SMH/QQQ and therefore ES as well. As this is not an earnings call, he is much more likely to share the rosy outlook here and in all fairness they did smash last quarters earnings so should be a fairly upbeat outlook as market looks to actual AI implementations/use cases in 2026 and beyond.
To sum up, the medium term outlook does not really favour the bulls, for the first time in a long time. However, tops are a process and until big supports start breaking no need to “express” any bearish views just yet. Positioning and sentiment warrant caution here and midterm years tend to see extreme volatility and the lowest average returns of the 4 year cycle. In the short term, markets may like the Venezuela (short term resolution) and new AI news coming out of the CES in LV.
Trade Ideas
Will alert in the chat.