After a bumpy but successful January, stock market bulls have little to complain about, but a lot to worry about. The S&P 500’s 1.4% rise in the same month amounted to an 18% annualized gain, which would represent a fourth consecutive year of superior returns (even if things even remotely worked out in such a linear fashion). The index has never fallen more than 3% from its all-time high, and the median large-cap stock has more than doubled the S&P’s gain. The Citi U.S. Economic Surprise Index, which measures how much macro data is contrary to expectations, is nearing a two-year high. According to FactSet, earnings growth has exploded from the consensus bogey to reach low double digits, while blended S&P 500 margins are running at record levels, a performance that has become routine. Corporate debt spreads remain happily aligned closely with Treasury yields. All of this gives bragging rights to stock optimists and those who support the general view that upward momentum shifts from tech companies to cyclical groups. But for a largely positive start to the year, there are a surprising number of caveats, extremes, and oddities that skeptics should call out. At the headline index level, the S&P 500’s January closing level was reached on the third business day of the month, although it devalued sideways and rose above the 7000 threshold during the day. In fact, the S&P has been mostly flat since just before Halloween, held back by sustained pressure on most of the Magnificent Seven. Does it make sense that the index has stalled for several months, having just doubled since the 2022 bear market bottom (when the intraday low was 3491)? .SPX 6M Mountain S&P 500, 6 Months Beyond range-bound large-cap benchmarks, volatile flows in precious metals and memory chip stocks, Bitcoin price movements and jitters in currency markets threaten to spread uneasy oscillations in previously stable stock and U.S. Treasury markets. Silver and Sandisk Friday’s mini-crash in silver and the sharp sell-off in gold, both following years of extreme overboughtness, coincided with a clear and orderly rebound in the U.S. dollar index from a four-year low. Memory stocks similarly soared vertically, creating a volatile technical situation ripe for a violent unwind. SanDisk stock closed down more than $100 from its intraday high on Friday after strong performance and guidance. The silver and memory name frenzy became, as always, a self-reinforcing momentum phenomenon built on favorable supply and demand dynamics and a seed of truth about hopeful “this time it’s different” arguments. Notably, both of these trades were fueled by viral narratives of severe material shortages, forced buying, and short squeezes (just like the original meme stocks were). China has reportedly restricted silver exports, leaving metal smelters unable to process enough scrap silver to move the supply needle. Memory chip production has reached its limit globally, and bulls are touting price-sensitive buyers who need the products for the inference stage of AI model training. Over one day last week, the iShares Silver ETF (SLV)’s dollar trading volume represented about half of its total $60 billion in assets under management. Did your fever go down on Friday? Will Silver Purge also take away adjacent momentum plays? SLV YTD Mountain iShares Silver Trust, YTD Hard to say. An interesting side story to the hyper-aggressive moves in metals and memory is that it reflects a lack of belief among the investor community in once-popular themes. Software is clearly in liquidation mode and appears to be the profit pool most disrupted by AI coding tools. But look at the poor response from Visa and Mastercard, once the perfect card processing leaders. Once seen as premium ‘formulators’, they are now vulnerable to new competition, perhaps under new legislation and perhaps AI-driven ‘agent commerce’. Of course, if a crowded growth stock exits in a chaotic manner, it could mean it may be overshooting and may be accumulating value. Visa and Mastercard have never been cheaper relative to the S&P 500 in their 20 years as publicly traded companies. If only for technical reasons involving the power of mean reversion, software stocks should at least be close to easing. Jeff DeGraaf, a strategist at Renaissance Macro, said the performance of momentum factors within the tech sector, meaning how high-momentum stocks have fared relative to low-momentum stocks, is currently in the top 5% of all measures since 2000. “The key is to be predictable and reduce momentum once you’re in the top five percentile,” he says. “It could be as simple as a semi-final vs. software” means aiming for a temporary rebound of software against the chip leader. This occurs at a time when momentum reversals are somewhat common. Last year, the deep-seeking scare in January, followed by a violent reversal of momentum strategy in mid-February, caused a sharp market decline even before the tariff panic became fully evident. January Barometer Every year around this time, articles tout the power of January to indicate the direction of stock prices for the rest of the year. Indeed, returns were better after January’s rally than when it was down. However, other months have even higher predictions for this score. And even after a negative January, the S&P 500 index rose 60% over the next 11 months. Moreover, one obvious exception to the “January pressure” rule occurred in 2018, the second year of President Trump’s first term. January’s wild bull run was replaced by a volatility shock exacerbated by excessive capital inflows into specialized trading products, with the S&P 500 up less than 3% from its late January high, but down 18% for the remainder of the year. Not a prediction, just a note of context. Some other unusual features of the current market moment should be mentioned. – Potential interventions to strengthen the Japanese Yen are being openly discussed and could have some knock-on effects on global risk positioning. *The president is nominating a new Fed chair, in this case Kevin Warsh, who has expressed skepticism about the Fed’s activist balance sheet policies in the past. As is always the case, new Fed chairs tend to be “tested” by market turmoil early on. While not a rule of any kind, the market knows this dynamic and may try to anticipate it, although Janet Yellen’s 2014 “test” was a minor and mild one. This is based on the understanding that midterm election years often see significant corrections. -OpenAI, Anthropic, and SpaceX continue to raise 11-digit sums of funding from individual investors, and each expects to increase their investment value through IPOs relatively soon. Will public equity markets be able to absorb this new supply now that even the Mag7 leaders are being sold to fund other stock purchases and share buyback activity is slowing down? Will the bulls get wider? If these are factors that encourage investors to avoid risk, then a convenient counterargument could be that most global stock markets and the majority of U.S. stocks are trending positively, and that skepticism is warranted. That’s exactly what it says, a solid macro signal. But can a wide tape be too good to be true? Deutsche Bank strategists reported Friday that investor positioning in cyclical sectors is now outpacing that in mega-growth stocks, which is relatively rare and could signal that the Street may be overextending industrials, materials and energy in the short term. Ned Davis Research strategist Ed Clissold also crunched the numbers last week on what to expect from the market when more than 60% of S&P 500 stocks outperform the index itself. As of last Wednesday, that number was 62%, the highest since 2001. Clissold found that in years when more than 60% of stocks outperformed the index, on average the S&P 500 index fell, while small-cap stocks and consumer staples outperformed. Bulls should expect a slightly narrower range of gains, with barely more than half of stocks outperforming their benchmarks. Should bulls support “retrenchment”? As with many things in the market and in life, what people want and what people need are often different.
