Last week was an abridged trading week, as markets closed on Thursday to honor the passing of President Jimmy Carter. The week itself closed with a sharp selloff on Friday. Yields spiked and equities fell after what Head of Technical Strategy Mark Newton described as a “Goldilocks economic report.” The market entered a “good news is bad news regime” as investors appeared to view strong jobs numbers as increasing the odds of a resurgence of inflation – thus a higher probability of a slower pace for Fed cuts.
Lee doesn’t believe inflation is accelerating, pointing to wage growth holding steady at 3.9% from a year ago. He also highlighted what Chicago Fed President Austan Goolsbee noted on Friday—this is not a level associated with wage-driven inflationary pressures.
There was also some concern after the University of Michigan survey of one-year-forward inflation expectations rose unexpectedly to 3.3%, up from 2.8% last month. Lee pointed out the likely role of political partisanship – the inflation expectations of those identifying as Democrats surged while those of Republicans fell, with supporters on both sides flipping their views between October and January. “To me, this means this U Mich inflation survey looks ‘very political’ because the only change between October and now is the Republicans taking the White House and Congress (and the Harris White House loss).”
Together, these sent the VIX briefly above 20 on Friday, “a sign of panic and a sign we are nearing a bottom,” in Lee’s view. He warned us that “this is turbulent for markets near term.”
That’s consistent with Newton’s technical analysis-based perspective as well. Newton noted that the S&P 500 is still technically within its bearish short-term consolidation pattern. On Wednesday, he also warned that “SPX looks likely to undercut 5,829 post Friday’s jobs report,” and it did just that, closing the week at 5,827.04. Looking further out, he suggested that based on his work, technical support lies near 5,700. “I suspect that SPX might attempt a bottom by early next week and begin to bounce into mid-to-late January,” he told us.
Sector Allocation Strategy
These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the January 2025 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.
Chart of the Week
Thus far in 2025, we have yet to see a full trading week, with U.S. markets closed on Thursday to honor the passing of President Jimmy Carter. But the first five trading days of the year have been good, which Fundstrat Head of Research Tom Lee says bodes well for the rest of the year. “If you close positive in the first five days of the year, this vastly improves the probability that the full year will end up positive as well,” he reminded us. Indeed, as shown in our Chart of the Week, in historical instances in which the preceding year saw gains of more than 10% and stocks then advanced during the first five days of the year, stocks ended the rest of the year up 82% of the time.
The inability to mount any kind of meaningful intra-day reversal points to a bit more weakness into early next week ahead of Wednesday’s CPI. That could be a pivotal event, if SPX reaches 5700 and might coincide with a reversal. For now, we see that the breakdown in Equal-weighted S&P 500 (RSP -1.57% ) on Financials and Healthcare weakness still makes it difficult to expect an immediate snapback as price has undercut the lows going back since December and has reached the lowest levels since last September. This might lead to another couple days of weakness into next week, and both trends and momentum remain bearish in the short run, as part of bullish intermediate-term patterns.
This morning’s Goldilocks Economic report has led Treasury yields to spike yet again and given the recent correlation with Treasuries and Equities, the “Good News is bad news” theme is causing Equities to sell off as thoughts of less Fed action is being priced into the curve. S&P has broken early January lows, while TNX has exceeded last Spring’s highs at 4.74%. With regards to SPX, the most likely target lies near 5700-5725 for SPX, or around 100 points lower. Breadth is decidedly negative as might be expected at around 6/1 negative, and the volume is around 2/1 negative, but not nearly as capitulative to think that lows are imminent today- ARMS index, or TRIN is trading.66 and we’ll need to see readings nearly at 2 to think that fear is setting in.
Small-caps have not responded positively to the recent backing up in rates and the last couple days of weakness have suggested a brief move down to new monthly lows might be needed before the Russell 2000 ETF (IWM -2.53% ) gets to support. I’ll discuss this in tonights report but it appears still early to thinking this is bottoming
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