Maintaining Risk Control Is Crucial as Market Sentiment Can Shift Quickly
2025.01.27 03:49
It’s been a volatile start to the year, with an abundance of expectations placed on what the new administration would do in its first weeks, days, and even hours of power.
We’re off!
This year, our January Calendar Range lined up with the inauguration, which sets up good inflection points for trading and analysis. In short, anything trading above or below the year-to-date high or low as of January 16th would suggest that it’s potentially changed significantly.
Since the first week of President Trump’s administration began one trading day later, it provides the potential catalyst to create breakouts and reversals immediately after the January range has been set.
Now that we’ve had significant moves in the market in the first week of the new administration, this week’s action can be used as a significant price level for a long time, potentially the whole year.
This analysis may seem a little too simplistic, but our January Calendar Range strategy has proven this simple indicator to be very effective for early detection of important trend reversals and the acceleration of durable trends.
This year the January Range is particularly likely to be significant due to the high level of anticipation of quick changes (executive orders) in policy. For example, the expectations of tariffs.
So one week into the new administration, what’s changed in a meaningful way since last week?
The primary way to look at the market through this lens of the Calendar Ranges is simply to look at the markets. Below you’ll see the ranges drawn on the 4 major equity ETFs.
The and have the strongest confirmation of a bullish breakout, so we’d expect these to hold the range high on a pullback. However, the market’s broad trend is more reliable when at least the SPY and are in synch, and that’s not completely true yet.
If the QQQ and breakdown below their Calendar Range high, it’s a warning that the upside momentum may have hit significant resistance. Likewise, a new year-to-date high in the QQQ and IWM would be a bullish confirmation of a January trend trade breakout.
This range analysis is extremely insightful on sectors and stocks as well; we’ll review the example below.
First, let’s look at the market’s response from a few other perspectives.
Investor Sentiment
As you can see in the chart below, retail investor sentiment as reported by AAII shows the bulls bounced back over the past week, jumping to 43% from 25% while bears dropped to 27% from 34%, bringing the bull-bear spread back into positive territory.
The chart below shows that the options market, as measured by the put/call ratio and skew, also turned more bullish.
Earnings Reports & Estimates
Roughly 80 companies have reported their Q4 earnings, and according to Yardeni Research,
“Better-than-expected earnings from US banks and the lack of Day 1 tariffs from President Trump likely restoked animal spirits. Analysts have raised their Q4-2024 earnings growth expectations from 8.2% to 9.1% y/y. We raised our estimate from 10.0% to 12.0%.”
Earnings season intensifies this week with over 300 companies and over 90 S&P members reporting. This will include 4 of the Magnificent 7. Tesla (NASDAQ:), Microsoft (NASDAQ:), and Meta (NASDAQ:) on Wednesday, and Apple (NASDAQ:) on Thursday.
The animal spirits and the charts may be bullish, and they can provide levels to manage trade risk, but actual earnings results and forward guidance are ultimately what matters most.
Zack’s created an interesting perspective with a historical summary of the 78 S&P companies that have reported so far.
The chart below shows that this subset of companies has reported results that growing on a sequential and year-over-year basis.
Interest Rates
The long bond’s decline (rise in rates) had been an increasingly significant headwind for bullish stocks. As with most market factors, this is not always obvious, and its impact is a function of the level of interest rates, the speed at which they are changing, how other markets are reacting (i.e. the ), and more.
After a relentless decline in the starting in early December, the TLT rallied from a few days prior to the inauguration through Tuesday the 21st and then settled down over the remainder of the week.
The chart below of the TLT would suggest that the long bonds may have found at least a temporary level to base.
For stock traders concerned that new policies could push rates higher in a market with the momentum of higher rates, this price action is a sigh of relief.
The impact of higher rates on stocks can be masked when looking at the indexes like the SPY or QQQ, which are dominated by large-cap tech stocks that can be less concerned with higher rates when they have high growth rates. However, the impact is more obvious when you look at rate-sensitive sectors or the broader market, as shown in the series of charts below.
A simple way to gain insight from the rate of change indicator (that’s based on 4 and 8-week periods), is to consider equity weakness during periods of bearish TLT readings to be more likely to lead to deeper corrections, and bullish periods in the bond indicator to be bullish for stocks, as long as the bullish bonds are not based on recession fears.
Notice in the charts below how the resumption of the TLT’s downtrend in Dec 2024 weighed even on the SPY which had rallied in the face of lower bond prices until that point.
The (RSP) shown below demonstrated quite clearly in 2023 how it can be more sensitive than SPY to the rate of change in the TLT.
IWM shown below is also more sensitive.
Finally, as you’d expect, the is very sensitive to the rate of change in the TLT. This is evident most recently by its peak in 2024, coming shortly after the TLT peaked in August.
What Next?
The TLT’s stability over the last two weeks isn’t bullish, and as you can see by the chart of TLT, it’s not a significant-sized move. It is, however, a significant development considering its bearish trend and investor’s bearish concerns leading up to the inauguration.
A simple way to keep tabs on the importance of the TLT in the coming weeks would be to watch its January Calendar range.
The chart below illustrates its 2024 price action around that year’s range and shows the significance of a break over this year’s high.
If TLT resumes its downtrend, a simple way to keep tabs on the most vulnerable areas of the market is with the calendar range. Currently, the only sector down year to date in the sectors summary table is Consumer Staples, which is a rate-sensitive sector.
As you can see from the calendar Range chart below, it’s not bearish, but it’s lagging the market. Use it to confirm the stock market’s sentiment on the direction of interest rates.
As Keith explains in more detail in his weekly video and the Big View bullets, there’s a strong risk on tone to the market supported by broadening strength in many technical indicators. Additionally, the new administration will certainly keep investors on their toes with volatile news flow so there’s no better time than now to be aware of the technical strength of the market.
The news flow will change often and quickly. As a discretionary trader, you’ll have a lot of opportunities to hone your skills in interpreting the market’s strength by its response to the news.
While our discretionary trading analysis above looks to anticipate the market’s trends with a flexible weighting of a collection of tools and analysis, MarketGauge’s algorithmic trading models navigate the market without the need for subjective analysis.
As success in active investing is a function of timing entries and exits, there are times when algorithmic models and discretionary strategies may seem at odds, yet still, both come out ahead in the end. For the discretionary trader the positions of the models can serve as inputs for analysis.
Our models that trade stocks based on our trend strength ranking system are all off to a strong start in 2025, with returns ranging from 3% to 10% year to date.
The Small and Mid-Cap Earning Growth strategy is leading, up 10% having reached intermediate profit targets in and . Both positions remain in the model and are highly ranked. This model will rotate into some new positions this week, which may include companies in the power and retail industries.
Our Large Cap Leaders, which focuses on stocks, is also outperforming, up 6.5% for the year vs. 3.7% for the SPY. This model has also been led by an energy stock, , and a luxury retailer, .
Our Sector model, which trades the strongest three sectors based on our trend strength ranking, is also led by the consumer, with its leading position being in .
Summary: Positive price action across all four key U.S. equities indexes (with the S&P making new all-time highs) and a breakout of both the monthly and six-month calendar ranges, along with a strong improvement in foreign equities puts us in a strong risk-on environment. Considering potential severe tariffs, maintaining risk controls is crucial as the markets can shift quickly.
