🍔Good News is Bad News

Plus: These stocks are about to break out!

Welcome back! Seven trading days into the new year and already a lot has happened. This is going to be a deep dive with macro, bonds, liquidity, tech stocks, politics, technicals, and stock picks. So let’s dive right in.

Market volatility continues

SPX was down -2% on the week. Markets remain in a choppy, volatile pattern with momentum failing and leading stocks taking a step back. @ConnorJBates_ on X had a quote and chart to put this in perspective: “Every single year there is a couple good trading periods that lasts anywhere from a few weeks to a few months… The majority of the time, the market is chopping around with no real direction and heightened volatility.”

Bullish periods last a few weeks to a few months

The VIX index is still high. As we have said many times, after big volatility spikes, vol tends to cluster and remain elevated for a week or more. For the past two weeks it has stayed in the 17-20 range; not high enough to trigger a full-blown selloff, but not low enough for the next rally to start. Truly an awkward middle ground.

Volatility clusters and remains elevated for days

Good news is bad news

This week we had several hot econ datapoints in job openings, unemployment claims, payrolls, services PMI, ISM prices paid, and inflation expectations. All pointed to the economy running hot and therefore higher inflation and fewer Fed rate cuts in 2025. It can be counter-intuitive to think that markets got spooked by a strong economy, but this is the definition of forward-looking.

Hence we find ourselves in a good news is bad news regime, at least until markets become content that inflation resumes its slide down. That way the Fed can continue cutting, at which point bad news will be bad news again. That’s the problem with goldilocks environments — it’s a fine line between too hot and too cold, and markets tend to overreact to swings in both directions.

In the meantime, we heard comments from several Fed speakers that sounded cautious about further easing interest rates. It seems runaway inflation is becoming consensus. When the market is pricing something as a certainty, it pays to think about the other side — what if the Fed cuts more? The key is to then identify a news failure (market reacts positively to further bad news) to signal the top is in.

The culprit: Bonds…

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• Bond market selloff

• Liquidity dipped in December

• Big moves in tech

• Canada loses a prime minister

• Hedge funds are selling

• Stocks that are breaking out

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