Navigating the Fed's New Tone

That message seems to be waking up the bears, as traders are now pricing in a 68% chance of a Fed rate cut in March, down from an 86% chance last week.
(The Red circle shows the aftermath of the Fed Minutes, while the green circle indicates the market reaction to the FOMC Dec meeting).

Source: ZH

Perhaps it’s “sober January,” as everyone’s back from vacation; this week is becoming a reality check to the past several weeks of euphoria, where the S&P nearly crossed its all-time high.

The markets still forecast double the number of cuts, or 6 to be precise, compared to the Fed guidance of 3; green shading represents the FOMC meeting.

Source: ZH

Past leaders could become future laggards.

It’s not a secret that the tech darlings have been carrying the market on their shoulder in 2023.

The S&P 500 ended 2023 with a remarkable nine-week run of consecutive gains, driven by the excitement over artificial intelligence (AI) and expectations that the Federal Reserve would begin reducing interest rates soon.

Source: Edward Jones

Last year, a few large tech companies, notably the “Magnificent 7” (Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA, and Tesla), greatly influenced the overall market. By mid-year, these companies were behind 90% of the S&P 500’s increases, largely thanks to advancements in AI that captured investors interest.

However, the average stock didn’t perform as well, mainly staying the same until mid-November, affected by ongoing concerns about high-interest rates. This was evident when comparing the S&P 500 Equal Weight Index, where each stock is equally weighted and showed no growth for the year, to the 100% gain of the Magnificent 7.

Here is another look at just how wildly valued the Mag 7 stocks are

The market cap of the 7 high-flying stocks stands at nearly 12 trillion, equating to that of the stock market size of Japan, Canada, and the UK combined!

Source: Apollo

On the other end of the spectrum were most companies in the S&P 500.

A record-high share of stocks in the S&P 500 have underperformed the index this year.

Source: Appollo

This divergence, so-called “bad breadth” in the U.S. stock market, is nothing new, but periods when this metric is elevated proceed with recessions, as indicated by the shaded areas.

, the market has become top-heavy, relying on a few household names to continue to drive virtually all the gains in the S&P 500, which leads to over-concentration risks.

The January Effect

Historically, January has been one of the strongest, if not the strongest, month for equity returns.

Source: WSJ

Historical data from Dow Jones Market Data, dating back to 1928, shows that the S&P 500 typically sees an average increase of 1.2% in January, with a success rate exceeding 60%. Similarly, the Nasdaq Composite has historically performed best in January, averaging a 2.5% gain and experiencing upward movements 65% of the time.

Investors often purchase fresh shares following December’s tax-loss selling, which is done to balance out realized capital gains. Additionally, there’s a belief that investors have increased funds available for market investments in January, often due to receiving year-end bonuses.

Investors long the S&P 500 using our 3x US 500

Alternatively, investors can short the S&P 500 using our -3x US 500

Investors long the Mag 7 using our FAANG+

Alternatively, investors can short the Mag 7 holdings using our -3x Apple , -3x NVIDIA , -3x Tesla , -3x Microsoft , -3x Alphabet , -3x Amazon , -1x Netflix .

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