Hello All,
It has been quite the week in the markets… between the initial Deepseek scare / “grey swan” in the markets on Monday followed by mega-cap earnings / FOMC yesterday & lastly to round off the week, we have PCE #’s tomorrow. As of now, the week has been led by the Dow as we’ve more so seen a bit of a rotation to value / cyclicals whereas the Q’s have been the worst performing index on the week, just under -130bps for obvious reasons… (Deepseek panic on Monday).
We recently published our ‘25 Outlook / Year Ahead which has a plethora of coverage on a wide variety of topics / themes as we get ready to head into ‘25 after coming off a strong ‘24 & for those who would like to read & prep for ‘25, I included a link to the report / write-up here.
Lastly, earlier this week, I published the follow up educational piece which has been highly requested and majority of the topics covered were all suggested by you all, so I hope you find good benefit.
For those who may have missed, a link to Educational Piece Part: Deux can be found here.
For those who may have missed the first educational piece, I included the range of topics covered below along with a link to the piece for those who would like to go back and read:
- General background / knowledge on all option strategies
- In-depth talk on risk / reversals & how to go about expressing / utilizing them
- Options Structuring
- When to used naked calls / puts vs. spreads
- Choosing expiration dates
- Identifying key pivots / supports / resistance zones
- General briefing on stock gaps
- What to look for in regards to fundamentals
- Implementing fundamental / macro / technicals into a trade
- Hedging
- Creating risk/reward setups
- Taking profits / managing losses
- Overall Process
- Book recommendations
A link to the first educational write-up can be found here.
I’m not going to waste much more time & am going to jump right into the recap below.
- SPY
It’s been a bit of an exciting week in the markets with volatility at first picking up on Monday from the “grey swan” caused by the Deepseek scare, & then yesterday, we had FOMC which didn’t include too many surprises & lastly, to finish the week off, we have PCE #’s tomorrow.
Let’s talk a bit about FOMC… for starters, the expectations for the meeting were pricing in a 96.8% chance of a pause which was indeed the end result. In regard to Powell’s actual speech, I would argue he tried to keep it as neutral as possible with a slight hint of a dovish lean, but in general, the main message was that the Fed needs more data to have confidence to resume the cutting cycle & essentially February & March datapoints will be VERY important given the next FOMC meeting is not until March. In regard to the inflation aspect, one statement that stuck out to me which is something we have directly discussed these last couple of weeks is that Powell acknowledged OER / Shelter & given recent declines, it should generally act as a bigger tailwind to get disinflation back on track given they’ve generally remained laggards, so this drop off is a bigger positive. Another statement that stuck out was Powell stated every member agreed that they are WAY above neutral… so, the Fed is indeed itching to cut / lower rates, but they just want a bit more confidence in regard to the inflation aspect to do so (disinflation resuming on path). Overall, I would still say it was a fairly Goldilocks conference and Powell even acknowledged January’s data as a nice improvement on the inflation front, but again, the Fed needs to see a bit more data before fully committing to resuming the rate-cut cycle (And or if the economy starts to drop-off, as again, Powell reiterated the Fed will remain supportive of the labor market / cut rates further if weakness does show up in labor / economic data). And lastly, the ONE big question for this FOMC meeting was whether or not if Powell would try & be political… similar to how his speech went in December of this past year. SEVERAL individuals whom were asking Powell questions had to do directly with Trump… almost as if they were trying to bait Powell to take a jab at Trump, but Powell rejected / ignored every single question in regards to Trump & more so responded with a quick & witty answer to just generally avoid the question… I’d say that was a general positive as well.
In respect to Spooz, not much has changed since Tuesday… we did see a bit of volatility off of the FOMC statement as some wording was slightly changed, but Powell then re-assured the change had zero signal (in regards to inflation specifically) & the markets then rebounded & Spooz ended up finishing off the day just a tad lower. Earlier on in the week on Monday, we did end up monetizing half our March puts we bought last week, which ended up being quite timely, but booked the 80ish % gain to monetize & take some gains given the size of the drop / ramp in vol that we saw (also turned out to be a great decision as that was essentially the low for the week thus far).
Today, we did end up filling the island-top gap that was established on Monday which is quite bullish as gap downs that tend to fill quickly show the strength in buyers whereas gap downs that don’t fill quickly tend to show the strength in sellers… even-though we did fill the island-top gap, we do still have PCE #’s tomorrow, but in general, I think we need to see Spooz firmly close above 6100ish & flip that resistance to support, as otherwise, I think bears can continue to have some lean / edge in the interim given 6100ish has now marked two prior interim tops (even-though this interim top was catalyst / news driven by Deepseek, BUT sellers did still emerge rather aggressively). The low on the week thus far did coincide with the 20d along with 5950ish / bull-gap below (highlighted demand zone) & I think in general, markets will remain supported as long as the bull-gap below remains / bulls maintain above the 20d (5950ish)… essentially a ping-ping for now in the interim until one side ends up giving, but if we were to see these recent local lows falter (potentially from a hot PCE although I think it would have to be a real scorcher), I think we’d likely go on to fill the next bull-gap below near 5900 - 5850ish which also happens to coincide with a support TL dating back to the late ‘23 lows, so in general, do expect it to be a firm support if tested.
The BEST possible outcome for bulls at this given moment is a gap up above 6100+ & continuation / follow-through onwards to new ATHs to get us out of this recent range-bound / consolidation action since the election.
- QQQ
We’ve mostly made it through Mega-cap earnings (Apple reported after-hours), but we do still have Google next week, but as of now, the Q’s are still hanging in there & today, tried to work up into the island-top gap above, but MSFT along with the lackluster action in Semiconductors / other areas in tech generally weighed on the Q’s which more so caused a general rotation in markets to other sectors… mostly Cyclicals / Small-caps / EMs & Commodities to be specific
Earlier on in the week, the Q’s did end up finding support on the TL dating back to the August ‘24 lows & thus far as the week has progressed, it continues to look like a higher low has been established, but I do still think we need to see the Q’s ultimately firm up above 530ish, as otherwise, we could be in for a bit more downside volatility. If we see the Q’s firm back up above 530ish, there isn’t much stopping the Q’s from heading towards 537ish / ATHs, but otherwise, if these recent local lows falter near 510-515ish, I think we could see the Q’s retrace lower & retest the local lows made earlier on in January near 500ish.
In respect to Mega-cap earnings, majority of the names were positively received besides Microsoft & a bigger reason was due to their guide which was related to FX headwinds, as otherwise, they had a fairly good report as well (slight miss with Azure, but otherwise, nothing out of the ordinary). We did get re-assurance in regard to Capex from META & as a result, the power-generation names went on an absolute tear today (AI infrastructure names did well too) … granted, the market went from pricing in “we need power” to “we need no power” back to “ok, maybe we actually do need power.” As of now given we have made it through all mega-cap earnings, I do think we need to see the bulls go on to make a higher high sooner then later… this recent high made in January after the recent decline has thus far turned out to be a lower high… if we start to decline from here & or resolve back lower, it starts to paint the picture of a trend of lower highs… not something to freak out about as it likely also means capital is rotating elsewhere in the market / breadth is broadening which is healthy as well, but just something to be mindful of.
- IWM
Small-caps have had a fairly muted week this week, but ended up being the best performing index today, as again, yesterday’s FOMC conference was fairly goldilocks (Powell discussed the setup is there for disinflation to start resuming / economy remains strong) & in regard to today’s data, GDP did come in slightly lower than expected, but Consumption came in better than expected along with Jobless claims, so in general, it was more so Goldilocks data. The only negative of today was new home sales missing, which the market initially dropped off the headline, but as the day progressed, the indices worked back higher to days highs & shook it off… as at the end of the day, bad news ends up translating to more cuts being priced in / a Fed that leans more dovish & or supportive of the economy, which after the rate-tantrum in December / freakout of nearly no cuts being priced in along with a potential hike, the market should generally take it as a positive as long as the economy doesn’t start to seriously drop-off in a rapid state.
As of now, again, not much has changed but IWM is still basing / flagging above 226ish (breakout zone out of prior range) & a measured move out of the current flag should propel IWM higher to the 234 / 237ish range above (soft & or more tame PCE print tomorrow would do the trick)… for the further upside followthrough, again, we likely would need to see bond yields continue to come in again along with potential for a better than expected PCE print tomorrow to really get the next leg going to the upside in small-caps.
On the contrary, if we were to see this flag fail to materialize & or IWM starts to resolve lower (hotter than expected PCE #’s / 10Y starts working back higher) & this breakout above 226ish proves to be a false one, we likely will see IWM work lower to test the CPI bull-gap below near 224 / 222ish which also happens to coincide with the 20d as well and should be a generally stronger support… if it does falter, we likely will see IWM completely fill the bull-gap into 219ish before finding a more firm support & it also sets up for a potential higher low as well along with the 200d sitting just below for added confluence of support.
- DIA
Again, not much has changed since Tuesday, but as of now, the Dow has been the best performing index on the week & is sitting up just over 100bps on the week. DIA has worked back up right towards the prior range (444 / 450ish) from the November / December period & is once again being met with 450ish / prior resistance where DIA ended up topping out… fairly simple, but for further upside & or for the continued rally to be sustainable, bulls would like to see 450ish flip from resistance to support to signal higher highs, but otherwise, I do think 450ish on DIA needs to be respected until proven otherwise.
If we were to see these highs falter (450ish continues to come in as resistance), I do think we could see DIA start to retrace lower towards 440 / 437ish near the 50d, but otherwise, there isn’t much bearish about DIA at all here & the general broadening / rotation (we saw more of this today) is quite healthy for markets as well. On a bigger-picture view, I would still argue the ultimate / bigger LIS is 430ish which coincides with the big CPI bull-gap from earlier on in January highlighted below & more so should act as a bull / bear LIS… faltering below should lead to a gap-fill into the 425s, but as long as the bull-gaps below remain supportive, bulls will continue to remain with edge on a medium / longer-term timeframe.
