Attack the Week (ATW)

January 12, 2025

Sunday Thoughts

In a market phase where pundits are toppling themselves on whether we see tops and bottoms in either equities, bonds or commodities, it’s important to remind us of a good old saying, which has served me well over the years: “Only Baboons pick bottoms”.

Source: Dall-E

In the world of investing, many participants try to "pick bottoms" — the precise moment when an asset or market reaches its lowest point before rebounding. While this can seem like a clever strategy, it's futile. Instead, focusing on relative attractiveness across markets is a far more reliable way to navigate the financial landscape.

I have mentioned the ongoing narrative of how bond yields look attractive. They already did 50 bps ago when you look at US Treasuries.

The ongoing term premium expansion took a breather after last Friday’s payroll (see more details in the 10 charts for the week below). With current Fed funds at 4.33%, we finally have positive carry for levered players to be enticed to start receiving rates relative to short-term rates, and maybe some will. This, however, is predicated on policy rates remaining at current levels or lower. With current macro dynamics, bondholders rightly are asking for more premia to hold longer-dated rates in case the Fed needs to hit the brakes again. Where is the right spot? Nobody knows, but technicals would suggest we are not there yet. Bonds will be a great buy again, but one has to be patient. I am also not hearing many talking about 6% or higher yields yet. Once “experts” are talking about the Fed hiking and/or 6% Treasury yields, sentiment might be about to turn. So, I would put that on your radar.

History is littered with examples of failed attempts to pick market bottoms. Consider the financial crisis of 2008. Many tried to time the exact bottom, but the volatility and uncertainty made it nearly impossible. The same applies to tops. In the late 1990s, many tried to call the peak of the dot-com bubble, often selling too early or too late. Rather than trying to pick bottoms or tops, it’s often better to look for relative performance and divergences for clues.

I wrote about how I identify market structures when looking at equities in the post below. I would conclude that the SPX is currently in a weak bullish phase, which is characterised by decreasing market breadth and diverging trends. Once again, the technicals here also look bearish, but if we are indeed forming a top, this could be a multi-week process.

Let’s now read Macro D’s latest thinking before we briefly scan the week’s upcoming calendar. We then check out the 10 most important charts for the upcoming week before scanning the newest output of our asset allocation model.

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Let’s go!