Friday Paper Charts

January 26, 2024

Yesterday’s Model Alert Update highlighted a few noteworthy changes in Bonds (momentum switching to short) and early signs of a topping out in NQ.

Focusing on NQ, one can’t help but notice how the thesis of laggards catching up looks challenged. A Goldilocks impulse should lift all boats would be the common reasoning.

For overall indices and the SPX to advance further, those laggards need to start performing. Whenever markets have divergences, they resolve in one of two ways. Either we see a catch-up, or the leaders ultimately start rolling over.

My indicator of overall breath is also highlighting fuel being sucked out, with the number of stocks trading above their respective 20- 50 and 200 days has started to revert.

Coupling all the above information with weaker bond momentum and steeper curves, I think we need to be careful chasing equities at this current juncture. This is not a bearish stance, as momentum is still guiding us higher, but it is a good reminder to book some of the profits and await better entries.

Talking of Laggards, we also had the ECB meeting, with the presser led by one of the most loved leaders of our time, Madame Lag(g)ard, herself. You get the joke.

Unsurprisingly, the ECB is sticking to its position that a spring rate cut isn’t happening, but interestingly, the madame did not explicitly push back against a near-term rate cut, leaving markets with a dovish interpretation of today’s performance.

She noted that the council continues to believe that it is “premature to discuss rate cuts”, adding that the ECB is "data dependent and not date dependent”. The latter point was in response to journalists pressing her on whether she was happy to stick to the comment from Davos that the ECB could cut rates by summer, which she confirmed.

On the face of it all, their data dependency rather than focus on time opens the door for the data to potentially prompt a rate cut before summer. Overall, it signifies a small dovish change in terms of communication. 

Remember the US recession talk? Me neither.

Source: Bloomberg

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