The Week Ahead
Volume 120 - Another stock in the trillion dollar market cap club but still no santa rally (yet)
Good morning all,
I hope everyone had a restful weekend.
This is my last Week Ahead before Christmas, and perhaps the final one for the year, as markets transition fully into holiday mode. With SPX 2w rVol at just 8%, the season's calm appears to be setting in so not much to write about. The year-end is almost upon us (so is my annual Year Ahead post)…
My year-end trades continue to work well
SPX Dec 20 5850/5950 risk reversal, initiated at -4.20, is now trading at 112.
SPX Dec 20 6000/6100 call spread, entered at 27.9, is now at 59.
I think the returns on these trades reflect the broader market optimism since entry, especially as mega-cap tech continues to trickle higher quietly (yet participants remain so underweight). Mag7, a clear post-election winner (my election trade), saw Tesla surge from my average at 225 to the current price 436, cementing itself as a retail and institutional darling yet again. Retail engagement has visibly surged, evidenced by explosive volumes in options for names like Tesla, which traded $265bn of options in a single day last month… if you recall, someone did say that retail would dictate the next move not so long ago.
FOMC
The Fed will most likely deliver a 25 bps rate cut this Wednesday, marking the third consecutive cut. However, expectations for a "hawkish cut" are high, with Powell likely to signal a slower pace of easing in 2025. The updated SEP will reflect higher growth and inflation forecasts for 2024, as well as a median 3.6% funds rate projection for 2025—signaling limited room for further cuts. Powell's message will be that the Fed isn’t in a hurry to cut further". Keep an eye on the new long-run dot estimate—which is likely to rise to 3.1%.
Single Stocks, Index & Vol
Equities remain well-supported, with tech leading the charge. Considering vol and last week’s “pessimism”, I think >6120 on ES1 is a conservative target for this week. Buybacks have been strong into year-end, but plenty of length is still to be added to Mag7 names; CTAs still have room to add. With only a couple of weeks into the end of the year, I see little reason for a sell-off, to rotate or reposition. Despite the recent dip in momentum factors, I think the dip can be bought here into year-end. Valuations remain a point of concern, particularly in tech - this I will touch base on in the year ahead.
Cyclicals are seeing solid inflows, supported by stronger economic data and resilient consumer spending.
Healthcare and Energy, in contrast, remain under pressure, reflecting defensive underperformance. Positioning in these sectors remains well below average, suggesting they could benefit from any rotation in 2025.
Commodities
Tactically bullish on gold, still holding a 2700/2800 GC spread, which costs 15.
Cut the copper long for a gain.
No view on oil other than the visible range 67-71.5.
Trade Idea…