The Week Ahead
Volume 126 - Give It Two Weeks, and You'll Forget This Dip Ever Happened
Good morning,
Markets were relatively volatile last week, to say the least... The sell-off on Friday dramatically reversed course about two hours before the close, with the S&P 500 rallying nearly 100 handles into the closing bell. This sharp intraday reversal underscores the point that last week's selling pressure was largely driven by aggressive positioning clean-ups, particularly within hedge funds trimming TMT exposure. The de-grossing seen in U.S. equities over the past fortnight has been notably high, ranking in the top percentile historically, emphasising the magnitude of this reset and panic.
FX / Macro - Not much has changed, yet…
This week’s main event is the Non-Farm Payrolls on Friday, a critical data point that I'll dig deeper into in my mid-week thoughts post. The primary drivers of price action, however, will likely remain positioning and flow dynamics rather than isolated economic releases.
Regarding the dollar (USD), positioning has become vastly cleaner. My stance remains neutral to slightly bearish, and I see limited immediate upside unless inflation expectations move considerably higher from current levels.
Recent tariff announcements have introduced fresh uncertainty into the macro picture, affecting trade-sensitive currencies. The USD has notably strengthened against commodity-linked currencies due to these tariffs, particularly with significant pressure on CAD and MXN. While I maintain my neutral-to-bearish stance on the greenback, it’s essential to remain vigilant, as further escalation in trade tensions could easily change things. Markets remain deeply concerned about Trump's proposed tariffs on China, Canada, Mexico, and potentially Europe. These are seen as growth drags and inflationary, complicating Fed policy decisions. While the market still largely underestimates tariff risks, sectors and regions most vulnerable have already begun repricing.
As for the Euro, I think the uncertainty that comes with tariffs will keep EUR/USD below 1.05 for now.
Single Stocks, Index & Vol
With such a significant and swift clean-up, this week sets up as a compelling buy-the-dip scenario. The aggressive moves likely exhausted systematic and fast-money selling flows, creating favourable conditions for a potential reflexive bounce higher. However, it's crucial for us to see technical confirmation before adding further risk.
Index Levels/Areas to Watch (ES1)
6040: This key resistance level remains the first significant hurdle. A decisive reclaim above 6040 would validate the bullish scenario and trigger further momentum.
6080: Clearing this level would firmly confirm momentum and potentially open the door for a renewed test of all-time highs (ATH).
For the week ahead, I expect 6040 to trade early on. NFP will be the deciding factor for whether we are ~6100 by the end of the week…
For the seasonality guys, the back end of February is the worst two-week period of the entire year. Now what?
Tech remains at the epicentre of volatility due to last week's aggressive de-grossing, yet the resultant positioning clean-up has provided attractive entry points in quality names. TMT stocks, in particular, have endured significant risk reduction. Despite short-term pain, the fundamental narrative in major tech names remains robust, particularly around the ongoing AI theme. Cautious optimism here remains warranted, pending confirmation from broader market moves. Positioning in U.S. equities has sharply dropped to near-neutral levels, effectively wiping out the optimism seen post-election.