Week of Dec 29 2024

A significant divergence is emerging between market positioning and technical indicators. Asset managers have built up $330 billion in equity futures exposure from just $40 billion in October 2022, while market gamma has collapsed from over $10 billion to $3.7 billion, removing an important stabilizing force. This comes as breadth measures deteriorate, with both NYSE McClellan Summation Index and Net New Highs turning negative for the first time since fall. The percentage of stocks above their 200-day moving average has fallen below 58% while the index trades more than 7% above its own 200-day average, a historically rare divergence.

The bond market continues to send increasingly concerning signals: the 10-year Treasury yield has risen 100bps since the Fed's September pivot, despite weakening economic surprise data. This divergence suggests growing skepticism about fiscal discipline, particularly regarding potential Trump 2.0 policies. Technical levels being closely monitored include the NASDAQ-100 at 20,830 (potential CTA selling trigger), the 10-year yield range of 4.75-5.00%, and the S&P 500's recent peak at 6090.27. The bond market's rejection of Fed policy is evident in record TLT outflows.

China's ongoing struggles present both a tail risk and a contributing factor to US exceptionalism. The failure of China's reopening boom, coupled with persistent deflationary pressures and declining bond yields, continues to drive global capital toward US assets. The stark divergence between Chinese tech performance (-52% since January 2021) and US tech (+67%) underscores this dynamic. Xi's policies, particularly regarding tech regulation and state control, appear to be exacerbating rather than alleviating these challenges.

Near-term technical caution is warranted given stretched positioning and deteriorating breadth, but structural support for US assets remains strong, particularly given the lack of compelling alternatives and continued technological leadership. The consensus clearly favors US assets, but the extreme consensus itself may prove to be one of the greatest risks to navigate in early 2025. This complex backdrop suggests exercising tactical caution while maintaining strategic exposure to secular growth themes, particularly given the historical tendency for breadth divergences to require 6-9 months before meaningful mean reversion.

Looking ahead, key catalysts include the January 10th jobs report, Q4 earnings season starting mid-January, and ISM Manufacturing data on January 3rd. The left tail risk centers on a disorderly unwind of extreme positioning if real rates rise sharply, while the right tail scenario envisions a "goldilocks" outcome where productivity gains contain inflation despite robust growth. Political developments loom large, with markets pricing high odds of increased China tariffs under a second Trump administration while remaining remarkably sanguine about political risk to dollar hegemony.