Week of Jan 12 2025

The technical deterioration is particularly evident in market breadth metrics, with only 51.49% of S&P 500 stocks trading above their 200-day moving averages despite major indices having recently approached all-time highs. Critical technical levels now under intense focus include the NASDAQ-100 at 20,880 (an important CTA trigger level), the 10-year Treasury yield range of 4.75-5.00%, and the S&P 500's recent trading range support. The collapse in systematic stability indicators is especially concerning, with SPX gamma at the 21st percentile and leveraged ETF rebalancing needs representing increasingly large portions of end-of-day trading volumes, particularly in the NASDAQ where they account for 27% of closing hour volume.

The macro narrative faces an immediate test with Wednesday's CPI report and the start of Q4 earnings season, where major banks' results and commentary will set the tone. Consensus expectations for 7.3% earnings growth - the second-highest pre-season forecast in three years - create significant event risk given elevated valuations (21.7x forward P/E) and the collapse in Fed cut expectations to below 30bps for 2025. Additional catalysts include NFIB small business optimism, retail sales, and housing data, which will help shape the narrative around economic resilience versus inflation risks.

Looking ahead, the left tail risk centers on a "fashionably late" hard landing scenario where the Fed, having potentially moved too early to signal cuts, finds itself constrained from responding to a growth slowdown amid sticky inflation. The right tail risk involves a "melt up" scenario driven by continued economic resilience, particularly if productivity gains contain inflation pressures despite robust growth. However, the simultaneous breakdown in stock-bond correlations and poor market breadth suggests the system may be particularly vulnerable to disorderly adjustment in either scenario.

This complex backdrop helps explain recent sentiment indicators reaching one-year lows across multiple measures, though contrarians note such extremes have historically preceded recoveries 88% of the time since 1982. However, the current combination of technical vulnerabilities, extended valuations, and challenged policy flexibility suggests any such recovery may require successfully navigating next week's gauntlet of data and earnings while avoiding several clear tripwires in rates and currency markets. The market's response to bank earnings and CPI data will likely determine whether current range support holds or if a deeper correction is developing.