Welcome to Our Sunday Session
Welcome to our relaxed Sunday market session, where we take a look back at recent market movements, review the fruits of our hard work over the last weeks and months, and cast our eyes forward to what’s coming. Together, we’ll uncover the tasty morsels of macro trading insights, dig deep into the hidden corners of the market to reveal creepy crawlies and other unmentionables, and help guide your steps—whether into the darkness or toward the light of market opportunities.
January 2025: Elevated Risk Environment
January presents a complex environment with several significant events likely to drive market volatility:
- Major catalysts: Federal Reserve minutes, payrolls, Consumer Price Index (CPI) data, and the presidential inauguration are scheduled for the month.
- Potential market drawdown: A decline of up to 10% is a plausible scenario given the confluence of these factors.
Given this backdrop, a cautious approach is warranted, with a focus on risk assessment and defensive positioning.
Sector Performance: Mixed Results

Oil and Gas: A December Outlier
Oil and gas drilling emerged as the only sector with notable gains in December. Speculation about potential deregulation under a new administration has fueled (pun intented) interest, but political shifts remain a key risk to this nascent recovery.
Consumer Cyclicals, Technology, and Financials
Post-election performance has been surprisingly robust in consumer cyclicals, technology, and financials. The classification of major companies such as Amazon (consumer cyclicals) and Google (communication services) contributes to this trend. Despite rising interest rates, financials have underperformed, possibly due to regulatory concerns. This presents a potential contrarian opportunity should deregulation efforts gain traction.
Health Care and Real Estate
Health care has faced challenges since September, highlighting the need for data-driven analysis over market narratives. Rising interest rates continue to pressure the real estate sector, a predictable response to tighter monetary conditions.
Market Breadth: Signals of Fragility
Internal market indicators paint a concerning picture:

- Declining breadth: 70% of December’s trading sessions featured more declining than advancing stocks.

- Equal-weight underperformance: The equal-weight S&P 500 has lagged the cap-weighted index by 13% over the past year, emphasizing the dominance of mega-cap stocks.

- Smart money selling trouble ahead: Decline in funding spreads suggested institutional investors are selling or scaling back futures longs, this is significant as its continued despite the small bounce last week.

- But retail are all in: Retail and broad market positioning is stretched here, this sets markets up for a potential sharp move lower if a catalyst emerges and we have plenty in the next few weeks.
The smart money is not always right and if they are caught short and wrong we could see a short sharp shock squeeze higher.
But they don’t call it smart money for nothing…..
Volatility Dynamics: Complacency or Calm?

Vola is chilling right now, Pina colada by the pool style…but it never lasts does it.
- VIX levels: The CBOE Volatility Index (VIX) remains at relatively subdued levels, which may indicate complacency among investors.
- VVIX analysis: The VVIX, which tracks the volatility of volatility, often spikes above 110 during periods of heightened market stress. Monitoring this metric could provide early warning signals.

- Gamma does matter: The chart above from GS shows that when market maker gamma falls markets move

- Mr Ambassador your spoiling us: 2023 and 2024 while not without their ups and downs never really delivered a punch on the nose to traders.
As big Mike once said everyone has a plan until…what’s your plan for ~-14% down in SPY?
Precious Metals: Strategic Opportunities
Gold might not be the worst plan in the world. It remains a reliable hedge against geopolitical and economic uncertainty, but silver presents an intriguing opportunity:

- Gold/silver ratio: The current high ratio suggests potential for silver to outperform as the metals revert to historical norms.

- Leveraged exposure: Instruments like the GDX (gold miners ETF) or individual companies such as Barrick Gold may offer amplified returns in a favorable market environment.

- Closing the gap with GDX: GDX call spreads setup really well if you want to add some spice to a trade on the shiny metal.

- Silver a safer bet: Silver has a more reliable correlation with gold and while not quite as juicy as GDX it still lines up well and is my pick to trade Gold higher over the next weeks. I use multiple axis to line up my strikes.

- The only way is up: So my assumption here is Silver closes that gap as its the Gold Silver ratio is on the highs and I’m short and longer term bullish precious, so I set my long strike at the gap close level and the short at recent gold highs.

- Suits you Sir: The payoff is pretty decent for what looks like a very clear setup, any general upward pressure on precious will get us there faster.

Looking at you Donald….
Outlook for January 2025
The confluence of major events and reduced market liquidity increases the likelihood of significant volatility:
- Institutional positioning: Data from Goldman Sachs indicates heightened short-selling activity among hedge funds.

- Tactical advice: Reduce risk exposure and reassess portfolio strategies ahead of inauguration day to avoid being caught off guard by sudden market movements.

Strategic Considerations for 2025
- Risk management: Adopt a defensive stance in January, given the elevated risk environment.
- Sector opportunities: Monitor financials and equal-weight indices for signs of rotation away from mega-cap dominance.
- Volatility indicators: Pay close attention to the VIX and VVIX as tools for gauging market stress.
- Precious metals focus: Explore silver and mining stocks as potential hedges against inflation and market turbulence.
Remember you don’t win the league in January, and you won’t make your budget in February, but you sure as hell can get your ass handed to you.
Sitting on your hands and watching the fireworks while placing some small bets and working on your risk game is my advice, maybe with a tasty beverage within reach, but you know, not investment advice…..