Mid-week market update: Trump promised a flurry of executive orders to implement his campaign promises on the first day he took office. Amidst the flurry, the market breathed a sigh of relief as there were no major risk-off catalysts. The market is apolitical and it doesn’t care about the reversal of DEI policies, or whether a mountain in Alaska is named Denali or McKinley. Although there were threats of 25% tariffs on Canada and Mexico, and a 10% tariff on China, both to be put in place on February 1st, there were no instant tariffs that would have rattled markets.
Trump showed during his first term that he cared about the stock market. As he begins his second term, the Trump Put seems to be alive again.
As a consequence, the S&P 500 is testing its all-time high at about 6100. Even though readings are overbought, this could be a “good overbought” advance that takes the market to new highs, with upside potential at the dotted resistance line measuring at about 6300 by the end of January. On the other hand, it’s disconcerting to see a breadth indicator such as the percentage above the 20 dma (bottom panel) fall on a day the market is testing its all-time high.
Here are the bull and bear cases.
Sentiment isn’t stretched
An analysis of institutional sentiment, as measured by BAML Global Fund Manager Survey, shows that respondents are bullish, but conditions aren’t extreme. Stocks could continue to rally from here.
Trump’s decision on the TikTok ban was even more encouraging for the bulls. As a reminder, Congress passed a law forcing TikTok’s Chinese parent ByteDance to either shut down or divest TikTok by last Sunday. The bill was signed into law by Biden and upheld by the Supreme Court in a 9-0 decision. Trump, who originally opposed TikTok’s U.S. presence, changed his mind and signed an executive order delaying the ban for 75 days. More importantly, he left the door open for TikTok to continue to operate if the U.S. government could take a 50% stake in the company.
Combined with the absence of immediate tariffs on China, the TikTok decision was a signal to the Chinese government that Trump was willing to make a deal. The less threaten tone against China also raises the odds of a China growth recovery, which is the BAML Fund Manager Survey’s biggest possible bullish surprise.
Weakening breadth
I had been encouraged by evidence of broadening breadth in the market, but today’s test of key resistance is being accomplished on narrow breadth. While breadth divergences can last for months before stock prices take a stumble, this is an unwelcome development for the bulls.
Another concern is the bond market, whose rally had underpinned the latest risk-on episode. Bond prices are stalling at resistance, which is another warning sign.
A complacent market
So where does that leave us? While the Trump Put is probably in place, traders can’t rely on it as unexpected policy announcements and individual company’s results during Q4 earnings season could induce volatility at any time. In the meantime, the market looks complacent. The accompanying chart shows the implied volatility (IV) of near-the-money SPY options that expire on January 31, 2025. The top panel shows the closing IV readings as of January 17, 2025, the Friday before Trump’s inauguration, and the bottom panel shows the latest figures. IVs are flat to down, indicating complacency in an environment of uncertainty.
In conclusion, the S&P 500 could rally above resistance at 6100 and end the month significantly higher, but I am inclined to be cautious and fade any upside breakout. Uncertainty is high and the market is an accident waiting to happen. At the same time, my inner trader isn’t inclined to actively take a short position in the face of possible rampage of the animal spirits.