Summary: The primary trend in equities remainsup with seasonality strongly supportive of a rally into the end of the year. Cyclical outperformance points to underlying market rotation as the Narrative Pendulum swings to healthy skepticism of the AI trade. Oil is trading at historic discounts and setting up for a potentially significant move, while BTC continues to trade like a wet rag amongst souring Strategic confidence.
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1. BofA’s latest Flow Show summary…
2. BofA revamped its Bull & Bear indicator to account for the increasing use of ETFs. Its new model triggered a sell signal on Oct 25th, and the indicator remains elevated at 7.8 (sell signals trigger > 8). This aligns with other short-term sentiment and positioning indicators. But more intermediate-term measures continue to show low net positioning amongst investors and hedge funds.
3. Last week’s ORCL-driven wobble shows that the narrative pendulum on the AI trade has swung back to healthy skepticism. BCA Research pointed out that 2025 “investment in tech equipment and software had reached 4.4% of GDP, nearly as high as at the peak of the dotcom bubble.” All signs point to this metric rising far above dotcom levels.
4. Despite the late week wobble, market internals remain broadly supportive of the bullish trend, with the one exception coming from LQD/IEF, which saw a big reversal off the back of the ORCL whiff.
5. The recent weakness is concentrated in the tech sector, while cyclical and value are seeing improving strength, implying rotation is going on underneath the surface (chart via @DeanChristians of Turning Point Market Research).
6. From Citadel Securities:
“We are entering one of the strongest seasonal periods of the year. The second half of December has one of the best hit rates of any 2-week period of the year. SPX has traded higher 75% of the time, with an average return of +1.3% (average positive return = +2.1%). Volumes are typically lower in the last two weeks of the year.”
7. Oil is at parity with silver for the first time since 1980. Historically, precious metals lead broader commodities at major inflection points, with oil eventually following suit.
8. Crude is compressing along a significant support level in the $55/56 range (green highlight). We’re agnostic on the short-term direction and are willing to play a tactical breakout in either direction. But in the longer term, we believe it is setting up for a renewed bull trend.
9. While the CoT data won’t be up to date until mid-January, I think it’s safe to assume that the sentiment and positioning picture hasn’t materially improved. Our multi-chart view shows both are at historic lows, while seasonality is about to turn strongly positive.
10. Some color from Goehring and Rozencwajg’s latest, “In 2004, when the last oil bull market began, the gold-oil ratio stood around 12. Today it is roughly 65. Energy’s weight in the S&P 500 has fallen from 6% then to under 3% now. Oil is cheaper and more under-owned than it was on the eve of its last great rally… The evidence now speaks plainly: the Permian has rolled. After reaching a peak of 5.73mm b/d in October 2025, crude output has slipped by roughly 100,000 b/d and has turned negative on a year-over-year basis. This decline in the Permian has, in turn, pulled total U.S. shale oil production down nearly 200,000 b/d compared with last year… Our models indicate the slowdown is fundamentally geological — rooted in the maturation of the resource — and therefore unlikely to be reversed by incremental engineering alone.
11. From Sentix’s latest, “The strategic bias for bitcoins continues to decline this week. The discount is 6 percentage points, adding up to a whopping 38 percentage points over the last 6 weeks. This means that the loss of confidence continues unabated, signalling a sustained willingness to sell in the crypto market. The recent price recovery is therefore on shaky ground.”
12. I think we’ll see crypto and risk assets in general rally into year-end. But… if vol returns, we’ll look to short the weaklings, which in this case is crypto. A daily close below its pennant would trigger a sell setup.
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Thanks for reading.
