Research Notes

Strategy

• Our Asset Allocation model saw a significant shift this week, and Jeff deGraaf shot a quick video explaining why. Watch the clip here.
  
  
• The beta-to-momentum rotation remains intact -and we think it has further to run.
   
  • Beta has only slipped from the 100th percentile to 97th...
  • While momentum has climbed from the 20th to 44th percentile, signaling more upside potential in the shift.
    
  
  
• The dollar's pullback from last week's near-overbought reading hasn't derailed its rebound. We still see scope for a move toward the 200-DMA before the trend exhausts.
  
  
• Energy seasonals are turning -historically the weakest sector at this stage of the Market Cycle Clock, with 3-month forward seasonals working against crude through November.
  
  
  • In case you missed it, look at the chart of the week for Market Cycle Clock update.

Economics

• Continuing claims jumped to 1.974 million for the week ending July 26. Over the last year, continuing claims have advanced 5.2%.
   
  • While continuing claims are rising, initial claims remain relatively low. This suggests hiring rates have softened, which in turn will push up the level of unemployment over time.
  • Neil runs a simple model taking ISM employment metrics along with ADP to make an estimate for NFP. This has shown that the private data tend to confirm the message of the official statistics, especially after the revisions.
  
  
• Governor Waller is emerging as a top candidate to serve as the Fed's next chair. Waller tends to be forward looking, rather than data-driven and would provide deep knowledge of the Fed system as a whole.
  
  
• Coming off the tariff ledge had led to an improvement in CEO Confidence with the Conference Board data improving to a 49 in Q3 from 34 in Q2 - though still consistent with net pessimism.
   
  • Important to note however that more CEOs see a net reduction in workforce, with 34% responding as such (highest since Q4 2020).
  
  
• A popular viewpoint being thrown out there goes like this: it makes perfect sense that May and June were revised down and July perked up due to trade turmoil. Neil sees a few problems with this story...
   
  • This assumes its uncertainty around tariffs rather than the actual tariffs that is the main problem. The effective tariff rate has been climbing for the last few months.
  • We still have additional section 232 tariffs coming, so while we may be through the worst of it, expect trade skirmishes in 2H2025.
  • Growth was already slowing before the jobs data, and the revisions basically bring payrolls more in-line with GDP - GDP rose just 1.3% SAAR in 1H2025.
  
  
• In June, real goods exports declined 1.5% following a 5.5% drop in May, and we are expected the trend to continue as the July ISM new export orders slipped 0.2pts to 46.1, marking the fifth consecutive month in contraction (<50).
   
  • Staying with ISM, service sector activity stalled in July to land at 50.1, notably weaker than expectations of 51.5. This was led by a weakening in key sub-components with business activity falling to 52.6 and new orders to 50.3.

Research Notes

Economics

• US labor market continues its downtrend. Weekly job postings continue to trend down, layoffs picking up, quits are cooling.
  
  
• March data showed broad economic weakness, with declines in services, confidence, housing, and commercial real estate.
  
  
• Rising inflation, weakening job outlooks, and cautious business spending point to growing economic strain.
  
  
• Home prices are cooling, which may curb spending as household wealth dips and the savings rate edges higher.
  
  
• The rebound in capital goods shipments looks fragile, with growth mostly tied to tech and broader investment plans weakening.
  
  
• New tariffs could cut 0.5% from GDP, strain trade ties, and raise car prices before production shifts take effect.
  
  
• Auto repossessions are at their highest since 2009, and tariffs may push buyers to the used market, keeping prices elevated.
  
  
• Despite trade tensions, signs of de-escalation and strong profits offer some cushion, with markets already pricing in much of the downside.
  
  
• Q4 growth was lifted by consumer and government spending, but with investment falling and key supports fading, a broader slowdown seems likely.

Strategy

• Market technicals show potential for a rebound. We think Mag7 approaches 50dma and potentially crosses through, getting to overbought, high beta stocks slowly recovering, and excessive outflows in IWM and SPY could fuel a tactical bounce.
   
  • Remember, this was a beta-driven correction, not a momentum-driven one.
    
    
• Bullish signals may re-emerge if a high percentage of stocks move about their 20dma and hit 20-day highs, suggesting a reassertion of the bull trend.
  
  
• Despite heightened policy uncertainty and a dark cross in tech, strong credit markets and sentiment tied to returns suggest the current pessimism may be overdone.
  
  
• Semi's continue to weaken, with even "good" ones coming under pressure.
  
  
• Staples pulled back at resistance levels, maintaining relative downtrend. Sharp unwind in beta and extreme underperformance suggests continued downward pressure.
  
  
• Transports reiterate bearish trend but flagging oversold and in "seller's frenzy". Expect short-term tactical bounce but fade the move.

Policy

• Debt limit deadline ("X-Date") likely between July and October, with resolution hinging on reconciliation or bipartisan deal amid uncertain cash flows.
   
  • Delays risk market volatility and a Moody's downgrade, raising U.S. borrowing costs.
    
    
• Trump will announce reciprocal tariffs on April 2, targeting about 15 key partners; recent moves on oil, autos, and threats to the EU and Canada may be strategic leverage.
  
  
• Section 232 is being used more broadly to justify tariffs on national security grounds, covering autos, copper, timber, and pharma, with an emphasis on U.S. production.
  
  
• Tariff timing and scope remain unclear, with Trump using them as a flexible tool, adding to market uncertainty.