The Rotation Into Safety Is Here - But Is the Bull Dead?

1) RATES – There will be plenty of panicked narratives about markets this morning that will include Warsh at the head of the Fed.  Noise.  The Bond Market didn’t, and doesn’t, care.  The MOVE Index (bond volatility) was DOWN 252 basis points on Friday, failing at TRADE resistance.  Meanwhile, High Yield Option Adjusted Spreads moved 1 basis point.  That’s nothing…pointing to NO stress in bonds.  For reference, Option-Adjusted Spread (OAS) is a key measure in fixed-income investing.  It represents the additional yield (or spread) that a bond offers over a risk-free benchmark (typically U.S. Treasury securities) after adjusting for any embedded options (such as call provisions that allow the issuer to redeem the bond early).  We’ll see how the Fed Front-Runner (2YR Treasury Yields) acts today. It got as low as 3.5% before reversing, now trading at 3.54%.  The top of TREND resistance is at 3.57%.  So we could see it move there before failing again.

2) GOLD – When volatility of anything reaches levels not seen in almost 20 years, caution is not just warranted, but needed!  Last week I pointed this out with an explicit warning that with gold volatility over 40, something had to break – Vol or price.  It was price, in a big way!  Upside Volatility perpetuates more volatility and now it’s just a circus of emotional transactions colliding with narratives.  This is not a time or place to jump headlong into gold with gold volatility (GVZ) still above 44.  Gold is down another -3.7% this morning and now trading inside TREND.  That TREND range is $4,674 - $4,854 and gold is currently trading at $4,720.  Selling in Gold picked up when it broke TRADE support at $5,187 Friday.  As an investor, this is an area for patience.  There’s been a lot of damage in this space as leverage got carted out.  This likely creates a time of “healing” and consolidation/digestion.  Gold could, and did already this morning, trade as low as the $4,470 area, which is another spot of strong support.  An old adage is that if it prints there, it’ll trade there.  So, patience.  Could an investor add a small amount to their portfolio here?  Yes.  I just wouldn’t expect it to fly back to all-time high all that soon.

3) FEBRUARY – “Seasonality” is not something heavily embedded into our algorithm’s calculations.  But that’s not to suggest that there isn’t something to learn from it either.  Historically, on average, February is one of the more difficult months of the year for stocks.  Does that mean it will be this time too?  Nope…markets aren’t that easy.  As soon as everyone thinks one thing will happen, the opposite is often the outcome.  Nevertheless, as I discussed last week, we need to keep an eye on certain ratios, like Consumer Discretionary (XLY) : relative to Staples (XLP) and Staples (XLP) : relative to Financials (XLF).  In January, the S&P 500 Consumer Staples ETF (XLP) gained roughly 7.5%.  It outperformed the Consumer Discretionary ETF (XLY) by more than 600 basis points.  That does not mean the bull market is over, just that it is the kind of rotation that you’d expect to see as markets enter a “seasonal average” rough patch.  Remember, when the XLY / XLP ratio is rising, investors are embracing risk and economic growth.  When it's falling, capital is moving toward safety.  That's what caution looks like.  What do we have?  Rotation that is starting to look like caution.  Does that mean the stock market has to crash?  No.  But do most market drawdowns/corrections tend to occur while this ratio is falling?  Yes.  Could 2026 be a more “risk off” year?  Possibly.  But Tech could just be in a consolidation getting ready to reassert its dominance too.  After all, it has been consolidating since OCT 2025.  Nevertheless, Staples (XLP) outperforming Cons Disc (XLY) and Staples outperforming Financials (XLF) isn’t what we really want to see.  Staples do not tend to be “leaders” in strong, risk-on environments.  We’ll see how it plays out, but volatility’s range (VIX) is also widening out.  That tends to point toward an increase in the volatility of volatility.  We are currently under-invested in the S&P 500 in our models, but Flows can and do change quickly.  So we’ll follow our models.