Oh boy! Tariffs, Earnings, Jobs Data
We had a round of mixed earnings beats from the mega caps last week, and with Core PCE coming out as expected, it was enough to keep the markets green. Markets opened bright and strong on Friday, but as soon as news of Trump’s proposed tariffs hit, sentiment shifted rapidly, turning the day into a sell-off. The big question going forward is whether these tariffs will trigger an ugly February, a month that is already seasonally weak.
Tariffs have historically had a significant impact on market volatility, particularly when they introduce uncertainty into global trade. New tariffs could lead to retaliatory measures, disrupt supply chains, and ultimately weigh on corporate margins. Companies with heavy international exposure, particularly those reliant on imports or exports, tend to get hit the hardest.
For example, during the 2018 U.S.-China trade war, tariffs sent shockwaves through equity markets, sparking risk-off sentiment and causing periodic corrections. Sectors such as technology, industrials, and consumer discretionary tend to be among the most sensitive to tariff announcements, given their reliance on global supply chains and foreign revenue. Additionally, a resurgence of tariffs could fuel inflationary pressures by raising costs on imported goods, complicating the Federal Reserve’s ability to manage interest rates.
February is a seasonally weak month
If you believe in seasonality, February is a historically weak month for equities—often seeing post-January profit-taking and seasonal headwinds—Trump’s tariff news could accelerate a correction if markets fear prolonged trade tensions. The key to watch will be how markets digest further details on the scope and impact of these tariffs. Will they be broad-based, or targeted? Will key trading partners retaliate? If uncertainty lingers, the combination of seasonal weakness and tariff-induced market jitters could make for a rocky start to the month.
Dow Jones – Stalling
All indices are showing similar chart patterns, so I’m focusing on the Dow Jones (DIA) for this update. DIA is at a critical juncture, flirting with previous highs. The problem with previous highs is that they often turn into resistance, requiring a strong earnings season or a significant macroeconomic force to break through.
Unfortunately, earnings season has been a mixed bag so far, and Trump’s proposed tariffs could send shockwaves through the markets, even if only temporarily.
What will move the markets next week?
- TARIFFS: We’ve seen this play out before—Trump’s tariff wars with China triggered rounds of retaliatory tariffs, ultimately leading to a 12% correction in the Nasdaq. If history repeats itself, markets could be in for a rough ride.
- EARNINGS: GOOG earnings on Tuesday will be the most important in my view. By the time AMZN reports on Thursday, the market tone for the week will likely already be set.
- JOBS DATA: Two critical jobs reports drop next week—ADP on Tuesday and NFP on Friday. Any sharp drop in employment numbers could raise recession fears, adding another layer of uncertainty to an already volatile market.
EARNINGS
We have a packed earnings calendar next week, but the two major market movers will be Alphabet (GOOGL) on Tuesday and Amazon (AMZN) on Thursday. I have a feeling that by Wednesday’s market open—after GOOGL earnings and the ADP report—the market’s tone for the week will already be set. AMZN’s earnings might still move the stock, but its impact on the broader market direction could be more limited.
DIVERGENCE INDICATORS – TNX
TNX (10-year Treasury yields) has pulled back slightly, which is a positive for now. But with Trump’s tariffs looming next week, any relief from TNX and $DXY could be short-lived. Tariff headlines could take center stage, potentially overriding the recent easing in yields and the dollar’s pullback, adding fresh volatility to the equity markets.
DIVERGENCE INDICATORS – $DXY
The U.S. Dollar Index ($DXY) is flexing its muscles this earnings season, with some companies already citing pressure from international markets and issuing softer guidance for the upcoming quarter. However, the four-month uptrend appears broken for now, which is good news—a rising $DXY is typically a headwind for equities. The last thing we want is for the dollar to keep climbing, as that tends to put downward pressure on stocks.
DIVERGENCE INDICATORS – VIX
Although markets took a dump on Friday, VIX is still flirting with that 16 level and hasn’t really spiked. Hope it was just a knee jerk reaction and we don’t get a repeat of 2018. Fingers crossed!
Trading plan for next week
Next week will be critical, as Trump’s tariffs could shake the markets just like they did in 2018. If we enter a deep pullback or correction, I’ll have to shift into defensive mode—closing bull call spreads as they get tested and strategically adding hedges to buffer losses.
Of course, all corrections eventually end, so if the market takes a hit, I’ll go into firefighting mode—managing risk first and then waiting for the correction to run its course before going bullish again. Hopefully, it won’t come to that, but I’ll adapt to whatever the market throws my way
Maya – Algo Testing Updates
I launched my trading algorithm at the end of October 2024 with the intention of trading six ETFs using $1-wide spreads. However, our beta testing group ran into issues getting filled on trades. Many of these spreads were mispriced, with ATM spreads trading at $0.65-$0.70 instead of the expected $0.50. This completely threw me off, forcing me to pivot—I had to abandon ETFs and switch to trading regular stocks instead.
I initially thought the switch would be as simple as replacing index ETF tickers with stock tickers. Alas, I was wrong. Stocks come with many more complications: earnings, gap ups/downs, dividends, splits, and other factors that make the transition far from seamless. But the biggest hurdle is volatility—the entry criteria I used for ETFs do not translate well to stocks.
As a result, my win rate with stocks dropped from 65% to 55%, which is why Maya testing is on hold. My goal is to push that win rate up to 65% before relaunching Maya v2. I’m aiming to solve this issue within the next 30 days and get things back on track. Stay tuned for Maya updates on Discord.Â