Momentum stocks are leading the market higher, but this is much different leadership than what elevated the market in 2024.

For example, the markets are at all-time highs, and “Risk Off” sectors (XLV, XLU, XLP) are outperforming  “Risk On” sectors (XLY, XLK, XLC), and the “Cyclical” sectors (XLI, XLB,  XLE) are outperforming both Risk Off and Risk On.

This is shown in the chart below of the year to date performance of major asset types.

Leading the year…

FXI – China
MTUM – the momentum factor ETF which is stocks with high momentum
GLD – Gold
COPX – Copper
QQEW – The equal weighted QQQ ETF
DBA- Commodities

And the worst performers…

MAGS – the ETF that tracks the Magnificent 7
HYG – High Yield debt
USO – Crude Oil
DXY - The dollar
VIX – The VIX (often referred to as the fear gauge)

This week’s price action was shaken up by higher than expected consumer inflation, better than expected tariff rhetoric, and weaker than expected Retail Sales data.

In last week’s Market Outlook,  we urged you to watch out for CPI and PPI reports. While they were the source of much volatility, they created a “round trip” move in bonds and stocks that created the week’s low and set the stage for the subsequent rally into the end of the week.

More specifically, the CPI report on Wednesday was hotter than expected and led to the biggest daily drop in the TLT in 2025. However, stocks shrugged off their lower open and closed higher.

As you see in the chart below, the bearish day created by the CPI was completely reversed on the next day when PPI didn’t confirm the hot CPI inflation data, and tariff news turned out to be less bad than expected.

Is The Market Cured of Its Inflation and Tariff Fears?

It’s understandable how bonds could react negatively to the CPI trends in the chart below, and Bloomberg’s key takeaways from the report sounded like this:

• The headline CPI gauge jumped 0.5% from December, the most since August 2023, exceeding all forecasts in Bloomberg’s survey of economists.
• Food and energy prices also boosted inflation, with eggs soaring by some 15.2% on the month.
• So-called supercore services prices soared by almost 0.8% on the month, in a potential sign that higher wage costs are again feeding through to prices.

The next day, the PPI data was not seen as problematic, but the trends of the last several months AND since the beginning of 2024 in the chart below certainly aren’t down.

As we discussed here before, it’s not the data we see in these charts of the economic conditions that matter most, but rather how the market reacts to it and what the expectations are for the future data of the chart.

To this point, stocks didn’t follow bonds lower on the CPI data, and both stocks and bonds rallied on the day of the PPI data. This is bullish action.

Last week the market reacted to, and we highlighted, the rising trend in consumer expectations for inflation.

Now consider this data below from the Cleveland Fed.CEOs in this survey expect 3.2% inflation 12 months ahead. That’s the lowest since 2018.

Retail Sales Weakness Seen as Good News For Stocks

On Friday, Retail Sales was an unusually large disappointment and weak number. The bond market rallied and stocks liked the idea that this might leave open the possibility for another rate cut this year. However, the Fed Funds futures did not indicate any higher probability of a rate cut as a result of this.

It’s also worth noting that the chart below shows that the last two January's had a similarly poor report without it becoming a trend.

Tariffs

The tariff news on the day of the PPI report, Thursday, was such that much anticipated widespread tariffs would be delayed, considered on a case-by-case basis, and potentially calculated on a “reciprocal” basis. The market rallied in response to this too.

On Friday, the idea that the widespread tariffs would be focused on being reciprocal rather than retaliatory sent stocks higher.

The market has demonstrated caution when tariff news is announced, but the pattern has been one of less and less of a market impact.

Why Are These Investors Bearish? Is This Bullish?

On Friday, the SPY, QQQ, and the equal-weighted Nasdaq Index ETF, QQEW, all hit an all-time high, but AAII investors are not celebrating. In fact, the trend in this sentiment survey has been getting more and more bearish for weeks.

In the chart below, you can see that the percentage of respondents who are bearish (red line) has been increasing since late 2024 as highlighted in yellow. You’ll also notice a similar pattern of increasing bearish respondents occurred when the market was in a prolonged bull trend at the end of 2021.

AAII sentiment is often referred to as a good contrary indicator, which would make this scenario potentially even more bullish.

I decided to look at this more closely with data starting in 2007. The data is below.

Below is a chart that shows the “spread” of bulls vs. bears. It is simply the % of bulls minus the % of bears.

WARNING: The higher number in the chart above means that AAII investors have more bulls than bears. Your instinct may be to assume that because this is a sentiment chart, the high bullish number is bearish. This is not true.

In fact, it may be that AAII Investors are surprisingly savvy!

The table below shows the percentage of the weeks (Time) that the spread was in a particular range and the average return looking forward for each category of the spread value.

One simple conclusion could be that if the AAII spread value falls below -10, it’s BEARISH until it gets back above it. When it’s over 10, it’s bullish!

Note: Data not shown here indicates that when the spread falls below -20 and -30, the returns get progressively more negative, and when the spread is over 20 or 30, the returns get progressively more bullish. 

Below you’ll find another view of this data with a focus on the rolling 4 and 8-week returns.

Sentiment should not be used as a signal without confirmation by price action. If history since 2007 is any guide, if the market starts to sell off and break key support levels and this is still negative, it would be bearish. On the other hand, the bulls should be hoping this trend in bearish AAII bears reverses.

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