SignalPlus Macro Analysis: Cautious Chasing of Highs in the Market, Short-term May See Bi-directional Volatility

2025-08-11 20:00

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Beware of potential downside catalysts such as a significant reversal in the US Dollar Index or unexpected inflationary pressures.

Original Article Title: "SignalPlus Macro Analysis Special Edition: Summer Break"

Original Source: SignalPlus

This week, there isn't much new development to report as the S&P 500 index recovered from the impact of the non-farm data release and approached its historical high. On the other hand, the Nasdaq index benefited from strong earnings performance, hitting a new record high, ignoring the ongoing political turmoil of the Trump administration and new import tariff issues.

Global risk assets also performed well, with European and Japanese stock markets rising due to ongoing trade resolution efforts, and the U.S. making concessions on tariff escalation and reduced tariffs on automobiles.

On the other hand, this week marks the expiration of the U.S.-China trade truce agreement, with some market participants expecting an extension of the deadline, but concerns exist that the U.S. may impose new tariffs on China due to its purchase of Russian oil — a similar action for which India has been sanctioned previously.

The good news is that the U.S. and Russia plan to draft a new Ukraine peace agreement ahead of this week's Alaska summit, providing another tailwind for risk assets, and with the war premium continuing to dissipate, oil prices have been pressured downwards.

U.S. capital inflows remain strong, with large-scale returns of domestic and foreign investors. The latest data shows that net purchases hit a monthly inflow record, and trading volumes have also hit new highs, providing a positive confirmation.

In 2025, U.S. stock market trading volume reached a historic high, far exceeding previous years, mainly benefiting from the strong return of retail trading since the beginning of the year. According to Citi data, the average daily trading volume in the first half of 2025 was nearly 50% higher than the previous five-year average, a significant 40% increase from the record set in 2024. This trend continued in July, with an average daily trading volume of 18 billion shares.

Indeed, the performance in 2025 has been so astonishing that 17 out of the 20 largest single-day trading volumes in history occurred in 2025, with 13 days in just the second quarter. Absolutely incredible.

Since the beginning of the year, retail participation has driven a high level of stock concentration, with some trading days in 2025 seeing the top five stocks' trading volume accounting for over 20% of the total market volume. Retail activity in call options has also seen a significant rebound, reaching its highest level since the onset of the COVID-19 pandemic.

In terms of financial reports, about 80% of the S&P 500 companies that have reported earnings have exceeded expectations, with a year-over-year growth of 12%. The outperformance rate reached 9%, led by the technology and financial sectors. Against the backdrop of lowered expectations following tariff concerns, second-quarter 2025 earnings per share significantly exceeded expectations.

The current rebound has pushed the market and credit market's probability of an economic recession back to single-digit lows. The U.S. fixed-income markets, as usual, are an exception, pricing in the most aggressive stance on further Fed easing.

In terms of inflation, despite the Fed's willingness to overlook recent price pressures, ISM subcomponent data shows a worrying rebound in payment prices. This indicator typically leads CPI by about a quarter, which could pose a challenge to the Fed's rate cut plans later this year. However, currently, driven by risk appetite sentiment, the market is willing to stay at high levels until hard data proves otherwise.

This week, cryptocurrencies have also experienced a similar rebound, mainly driven by Trump's directive for regulatory agencies to "study" the possibility of including cryptocurrencies (and private equity) in 401(k) investment portfolios. If this becomes a reality, it would clearly open up significant buying demand. However, there is still a long way to go before it becomes law.

More excitingly, Ethereum led this week's rally, with a weekly gain of +20%. The latest mainstream experts/followers have praised ETH as the latest FOMO (Fear Of Missing Out) target in the public equity space. Retail traders have responded actively, driving BNMR up nearly 60% this week, showing "native speculators" how to properly FOMO in a regulated world.

As expected, Ethereum ETFs saw inflows of around $700 million in the last two days of the week, pushing total inflows to a new all-time high, with assets under management doubling to nearly $10 billion since the beginning of the year (compared to $3 billion at the beginning of the year).

ETH's recent rebound has also led to a divergence in short-term volatility, with Bitcoin's implied volatility still hovering near historic lows, while ETH's volatility has surged significantly. ETH's term structure is currently inverted, with long-term volatility expected to fall to the ~70% range, while BTC's IV curve is the opposite, with short-term volatility being severely compressed, with the spot market staying around $120,000.

By comparison, just a month ago, the market pricing only implied a 5% chance of ETH hitting $4.5k in August, while the actual market movement has far exceeded the implied path, catching many participants off guard.

Looking ahead, at the current juncture, we believe there is no compelling need to chase the market higher, as we anticipate a bi-directional swing in market assets over the next month or so. Be wary of potential downside catalysts such as a sharp reversal in the US Dollar Index or unexpected spikes in inflation. Traders, please stay vigilant, and may your trades be smooth!