Landon Phillips 9/6/25 Landon Phillips 9/6/25

The Market’s Balancing Act: A Defensive Turn

This week highlighted the market’s transition from steady strength into a more unsettled posture. While equities have enjoyed a long run higher since spring, conditions now point to turbulence beneath the surface.

Our Signal held elevated through early in the week, but by Friday it compressed meaningfully — a clear sign that breadth is softening and short-term momentum has lost its edge. Historically, when the Signal hovers in this “compressed” zone, markets tend to struggle with follow-through and often experience volatility events.

Defensive Adjustments

We leaned into that reality. Over the course of the week, our allocation shifted step by step: trimming SPY, QQQ, and IWM exposure, while raising both cash and volatility hedges. By Friday’s close, the portfolio stood at just over 60% equities, balanced by 26% cash and 13% in VXX. That’s a notable shift from last week’s higher equity stance, reflecting our commitment to avoiding large drawdowns while staying prepared for recovery opportunities.

The Volatility Trap

Our instinctive framework (i.e., the human element of decision-making) adds another layer: when momentum indicators rebound slightly from mid-range levels, they often precede volatility spikes. This “volatility trap” has emerged in the current setup, indicating that while the broader trend remains intact, the near-term environment carries an elevated risk. In most instances where this setup has appeared in the past, a better buying point emerged within 14 days or so. Sometimes the decline is violent, sometimes it’s modest. While we can’t say which case will unfold, we can build the portfolio for protection. The end goal of the portfolio research is to simply outperform the “market,” so there’s no need to be a hero here. Patience is key.

A Neutral Forecast

Statistically, the next 7-day outlook is strikingly neutral. As the SPY distribution chart shows, the expected return is close to zero, with probabilities of positive versus negative outcomes nearly balanced. This underscores the key point: patience is warranted. Markets may grind sideways, whip up volatility, or briefly reset before healthier setups emerge.

Author Note: Market analysis and this blog post were conducted and written by Red Oak Quant’s custom AI Agent, using proprietary methods originally developed through years of human research and continuously overseen by a human for accuracy and reasonableness.

Disclaimer: The information provided here is for educational and informational purposes only and should not be considered financial advice. I am not a licensed financial advisor, and my portfolio may not be appropriate for your financial goals or risk tolerance. All investments involve risk, including the potential loss of principal. Historical data and market models are not indicative of future results. Please consult with a licensed financial professional before making any investment decisions.

This chart shows the change in our research-driven portfolio construction algorithm recommendation over the last week. An increase in cash and VXX hedge are notable with a corresponding reduction in QQQ.

This distribution chart shows the return probabilities for SPY over the next 7 days with indicators at one standard deviation. Strikingly neutral.

This chart shows the distribution returns for VXX over the next 7 days. Note how wide the standard deviations are, indicating a wide range of possibilities and variability in the data set.

Landon Phillips 8/29/25 Landon Phillips 8/29/25

A.I. Advises Bullish Caution; Signal Is Conveniently Aligned For September Swoon

September has long carried a reputation as the weakest month for stocks, and history backs it up. Since 1950, the S&P 500 has averaged negative returns in September more often than any other month. The reasons vary — from portfolio rebalancing to investor psychology — but the pattern is hard to ignore.

This year, that seasonal backdrop aligns neatly with our Signal. At Friday’s close, the Signal held well above neutral, keeping us in bullish territory — but momentum has weakened, breadth has softened, and volatility has begun to creep higher. In other words, conditions are stretched.

A useful way to picture it is like a spring. For weeks now, the market’s spring has been pulled apart — breadth expanding, overbought readings persisting, and the Signal staying elevated. But springs don’t stretch forever. Eventually, they snap back toward their neutral state. History suggests September may be when that compression begins. A pullback of 3% to 5% sometime in September would not be abnormal given the conditions.

Importantly, a snapback doesn’t mean collapse. In fact, pullbacks often create the setup for high-probability recoveries. Our Signal is specifically designed to identify those transition points — when excess has been worked off and conditions shift back toward strength. That’s when probabilities become most favorable for renewed upside.

And while headlines will no doubt be written to explain whatever happens next, we view the news as narrative, not cause. Markets move because of structural tension — the spring itself — and the news simply gives us the story afterward. This is why we don’t trade headlines; we trade the Signal.

On Projections vs. Positioning

Last week’s probability model leaned heavily toward positive 7-day returns. That outcome didn’t materialize — equities slipped instead. This shows the natural limits of forecasting: probabilities tilt the field, but they don’t erase uncertainty.

What mattered more was the construction model — the framework that guided our portfolio allocation. Even as projections pointed higher, the construction model called for a measured, slightly defensive stance: balanced equity exposure, extra cash, and a volatility sleeve. That positioning kept us in the game during the early part of the week, but with enough protection in place as weakness materialized into the close.

In short, the projection model told us where the odds leaned; the construction model made sure we were prepared if the less-likely path took hold.

As we head into September, the message is simple: the long-term trend remains constructive, but the near-term path is likely to be bumpier. The spring is stretched, compression is due, and history suggests the next reset may ultimately prepare the way for recovery.

Author note: Market analysis and this blog post were generated through Red Oak Quant’s proprietary research framework, implemented with the assistance of an AI agent for back-end data analysis and drafting. The methods and workflow were originally developed by a human researcher, and all outputs are reviewed by a human for accuracy and reasonableness before publication.

Disclaimer: The information provided here is for educational and informational purposes only and should not be considered financial advice. The analysis reflects historical data, model-driven probabilities, and professional judgment, but it is not a guarantee of future results. All investments involve risk, including the potential loss of principal. Please consult with a licensed financial professional to determine what is appropriate for your financial goals and risk tolerance.

Landon Phillips 8/24/25 Landon Phillips 8/24/25

The A.I. was right about the snapback, now it’s calling for better odds for bulls.

Last week our Signal reliably flagged the risk of a short-term pullback, and the market delivered exactly that — five straight days of decline, the longest such stretch since January. By shifting to a slightly defensive, neutral portfolio mix, our strategy avoided the brunt of that weakness. This is by design: the portfolio algorithm aims to sidestep major drawdowns while still participating in market upside when conditions improve.

This week brought the improvement. After several sessions of pressure, equities reversed sharply on news from the Federal Reserve. The Signal responded in kind, surging decisively into bullish territory. Breadth expanded, momentum turned positive, and risk gauges eased, confirming a shift into a Bullish / Uptrend regime.

With this transition, we are rebalancing back toward equities, spreading exposure across the S&P 500, Nasdaq, Dow, and Russell 2000. At the same time, we continue to hold a modest cash reserve. Extreme breadth thrusts often come with elevated snapback risk, and our staged approach allows us to participate in the new trend while preserving flexibility if short-term volatility returns.

Looking forward, the probabilities favor continued strength over the next several weeks. Historically, similar setups have shown elevated odds of positive returns, particularly in large-cap and technology-focused indices. Even so, discipline remains key. Overbought conditions suggest the near-term path could still include pauses or shallow pullbacks, even within a constructive broader trend.

As always, we’ll let the data lead. If strength persists, we will increase equity exposure further. If momentum stalls, our balanced positioning provides protection. For now, the evidence supports leaning bullish while respecting short-term risks.

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Author note: Market analysis and this blog post were conducted and written by Red Oak Quant’s custom AI Agent.

Landon Phillips 8/16/25 Landon Phillips 8/16/25

Rotation From Risky to Neutral

This week was a reminder that even in upward-trending markets, risk management matters. The Signal held in neutral territory but weakened into the close on Friday, pulling back from earlier strength. While momentum remains intact, breadth has softened and short-term risk levels are elevated.

Our positioning reflects that reality. Over the past several weeks we’ve leaned steadily into equities, but this week we rotated further toward a defensive-neutral mix. That means balanced exposure across the major indices — S&P 500, Dow, Nasdaq, and Russell 2000 — paired with a meaningful cash reserve. Importantly, leveraged positions are now fully closed. In prior cycles, conditions like these have often marked transition periods where volatility can re-emerge suddenly, even if longer-term outlooks remain constructive.

Looking forward, the Signal suggests a continued neutral stance is warranted. The probabilities of positive returns remain modestly favorable for equities, but the environment also carries above-average risk of short-term pullbacks. Historically, setups like this tend to reward patience — holding balanced allocations while waiting for the next high-conviction shift.

As always, we’ll let the data guide the strategy. If conditions strengthen, we’ll re-enter more aggressively. If weakness accelerates, our defensive posture will help absorb the shock. For now, steady positioning and disciplined risk management remain the playbook.

Author note: Market analysis and this blog post were conducted and written by Red Oak Quant’s custom AI Agent.

Disclaimer: The information provided here is for educational and informational purposes only and should not be considered financial advice. I am not a licensed financial advisor, and my portfolio may not be appropriate for your financial goals or risk tolerance. All investments involve risk, including the potential loss of principal. Historical data and market models are not indicative of future results. Please consult with a licensed financial professional before making any investment decisions.

Landon Phillips 8/10/25 Landon Phillips 8/10/25

Building New Quant Models With GPT 5

This week, OpenAI released GPT-5 for general public use. I’ve spent the past several days putting it through its paces — running fresh backtests, refining concepts, and improving how I identify broad market pivots. My initial impression: it’s powerful. GPT-5 handles complex rule sets far better than earlier versions, though it’s not flawless. It will still make mistakes, so it’s critical to review its outputs carefully.

One pro tip from experience: ask GPT-5 for any intermediate files it creates before you close out a session. These models generate a lot of working files in the background, and once the session ends, they’re gone. If you don’t save them, you’ll have to start from scratch.

One of the new tools I’ve been testing is a Trough Recovery Score. The idea came from the challenge of dealing with over a decade of backtest data, covering about six key variables in the signal. The combinations are enormous, which means that for some setups, there may only be a handful of identical historical cases to reference. The scoring system solves that problem by creating a more generalized, composite measure of favorable “trough to recovery” conditions.

It works surprisingly well. GPT-5 helped me design the scoring and backtesting methodology in a way that balances robustness with the need to avoid overfitting. The result is a metric that captures the bulk of what my experience tells me to look for — but with historical probability data behind it.

Right now, the Trough Recovery Score for the current market stands at 80 out of 100, a level that historically comes with an increased probability of positive returns over the next two weeks. The chart below shows the system’s historical outputs for this setup.

Author’s note: This article was edited for clarity by AI.

Disclaimer: This content is for educational and informational purposes only and does not constitute financial, investment, or trading advice. I am not a licensed financial advisor. Any strategies, models, or projections discussed may not be suitable for your specific financial situation or risk tolerance. All investments involve risk, including the possible loss of principal. Historical performance and model-based scenarios are not indicative of future results. Always consult a licensed financial professional before making investment decisions.

Landon Phillips 8/1/25 Landon Phillips 8/1/25

Quant AI Signals Additional Caution

Markets extended their recent decline today, with broad-based weakness across major indices. The Red Oak Quant Signal declined further into oversold territory, while several momentum indicators remain under pressure.

Volatility continues to rise, with the VIX closing at 20.38 — reflecting elevated uncertainty but not yet signaling resolution. While some breadth indicators are now near historical low levels, the environment remains unfavorable for new long entries until conditions stabilize.

The recommended posture remains defensive. Allocations continue to favor volatility protection and cash, while participation in equities is minimized across all categories. While oversold conditions often precede tactical reversals, we prefer to wait for further confirmation from both volatility and momentum indicators.

Patience remains warranted until volatility begins to subside and trend conditions begin to improve.

Author note: Market analysis and this blog post were conducted and written by Red Oak Quant’s custom AI Agent.

Landon Phillips 7/29/25 Landon Phillips 7/29/25

Quant AI Flashes A Short-Term Warning

Today’s market signals have turned distinctly bearish, indicating heightened caution. The significant drop in our signal, along with a strongly negative secondary indicators and weakening Signal momentum, highlights increased downside risks. Additionally, stochastics are swiftly moving towards oversold conditions, reinforcing the near-term bearish sentiment.

Volatility, as measured by the VIX, rose moderately to 15.98, reflecting increased investor anxiety and potential market turbulence ahead. Consequently, our recommended portfolio allocation strongly emphasizes defensive positions, including significant exposure to volatility instruments (VXX) and elevated cash reserves to preserve capital and provide flexibility.

Investors should brace for potential downward movements in major indices (SPY, DIA, QQQ, IWM) over the short to medium term. Maintaining vigilance and defensive positioning is crucial until signals show stabilization or improvement.

Author note: Market analysis and this blog post were conducted and written by Red Oak Quant’s custom AI Agent.

The image above displays the probability of positive return by ticker symbol. Dashed lines indicate our model’s maximum and minimum probability limits.

Landon Phillips 7/19/25 Landon Phillips 7/19/25

A Market in Waiting

The close of this past week leaves us with a market in transition. Our signal moved into a neutral posture on Friday, suggesting no clear advantage for either the bulls or the bears.

Momentum is cooling, and while we’re not seeing widespread weakness, the enthusiasm from earlier in July has faded. Key indicators have slipped lower, confirming that the rally is taking a breather.

During this phase, we maintain a balanced portfolio posture. That means diversified index exposure—DIA, SPY, and QQQ—with a healthy allocation to cash. This approach helps preserve gains while staying flexible for whatever direction the market chooses next.

We’ll keep watching for a pivot—either into bullish strength or deeper weakness. For now, it’s best to stay even-footed.

Author note: Market analysis and this blog post were conducted and written by Red Oak Quant’s custom AI Agent.

Landon Phillips 7/15/25 Landon Phillips 7/15/25

Market Internals Shift to a More Cautious Stance

After a steady stretch of strength across the equity markets, today’s data reflects a notable change in tone. Our internal signal, which tracks broad market participation and momentum, moved sharply lower — a drop of nearly 22% in one session — suggesting a shift away from the recent bullish regime.

This kind of movement doesn’t automatically imply a major correction ahead, but it often signals that the easy upside may be behind us, at least for now.

Short-term momentum indicators such as stochastics and MACD have both turned lower, and broader participation — particularly among smaller-cap names — is beginning to narrow. Notably, IWM (small caps) continues to lead on the downside, consistent with prior patterns where riskier segments of the market react first to changing conditions.

Breadth and relative strength indicators also weakened today, pointing to a market that may be entering a consolidation or retracement phase. Importantly, volatility remains contained, and we’re not yet seeing signs of broader investor concern.

Historically, this environment tends to deliver mixed outcomes. Short-term return probabilities over the next 7 to 14 days decline, while longer horizons often see stabilization and potential recovery — depending on how momentum evolves in the coming sessions.

In short:

The signal has shifted out of its prior bullish zone.
Breadth and momentum are softening.
While not bearish outright, the market looks less supportive in the near term.

This is a time to be observant. Tactical positioning may be more appropriate than directional conviction until the signal reasserts itself.

Author note: This analysis and the writing of the blog post were conducted using Red Oak Quant’s custom AI agent and market model.

Landon Phillips 7/12/25 Landon Phillips 7/12/25

Quant Model Updates

It has been some time since my last blog post about the US Equity Markets. Previously, I highlighted that we needed to see a clearing signal from the market following our recent correction. I stated that the clearing can take some time, even months. That has proven to be true. The market has rallied impressively since its lows, and if someone was able to participate, they are experiencing substantial gains. Now, the clearing event is complete, and our model should resume its normal accuracy.

During this time, I’ve had the opportunity to update my quant model and work to improve the outputs. AI has improved substantially and rapidly. I’m impressed with the current state of the technology. The agent I’ve created is faster and easier to use than ever before. While I still believe it’s important to have a human-in-the-loop, the analytical capabilities are quite impressive. Particularly exciting is the ability to “see” charts and interpret the data. I’ve been giving it the most complicated charts that I have, and it consistently reads them with accuracy, and occasionally points out insights that I’ve missed. It has become a true partner in my analytical process.

Below is the analysis that my AI agent created for the current market state:

After several days of steady upward movement, today’s market action delivered a decisive shift in our core signal.

The signal — which tracks internal strength across a wide swath of U.S. equities — had been hovering in overbought territory for nearly a week. Historically, this regime supports continued gains, especially when paired with a low-volatility environment like we’ve seen. However, those conditions no longer hold.

Today, the signal dropped sharply, decisively breaking below its overbought threshold. At the same time, short-term momentum indicators rolled over from their recent peaks. This combination — a fading internal breadth coupled with peaking momentum — often marks the start of a pullback phase.

Small caps were the first to break. While large-cap indices like the Dow (DIA) and S&P 500 (SPY) are still holding near highs, more speculative corners of the market (notably small caps and growth) are already rolling over. This divergence tends to precede broader weakness.

Our model classifies today’s conditions as a "pullback regime," where probabilities of short-term gains fall below 50% and average returns flatten or turn slightly negative over 7–14 days. These phases are typically brief but meaningful — and often present tactical re-entry opportunities once exhaustion plays out.

For now, the takeaway is simple: momentum has stalled, and risk has risen.

Disclaimer: The information presented here is for educational and informational purposes only and should not be construed as financial advice. I am not a licensed financial advisor, and my portfolio may not align with your financial goals or risk tolerance. All investments carry risks, including the potential loss of principal. Historical data and model-based projections are not guarantees of future performance. Always consult a licensed financial professional before making any investment decisions.

Landon Phillips 4/27/25 Landon Phillips 4/27/25

A Few Positive Signs Are Emerging

Last week, I discussed the broader macro perspective of the market and highlighted several technical and fundamental reasons why the equity market is likely facing a few months of headwinds. While I still believe that to be an accurate macro view, I also expect there will be tactical trading opportunities that emerge throughout this period.

Notably, our "signal" has historically shown a peculiar ability to provide early warnings of major market selloffs, such as the one we just experienced. There have only been a handful of such declines captured by the signal in its history, so I continue to categorize this behavior as “interesting, but not yet proven.”

Before any meaningful tactical trading can resume, there is typically a "clearing" event in the signal that needs to occur. Encouragingly, that clearing event appears to be underway. It often takes time to fully develop—sometimes several months—but once it does, conditions may again favor tactical trading strategies based on our AI model. Until that process is complete, I will continue to maintain a defensive posture in my portfolio composition.

Disclaimer: The information provided here is for educational and informational purposes only and should not be interpreted as financial advice. I am not a licensed financial advisor, and my portfolio strategies may not align with your financial goals or risk tolerance. All investments carry inherent risks, including the potential loss of principal. Historical data and model-based projections are not guarantees of future performance. Please consult with a licensed financial professional before making any investment decisions.

Landon Phillips 4/18/25 Landon Phillips 4/18/25

A Little Bit of Pain: Why Consumer Debt Signals a Coming Economic Storm

Over the past month, the economic landscape has shifted meaningfully. It’s become clear that the U.S. is fully willing to cut off a finger if it means forcing other countries to cut off an arm—or worse. That’s not a strategy without risk, and it seems foolish not to prepare our portfolios accordingly.

I moved into very defensive positions as the downturn began, and I’ve maintained that posture. The big question now is: how long will this economic cold front last?

Let’s take a step back. Below is a 20-year monthly chart of VTI, the Vanguard Total Stock Market ETF. The red line is the 50-period simple moving average—a well-watched technical level. Time and again, we see that the market likes to bounce off this support.

Below the chart is the Simple MACD (Moving Average Convergence Divergence) indicator.

Don’t outsmart your common sense: when the red and blue lines cross, market momentum tends to follow for months. Based on this, I wouldn’t expect the market to find meaningful technical support for at least another six months, give or take.

Now, let’s look beyond the charts and into real-world fundamentals. I asked ChatGPT to gather several consumer-related metrics. I believe consumers are the lifeblood of the economy, and their financial health is a strong bellwether of what’s to come.

Two metrics in particular have had my attention for a while now—long before the current administration took office:

Rising credit card balances
Falling personal savings rates

Don’t outsmart your common sense.
When people deplete their savings and rely on credit to maintain lifestyle spending, it’s just a matter of time before reality delivers a gut check. I think we’re right on that edge. Review the data below and you’ll likely come to the same conclusion.

So, what does all this mean? Brace yourself. We’re in for an economic roller coaster ride.

Landon Phillips 3/15/25 Landon Phillips 3/15/25

Technical Pivot Or Fundamental Colapse?

In last week’s blog post, I suggested that the market might be attempting to establish a bottom but noted that a meaningful decline in the VIX would be needed for confirmation. It now appears that we may finally be seeing the VIX retreat. In the chart below, I have compared the S&P 500 to the VIX over a one-year period, highlighting recent VIX spikes and their corresponding S&P 500 lows. I use this relationship, alongside my AI-derived model, to identify potential market pivot windows. Historically, when these indicators align, they have provided a high-probability bullish entry signal over a 14- to 28-day period (or longer).

That said, I am not a proponent of blindly "catching a falling knife" when it comes to investing. While there are technical signals suggesting a potential entry opportunity, I remain mindful of broader fundamental factors impacting the market. Recent consumer confidence readings have been lower than ideal, and many public companies have adjusted their forward guidance due to signs of consumer weakness. Credit card debt remains elevated, and elected officials have signaled the likelihood of economic challenges as they restructure global economic relationships. Additionally, after two consecutive years of strong market gains, it is reasonable to ask: how long can this momentum continue?

With these factors in mind, I plan to approach any leveraged-long positions with caution. I am looking for further confirmation of a market pivot on Monday before committing.

By implementing a good defensive portfolio strategy, I’ve substantially avoided the market pullback thus far in 2025. I’ll continue to use the AI model and my overall risk mitigation strategies as we move through the rest of this year.

Based on the AI Quant model, the probabilities of a positive return are as follows:

7-day horizon: DIA (86%), SPY (71%), QQQ (57%)
14-day horizon: DIA (71%), SPY (57%), QQQ (57%)

Landon Phillips 3/8/25 Landon Phillips 3/8/25

Finding a bottom? As much art as science.

Using the AI model for market forecasting provides a scientific and data-driven approach, but there is still an essential element of human interpretation required for effective portfolio management. Much like a TV weatherman uses models to predict weather patterns, I leverage the AI model as a tool to develop market forecasts while applying years of study and observation of the underlying signals to interpret likely outcomes. In many ways, market forecasting is as much an art as it is a science.

Based on my interpretation of the signal data alongside the AI model, I believe we may be approaching a bottom for this pullback— which, for the Nasdaq, technically qualifies as a correction. The signal appears to be transitioning from a downtrend to an uptrend, and when combined with traditional market analysis, this suggests we could be finding a bottom. However, I am still watching for a reversal in the VIX as confirmation, which has not yet occurred. If and when that confirmation comes, I plan to execute my leveraged-long portfolio strategy to capitalize on the potential upside.

From a quantitative perspective, the model currently suggests a 70% probability of positive returns over the next seven days. Interestingly, the 14-day probability for DIA is lower at 55%, while SPY and QQQ remain elevated at 70% and 80%, respectively. These probabilities provide valuable context but must be assessed alongside broader market conditions.

Landon Phillips 2/25/25 Landon Phillips 2/25/25

A Bullish Pivot is Present

As of the market close on Monday, our model indicates the presence of a bullish pivot window. This can be likened to a spring that is compressed and pulled apart by market dynamics. Our model aims to identify the state of this spring. Currently, the spring is highly compressed and has the potential to expand rapidly, sending markets higher.

This marks the start of the window, which typically lasts a few days. We will seek confirmation that the market is beginning to recover from this medium-term pullback. We will analyze our proprietary signal methodology and look for traditional indicators, such as a decline in the VIX, which often accompanies pivots.

We will implement our leveraged-long trading strategy over the next few days. This approach increases our risk profile but also provides additional exposure to rapid recovery. As index ETF traders, we do this by reallocating portions of our portfolio into leveraged bullish ETFs. We will maintain this structure as long as the probabilities are favorable, which should enable us to outperform the market during this period.

Landon Phillips 2/22/25 Landon Phillips 2/22/25

Possible bullish pivot next week?

This week, our model temporarily halted its positive return trajectory over the 14 days until Friday. On Thursday and Friday, US Equity Markets experienced a decline, which aligned with the model’s projections and suggests a potential market pivot next week, possibly coinciding with NVIDIA's earnings announcement on Wednesday. Other economic news events could also act as catalysts, but significant attention will undoubtedly be directed towards NVIDIA on Wednesday morning.

Landon Phillips 2/13/25 Landon Phillips 2/13/25

Market Alert 2.13.25

As of mid-day today, our model has detected a notable shift in the probability of positive returns over the 14-day horizon. The model now indicates an 85.7% likelihood that the major market indices will be higher 14 days from now, signaling a strong bullish outlook.

However, it is important to note that the 7-day horizon currently reflects only a "slightly above average" probability of positive returns. Given this, we remain cautious about increasing risk exposure at this time, as historical patterns suggest that similar conditions have been accompanied by short bursts of volatility. We will continue monitoring market developments and provide updates as needed.

Landon Phillips 2/8/25 Landon Phillips 2/8/25

Market update 2.8.25

Looking ahead to the coming trading days, our model indicates a decreased probability of positive returns over the 7-day and 14-day horizons for the Dow, S&P 500, and Nasdaq. Several notable economic events are scheduled for next week, with particular attention on Federal Reserve Chair Jerome Powell’s testimony before Congress regarding monetary policy and the economic outlook, scheduled for Wednesday. This event could provide key insights into future market movements and policy direction.

Additionally, our model suggests that the market remains vulnerable to a sharp downward move, and Powell’s testimony could serve as a potential catalyst for such volatility. As always, we remain attentive to evolving market conditions and potential shifts in sentiment.

Landon Phillips 2/2/25 Landon Phillips 2/2/25

The Game Theory of Tariffs: What’s Next for Markets in 2025?

Introduction

The United States has once again entered a period of heightened trade tensions, implementing new tariffs on Canada, Mexico, and China as of February 2025. These tariffs—25% on Canadian and Mexican imports and 10% on Chinese goods—are intended to address concerns over trade imbalances, immigration, and national security. However, history tells us that tariff battles often lead to economic instability, market volatility, and retaliatory measures from affected countries.

Using game theory, we can predict how key players—these trading partners and the U.S.—will likely respond, and what that means for businesses, investors, and markets in the months ahead.

Game Theory and the Likely Outcomes

At its core, this tariff standoff resembles a prisoner’s dilemma, where each country must decide whether to retaliate, negotiate, or absorb the costs. Historically, tit-for-tat strategies dominate trade disputes—when one country imposes tariffs, others respond with their own. However, escalating trade wars harm all players, making cooperative negotiation the rational long-term move.

We can analyze the possible payoffs for each country using a simplified scoring system based on economic and political outcomes:

Optimal Strategies Based on Payoff Outcomes:

Short-Term (0-6 months): Tit-for-Tat Retaliation Likely
- Canada and Mexico implement countermeasures on U.S. exports (-2 U.S., -2 Can/Mex).
- China retaliates selectively while also using WTO legal pressure (-3 U.S., -3 China).
- The U.S. maintains tariffs but does not escalate immediately.
Medium-Term (6-12 months): Two Likely Paths
- Trade War Escalates (-3 to -5 U.S. loss) if the U.S. raises tariffs further.
- Negotiations Begin (+2 U.S.) if selective tariff exemptions are introduced.
Long-Term (12+ months): New Trade Agreement or Selective Tariff Rollbacks
- U.S. rolls back some tariffs in exchange for minor trade concessions (+2 U.S., -1 China).
- Markets stabilize as trade uncertainty fades.

What History Tells Us About Tariff-Induced Market Shocks

If history is any guide, market volatility is almost guaranteed. During the 2018-2019 U.S.-China trade war, tariffs wiped out an estimated $1.7 trillion in U.S. equity value, according to National Bureau of Economic Research (NBER). The S&P 500 saw multiple sharp drops following major tariff announcements, with trade-sensitive sectors—manufacturing, agriculture, and retail—taking the hardest hits.

Similar dynamics could unfold in 2025. If the U.S. maintains or escalates tariffs, markets will likely react negatively, especially in import-heavy industries like autos, semiconductors, and consumer goods. However, if the administration signals willingness to negotiate or selectively remove tariffs, stocks could stabilize as trade uncertainty diminishes.

Projected Market Scenarios for 2025

Based on historical patterns and current policy directions, three potential market trajectories emerge:

Best-Case Scenario (+10% S&P 500 growth): Partial tariff rollback, inflation stabilizes, and earnings growth remains strong. Markets rally as trade fears subside.
Moderate-Case Scenario (+3% S&P 500 growth): Tariffs remain, but minor exemptions ease supply chain disruptions. Market performance remains modest.
Worst-Case Scenario (-15% S&P 500 decline): Trade war escalates, inflation surges, and Fed policy remains tight. Stocks tumble as economic uncertainty rises.

For businesses, the next 6-12 months are critical. Importers should negotiate supplier contracts, seek alternative sources, and monitor tariff exemption opportunities. Investors should hedge exposure to trade-sensitive sectors while considering companies with strong domestic supply chains.

Conclusion: What’s the Most Likely Outcome?

While the tariff battle of 2025 is still unfolding, one thing is clear: markets hate uncertainty, and trade wars historically lead to short-term losses before negotiations eventually bring stabilization. The most probable scenario based on game theory is that tariffs will remain in place for the next 6-12 months, causing economic and market turbulence, but selective reductions and trade agreements will follow within 12-18 months.

The key takeaway for businesses and investors? Prepare for volatility, explore supply chain alternatives, and watch for diplomatic signals that could indicate a turning point in this economic chess match.

Credits

This article was developed through a collaborative effort between Landon Phillips, MBA, and ChatGPT using the Chat4o engine. This work reflects a shared exploration of economic dynamics in response to global trade policies.

Landon Phillips 1/25/25 Landon Phillips 1/25/25

Market Update 1.25.25

It’s been a while since we posted a market update. The end of 2024 brought a market pullback that we view as a normal part of healthy growth. During that period, we observed several minor gains and losses within an overall medium-term bearish trend. At the time, our model projected an 85% chance of positive returns over 14, 21, and 28-day horizons. While the shorter-term projections did not materialize, as of Friday’s close, the market is now aligned with the previously published 28-day target.

This serves as an important reminder that 85% is not 100%. Even though our model performs very well, it is not perfect (and no model is). As such, we must always account for potential inaccuracies when constructing our portfolios.

Looking ahead to the coming trading days, our model suggests that moderate gains are probable for the tracked indices over the next seven days. However, we cannot entirely dismiss the possibility that a short-term peak has already occurred. The probability of positive return remains below our nominal threshold, indicating that market bulls may be fatigued and vulnerable to a short-term bearish reversal.

Defensive Adjustments

The Volatility Trap

A Neutral Forecast

On Projections vs. Positioning

Introduction

Game Theory and the Likely Outcomes

What History Tells Us About Tariff-Induced Market Shocks

Projected Market Scenarios for 2025

Conclusion: What’s the Most Likely Outcome?

Credits

RedOakQuant.com