The Market Outlook for the Week Ahead, or Risk is Rising

On Saturday night, I received an urgent call from a Mad Hedge Concierge client who was expecting a stock market crash to ensue at any time. Would the US attack on Venezuela be the trigger?

Not a chance, I answered. The military action would have no market impact. If anything, the removal of uncertainty in a year of endless uncertainty might actually cause the stock market to rise. But even I was unprepared for the monster five-day 1,200-point, 2.5% rally in the Dow Average we got.

Welcome to the stock market of 2026, with a black swan a day.

I have spoken to probably two dozen portfolio managers over the last three weeks, and they all have one thing in common. They are all long, and they all hate it.

Stock markets are at all-time highs. An S&P 500 (SPY) price earnings multiple at 25X is at a 26-year high. The market is powering upward on the prospect of super liquidity at midyear, Kool-Aid drinking, and fumes. This is normal behavior in the sixth year of a six-year bull market (I don’t count the 2022 dip as a real bear market).

And here is the problem for money managers everywhere. Markets can run on super liquidity, Kool-Aid drinking, and fumes for a very long time. The last three years of the Dotcom Bubble from 1997-2000, which I traded until the very last day, made no sense whatsoever from a valuation, cash flow, or earnings point of view.

It was all fluff.

But power on the market was endless. A lot of hedge funds went bust during this time, selling short overvalued technology stocks too soon.

So here we are all and hating our portions.

I can also tell you, the character of this stock market has changed. You may have noticed that we are seeing wild intraday swings in single stocks. Microsoft (MSFT) and AbbVie (ABBV) are recent examples.

We are also seeing the Volatility Index ($VIX) plumbing multiyear lows, while the options implied volatilities of single stocks are rising. This is a rare occurrence and is also indicative of market tops.

Let me talk about the coming super liquidity. The layman’s explanation is that the printing presses are about to run 24/7, debasing the US dollar by at least another 10% and igniting inflation. Quantitative Easing, which started on December 1, will blow up the Fed balance sheet by at least $3 trillion this year. And the president has promised that the next Fed governor will take overnight rates down to 1% on day one.

Let me put this all in perspective. The greatest wartime debt to GDP in US history was in 1943 at 28% when the government took delivery of 100,000 combat aircraft that won WWII. The greatest peacetime debt to GDP in history is now, some 18% of our $28 trillion GDP.

On top of that, another 21% of GDP worth of debt from the previous Trump administration is maturing and has to be refinanced, taking the grand total to 41% of GDP. This is why the government is panicking and using every means possible for the government to buy back its own debt.

Whether the bond market can handle this will be the seminal investment question of 2026. By the way, Japan went this route in 1990 and ended up with 30 years of no economic growth, the world’s highest debt-to-GDP ratio, and zero stock market returns.

We also received an indication on Friday that Fannie Mae and Freddie Mac would buy $200 billion worth of mortgage-backed securities. Never mind that these entities are in receivership (bankrupt), can only get money from Congress, and this amounts to a mere two days’ volume in the massive mortgage-backed market.

So I wouldn’t count on this happening any time soon. But it was enough to take 30-year fixed rate mortgage rates below 6.0% for the first time in a year. It also ignited a huge short-covering rally in the entire real estate sector.

You may recall, I expected exactly such a move in last week’s letter. The moves were breathtaking, with DH Horton (DHI) up 14%, Rocket Mortgage (RKT) picking up 12%, and Sherwin-Williams (SHW) gaining 6%. Many of these stocks recovered half of their losses from their September highs in a single day. It still remains one of the few unloved bargain sectors in the entire market.

I am not inclined to chase big moves based on a sole tweet. But the recovery in real estate will occur someday. It may be time to start buying the big dips.

Or you can just turn off the TV, ignore the noise, and not try to outtrade hedge fund leader Citadel Securities. As long as technology is improving, and if anything, it is now accelerating, share prices will rise over the long term.

Sure, you may get the occasional 50% drawdown. Remember that only last April, market leader Nvidia (NVDA), which we all own, ended a two-month 39% fall. That was when the company’s price-earnings multiple fell into the teens.

My response to these volatile and contradictory markets is to do what I always do. Ignore the noise and buy low and sell high. It’s my unique idea, which I am thinking of patenting. Everyone talks about it, but nobody ever does it.

Tech stocks saw their first up days of 2026 on Friday, ending 20% corrections for many of the best stocks. That was enough to prompt me on the long side.

How about you?

I closed out 2025 up +62.02%. That takes my average annualized return to +50.61%, and my performance since inception reaches a new all-time high of +813.96%. These are all non-compounded numbers.

I entered the new year 100% in cash, waiting for the market to tip its hand on directions. That direction now appears to be up. On Friday, I added new longs in Apple (AAPL) and CrowdStrike (CRWD), taking advantage of 20% in both stocks. That leaves me 20% long and 80% in cash awaiting the next market bottom, where I will try to increase risk.

Some 65 of my 79 round trips in 2025 were profitable. We were up every month for the second year in a row in one of the most difficult trading years in market history.

Try beating that anywhere.

Nonfarm Payroll Rises by a very Weak 50,000 in December, down 80% from a year ago. The figures were leaked by the president on Truth Social the night before to boost traffic. The Headline Unemployment Rate fell to 4.4%. The hiring freeze continues with the worst job numbers since the pandemic. Wages rose 0.3% for the month, giving us a full-year advance of 3.8%, topping the inflation rate.  Not good. Ten-year US Treasury yields hit a five-month high at 4.21%.

Inflation Cools with a 2.7% CPI for October and November combined. Many data points were missing thanks to the longest government shutdown in history, where data was just not collected by laid-off government workers. Cities where data is no longer collected were marked as having a zero inflation rate. It is a real apples-and-oranges comparison, almost useless. Tariffs left a big footprint.

Stock Market Rockets on Venezuela Attack, removing uncertainty for the investors.  The same thing happened in 1991 when the onset of the first Gulf War ignited stocks, but also crashing oil prices. I know a hedge fund that went bust betting the wrong way on oil. Still ahead, an imminent Supreme Court decision on tariffs and a market-destroying impending government shutdown on January 30.

US Manufacturing Jobs are in Free Fall. continuing an eight-month skid that began last spring after President Donald Trump rolled out aggressive import taxes that he pledged would lead to a resurgence of blue-collar jobs by reshuffling world trade to favor U.S. workers. The reshuffling has certainly occurred, with the U.S. collecting around $30 billion a month in tariff revenue, spread among U.S. consumers, importers, and overseas exporting firms, and as firms first frontloaded goods abroad to stock their shelves with tariff-skirting inventory, then slowed their purchases and brought down U.S. import levels.

Gasoline Prices Hit 4 Year Low, thanks to collapsing crude, which hit $55 a barrel. The average price of unleaded gasoline in the U.S. has fallen to its lowest level since 2021, according to AAA. I saw $2.70 a gallon in Nevada. Some 110 million Americans are expected to make road trips this holiday season.

Gold (GLD) to Hit $4,800 and Ounce by End 2026, says Morgan Stanley. In a note dated January 5, it also said the attack on Venezuela over the weekend was likely to attract buyers to gold as a safe haven, but did not specify this as a reason for its $4,800/oz forecast. Traders view gold as a safe store of value during times of economic and geopolitical turmoil that also performs well in low-interest-rate environments when its non-yielding nature is less of a disadvantage financially. For silver, the bank said 2025 marked a peak deficit, adding China’s export license requirements, which have taken effect from the start of this year, added to the “upside risk for silver”.

Silver recorded its strongest annual gain in 2025, surging 147%, on rising industrial and investor appetite and a structural market deficit. Buy (GLD) and (SLV) on dips.

Margin Requirements Rise for Gold and Silver, after the ballistic December performance. Gold is up more than 64% year to date, on track for its best annual performance since 1979 and third straight positive year. The rally has been supported by a multitude of factors, including the impact of US interest rate cuts, tariff tensions, and robust demand from exchange-traded funds and central banks.  Silver has far outpaced gold in 2025. The metal, which has endured wild price swings in recent days, is on course for annual gains of nearly 150%. Like gold, this would be silver’s best yearly performance since 1979. Silver’s price boom has stemmed from a mix of low supply and high demand from India, as well as industrial needs and tariffs. The long-awaited consolidation is here. Avoid (GLD) and (SLV) for the short term.

GDP Grows at an Annualized 4.3% in Q3, a two-year high. The figure received a huge one-time only boost from the collapse of imports triggered by tariffs, which are subtracted from the GDP calculation. The government is going to have to find another source of growth in 2026. You only get an import collapse once. An impending government shutdown on January 30 won’t help.

S&P Case Shiller Gains Modestly in October, up a weak 1.4%. Gains were seen in Chicago (+5.8%), Cleveland (+4.1%), and New York City (+5.0%). Losses were seen in eight cities, with Tampa (-4.2%), Phoenix (-1.5%0, and Dallas (-1.5%) posting the worst numbers. Real Estate was the worst-performing sector in the S&P 500 in 2025. With rates at these levels, first-time buyers have to save for seven years to make the down payment.

Tesla (TSLA) EV Sales Drop 9% in 2025, and 29% in the UK in December as Chinese brands take over the global market. Tesla has become a lagging No.2 in the EV scene. BYD UK registrations surged nearly 5-fold last month, according to New AutoMotive. Sell (TSLA).

Strategy (MSTR) Discloses $17.44 Billion Loss in Q4, thanks to a 36% collapse in the price of Bitcoin. Shares of the largest corporate holder of bitcoin slumped about 47.5% in 2025 as investors reacted to swings in cryptocurrency markets that impacted Strategy’s balance sheet and earnings. As of January 4, 2026, the balance of the USD Reserve was $2.25 billion, the company said. Strategy has maintained a U.S. dollar reserve to support the payment of dividends on its preferred stock and interest on its outstanding debt. At this point, you probably want to be buying dips in (MSTR) on hopes of a Bitcoin rebound.

US Trade Deficit Hits 15 Year Low. Tariffs have made imports so expensive that nobody can afford to buy anything anymore. It’s another sign of shrinking standards of living. In the meantime, over 1,000 companies. The US dollar finally caught a bid on the news.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns over the next four years. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.

On Monday, January 12, at 8:30 AM, a number of Fed speakers make their opinions known.

On Tuesday, January 13, at 8:30 AM EST, the US Inflation Rate is announced.

On Wednesday, January 14, at 8:15 AM EST, the Producer Price Index is disclosed.

On Thursday, January 15, Weekly Jobless Claims are published. We also get the New York Empire State Manufacturing Index is released.

On Friday, January 16, US Industrial Production is published.

At 10:00 AM EST, we obtain the Baker Hughes Rig Count.

As for me, the University of Southern California has a student jobs board that is positively legendary. It is where the actor John Wayne picked up a gig working as a stagehand for John Ford, which eventually made him a movie star.

It landed me a summer job working for Thomas Noguchi, the Los Angeles County “Coroner to the stars.” Another year, I snared a job at a preschool for the children of stars, where I taught the kids of the Mamas and the Papas how to swim. They grew up to form their own rock group (Wilson Phillips).

As a beneficiary of a federal work/study program in 1970, I was entitled to pick any job I wanted for the princely sum of $1.00 an hour, then the minimum wage. I noticed that the Biology Department was looking for a lab assistant to identify and sort Arctic plankton.

I thought, “What the heck is Arctic plankton?” I decided to apply to find out.

I was hired by a Japanese woman professor whose name I long ago forgot. She had figured out that Russians were far ahead of the US in Arctic plankton research, thus creating a “plankton gap.” “Gaps” were a big deal during the Cold War, so that made her a layup to obtain a generous grant from the Defense Department to close the “plankton gap.”

It turns out that I was the only one who applied for the job, as postwar anti-Japanese sentiment then was still high on the West Coast. I was given my own lab bench and a microscope and told to get to work.

It turns out that there is a vast ecosystem of plankton under 20 feet of ice in the Arctic, consisting of thousands of animal and plant varieties. The whole system is powered by sunlight that filters through the ice. The thinner the ice, such as at the edge of the Arctic ice sheet, the more plankton. In no time, I became adept at identifying copepods, euphasia, and calanus hyperboreaus, which all feed on diatoms.

We discovered that there was enough plankton in the Arctic to feed the entire human race if a food shortage ever arose, then a major concern. There was plenty of plant material and protein there. Just add a little flavoring, and you have an endless food supply.

The high point of the job came when my professor traveled to the North Pole, the first woman ever to do so. She was a guest of the US Navy, which was overseeing the collection hole in the ice. We were thinking the hole might be a foot wide. When she got there, she discovered it was, in fact, 50 feet wide. I thought this might be to keep it from freezing over, but I thought nothing of it.

My freshman year passed. The following year, the USC jobs board delivered up a far more interesting job, picking up dead bodies for the Los Angeles County Coroner, Thomas Noguchi, the “Coroner to the Stars.” This was not long after Charles Manson was locked up, and his bodies were everywhere. The pay was better, too, and I got to know the LA freeway system like the back of my hand.

It wasn’t until years later, when I had obtained a high security clearance from the Defense Department, that I learned of the true military interest in plankton by both the US and the Soviet Union.

It turns out that the hole was not really for collecting plankton. Plankton was just the cover. It was there so a US submarine could surface, fire nuclear missiles at the Soviet Union, then submerge again under the protection of the ice.

So, not only have you been reading the work of a stock market wizard these many years, but you have also been in touch with one of the world’s leading experts on Arctic plankton.

Live and learn.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader