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Back in early October, I made a post claiming that QQQ with top out at about $637, most people said I was crazy, then ironically, that was the exact spot it corrected weeks later.
Here we are three months later, and we are just about at that level again. So now what?
With the recent batch of earnings, it does appear the market is building strength, but there are a few signs that underlying market weakness is continuing to build.
Maybe we top out here, or maybe resistance breaks, only to produce a throw over, which is common on the fifth wave of an Elliott structure.
Other issues I’m seeing…
# Liquidity
Liquidity is the first and most important piece of the puzzle. Liquidity is essentially the fuel that drives financial markets. A perfect example of this was during Covid when the government stimulus helped power a major rally. On the other hand, when the quiddity drives up, markets often struggle even if fundamentals are strong.
Many traders don’t look at liquidity at all, others only focus on if the Fed is engaging in quantitative easing or quantitative tightening, but that’s only part of the story.
Another important tool is the Federal Reserve’s Overnight Reverse Repurchase Agreement facility, commonly referred to as RRP. This program allows large financial institutions, especially money market funds, to park cash at the Fed overnight in exchange for Treasury securities.
Last year, markets held up better than expected during the quantitative tightening phase because money was flowing out of the RRP and back into the financial system. Essentially, RRP acted as a cushion against the quantitative tightening process.
Take a look at RRP now…
https://preview.redd.it/szohwrk6u3gg1.png?width=1024&format=png&auto=webp&s=f0a8c6ccc64ab0870f5e595476053d40a9fb19c7
That cushion is now essentially gone. Balances in the RRP facility have fallen from roughly $2.5 trillion in 2023 to only about a billion today. That is essentially nothing.
When the tank is empty, it becomes concerning. The large pool of idle cash that could flow back into the system is now gone, and so is the excess fuel that can power the market forward; this is generally negative for stocks.
# Call/Put Ratio
One of my favorite sentiment indicators and one of the indicators that is often overlooked is the put/call ratio.
This indicator compares the volume of put options traded to that of a call option. When the ratio hits .75 the suggests that fear is dominating as traders seek increased protection. Being that this is a contrary an indicator, this often marks market bottoms. Low readings, generally below 0.55, signal complacency and excessive optimism, which tend to show up near market tops.
Right now, the equity put call ratio is at .54, so yeah, it’s at a level where we need to be concerned that a market top could be forming and a pullback is on the horizon.
# XLY vs. XLP
Something else I am monitoring is the relationship between the Consumer Discretionary (XLY) vs. Consumer Staples (XLP).
XLP represents companies that sell essential goods such as food, beverages, and household products. Things everybody needs and will continue to buy in any market environment. XLY represents more discretionary spending, including companies like Amazon, Tesla, and Home Depot. These are purchases people make when they feel confident in their finances.
When XLY outperforms XLP, it signals a risk on environment. Consumers are spending freely, and that is typically bullish for the economy and the market. When XLP starts to outperform XLY, it suggests consumers are becoming more cautious and shifting spending toward necessities. That defensive rotation can be an early warning sign, even if the broader market is still climbing.
See Chart...
https://preview.redd.it/r1hdiss9u3gg1.png?width=1024&format=png&auto=webp&s=1b0cfc6c35eeebac7c36ac44600a4643d9ea4eec
We are now seeing signs that Staples are beginning to outperform Discretionary. That shift does not mean a selloff is about to happen. Markets can continue rising for weeks even as these internal warning signals build. However, it does tell us that defensive positioning may be quietly increasing under the surface.
As of late January 2026, XLP has shown noticeably stronger performance year to date compared with XLY. When you combine that with a put/call ratio hovering near complacent levels, it suggests the market may be on a short leash where the risks are rising.
Most people probably don’t even know what I’m talking about when I say the Gann window from February 9-11 is quickly approaching, but this is generally an inflection point where markets turn around.
You should digest this information however you wish. There’s no reason to jump to conclusions one way or the other, but as traders we should consider that conditions are shifting and that being a little more defensive heading into February, which is generally the second worst trading month of the year and one of only two months that has negative returns over the last 80 years, is simply good financial positioning.