Good morning investors,
The S&P 500 sits just 55 points from 7,000 while the Dow breaks above 49,000 for the first time as Venezuelan oil dynamics and AI narratives drive records. Sandisk's 27% surge Tuesday exemplifies memory chip mania with DRAM prices expected to rise 40% through Q2.
Warner Bros Discovery's board unanimously rejects Paramount's hostile bid again, sticking with Netflix's $72 billion deal despite Larry Ellison's personal guarantee, while small caps continue outperforming with the Russell 2000 up 1.37% Tuesday, as multiple catalysts converge for sustained 2026 strength.
Opening Bell: Records Everywhere
Dow ($DIA ( ▲ 0.12% )) futures up 30 points while S&P ($SPY ( ▲ 0.07% )) and Nasdaq ($QQQ ( ▲ 0.21% )) futures slip 0.1% and 0.2% respectively after Tuesday's broad rally. Nine of eleven S&P sectors gained with healthcare and tech leading, while data storage names Sandisk, Western Digital, and Seagate dominated gainers.
Nvidia CEO Jensen Huang confirming "very high" Chinese demand for H200 chips with production already flowing validates continued AI spending despite export restrictions. The company working out final licensing details with the government suggests imminent approval.
Memory Chip Mania Intensifies
Sandisk's ($SNDK ( ▼ 0.59% )) 27% Tuesday explosion after being 2025's best S&P performer shows traders moving in herds chasing momentum. The memory shortage driving 40% price increases through Q2 creates winners and losers, which is great for Samsung and SK Hynix, painful for Apple and Dell facing margin pressure.
Jefferies' warning that bulls have "no idea" about Yangtze Memory's ramping Chinese production adds crucial nuance. The cyclical memory market swings violently between shortage and glut, and timing an exit matters more than entry. Current euphoria reminds me of previous peaks before oversupply crashes prices.
WBD-Paramount-Netflix Drama Continues
Warner Bros Discovery's ($WBD ( ▼ 0.43% )) board calling Paramount's bid "inferior" despite Larry Ellison's personal guarantee shows conviction in Netflix's $72 billion deal. Chairman Di Piazza emphasizing "compelling value, clear path to closing and protections" suggests the board sees regulatory certainty with Netflix versus antitrust risks with Paramount.
Paramount's failure to increase its $30/share offer despite explicit instructions on improvements validates the board's stance. The hostile approach directly to shareholders continues, but without sweetening terms, success seems unlikely.
Small Cap Thesis Accelerating
Tuesday's 1.37% Russell 2000 ($IWM ( ▲ 1.32% )) gain approaching new all time highs confirms my 2026 small cap conviction. Goldman Sachs noting U.S. small caps trading at 26% discount to large caps near historic lows while offering higher forward earnings growth creates compelling setup.
Multiple catalysts converge: easing rates disproportionately benefit leveraged small caps, domestic revenue concentration advantages them over multinationals, AI productivity gains deliver larger percentage impact on lower margins, and recovering M&A/IPO activity validates valuations. This isn't just January effect, it's structural rotation beginning.
Jobs Data Preview
Today's JOLTS expecting 7.72 million openings versus 7.67 million prior provides labor market temperature check ahead of Friday's payrolls. The quit rate remains crucial for gauging worker confidence, declining quits suggest employees fear job market weakness despite official strength.
ADP's December reading expecting 48,000 jobs added versus -32,000 prior sets up potential surprise given seasonal adjustments and shutdown disruptions. ISM services at 52.3 expected confirms modest expansion continues.
Venezuela's Oil Reality
Trump announcing $2 billion in Venezuelan crude imports sent WTI down to $56.85 and Brent to $60.58 as supply concerns ease. China denouncing the U.S. as "bully" after Venezuela diverts supplies from Beijing shows geopolitical tensions rising despite muted market reaction.
Chevron and Quantum Energy teaming for $22 billion bid on Lukoil's international assets demonstrates major oil companies positioning for consolidation opportunities. The Venezuelan rebuild remains years away but creates optionality for positioned players.
Hyundai's Robot Subscription Model
Hyundai leveraging Boston Dynamics to mass produce thousands of robots by 2028 with subscription model represents fascinating business evolution. Converting one time sales to recurring revenue while reducing upfront costs mirrors software's SaaS transformation.
The "robot landlord" concept where Hyundai maintains ownership while customers pay for usage creates predictable cash flows and customer lock in. Tesla's competition in humanoid robots faces formidable challenger with automotive manufacturing expertise.
January Effect Analysis
DataTrek Research's findings that January's full month correlation to annual returns stands at 0.44 provides statistical backing to market lore. When January finishes positive (60% of time since 1980), stocks gain 16.1% annually with 86% win rate. Negative Januarys still see recovery but with single-digit returns.
The first five days matter less than full month, explaining why this week's strength doesn't guarantee anything. Yet retirement contributions, fresh capital, and reset optimism create favorable dynamics worth monitoring.
Final Thought
Markets are pushing to break psychological barriers, with the S&P approaching 7,000 and the Dow above 49,000. Doing this while maintaining broad participation validates this rally's sustainability. Healthcare and tech co-leading with nine sectors positive shows healthy rotation rather than narrow speculation.
The memory chip frenzy exemplifies both opportunity and risk in momentum markets. Sandisk up 27% after already being 2025's best performer screams euphoria, yet structural DRAM shortages support continued strength. The key: recognizing when shortage becomes glut, enthusiasm becomes mania.
Small caps represent 2026's best risk/reward with multiple structural tailwinds converging. The 26% valuation discount to large caps won't persist as rate cuts benefit leveraged balance sheets disproportionately. Goldman's observation that AI productivity gains deliver larger percentage impact on lower-margin businesses creates underappreciated catalyst.
Venezuela's evolving situation creates asymmetric opportunities for energy investors. While immediate supply impact remains minimal, long-term potential accessing 303 billion barrels transforms valuations for companies like Chevron with existing expertise.
January's statistical edge combined with favorable fundamentals supports continued gains, but memory chip mania warns against complacency.
As always, feel free to reach out with questions about positioning strategies.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.