In April last year I took a look at the market potential for a downturn that ultimately, never materialized. That scenario was negated by the break of the March high during the summer, followed by a sequence of higher highs and higher lows as part of a bull market cycle. So what will 2025 bring?
1. Search Sentiment
First off, I took a look at search-sentiment. How many people have searched for the term "market crash" in the United States? More often than not, these spikes - when they occur - are more often associated with major market bottoms than market tops.
When we match the search spikes to a chart of the S&P 500 we can see how nearby market lows turn into major market lows. The odd one out could be the June 2024 search spike as there was barely a pause in the advance, not something we have seen during other search-spikes, with the possibe exception of the February 2018 spike. However, what I do like about the 2024 spike is how it occurred around a solid psychological support of 5,000 in the S&P.
2. Fed Funds Effective Rate
After an extended period of near-zero interest rates caused by the credit crisis, we have now returned to a more typical rate rising cycle that brings with it the associated risk of recession. Historically, Fed rates are relatively low, although consumers voted for change during the election. Economic conditions are skewing more bearish, but there is room for Fed maneuver if needed.
3. Consumer Discretionary and Staples
When we look more at breadth metrics we have a more mixed picture. The one chart that is screaming a major market low is the relationship between consumer discretionary and staples ETFs (originally featured by J.C. Parets). Supporting technicals in 2023 mirrored that of the low in 2009. Whether we have a secular low in place will become apparent in the months ahead, but it's a positive start.
4. Transports and Industrial Average
But when we look at the relationship between the Dow Transports and the Dow Industrial Average, we see a downward trend as the Dow Transports drop back into their prior base while the Industrial Average kicks on.
This trend shift suggest a cooling period is on the horizon, but when this relationship comes with a spike low, then a major market low will be in place.
Looking at a target for the Dow Transports? Hitting 11,000 in 2026 is the measured move target.
5. S&P 500's Bearish Inversion
Investor sentiment is shifting more bearish, particularly after the election. We will be more comfortable calling a major swing low when we get the bearish inversion, as happened in 2023 and 2022. Realistically, it will take a test of the 200-day MA to get there.
6. S&P 500 Equal Weight Index
The equal-weighted S&P index is actually closer to a test of its 200-day MA.
7. S&P 500 Bullish Percent and Percentage of Stocks Above 50-Day MA
When we look at S&P Bullish Percents and Percentage of Stocks Above 50-day and 200-day MAs, things look much better for bulls and a major low. These metrics suggest a major low is in place, and if not, then a significant positive divergence will take shape in 2025.
8. Nasdaq
2024 was a year of rising new 52-week highs for the S&P and Nasdaq, but as the year closed out we have started to see that shift and swing back in favor of new 52-week lows; 2025 could be a little rocky in this regard.
9. RSP to SPY (NYSE:SPY) Chart
I don't know what to make of the next chart as we are far away from the conditions of 2009 lows or even the 2020 low, and I don't see the S&P offering the strong 'buy' this chart suggests given we haven't yet tested the 200-day MA in the equal-weight or 'regular' S&P. One to re-evaluate in the year ahead.
And the inverted yield curve suggests we are more likely to see further selling in 2025.
When I look at a cross-section of sectors, I see a Dow Jones World Index, Dow Industrial, and Technology sector that has peaked, with Basic Materials already in decline.
10. Dow Jones
A dollar still in ascendancy but a few years from a top, and a commodities market on the rise after a spike low in 2020. This is a monthly chart, so while my previous comments suggest there is room for further upside, we need to consider a period of slow down - if not decline - may only be a few years away for equity markets. The next era of commodity (and/or crypto) bugs is already upon us.
Certainly, the arrival of "President Musk", and the breakout in Bitcoin (and strength in crypto in general) from a lovely cup-and-handle pattern, will define the rest of this decade.
The relationship between the Pring's Inflation and Deflation Index suggests we haven't yet hit an opportunity low for commodity buying, despite the rise in the commodity index. Another one for commodity bugs to watch; prepare for a breakout in the bullish wedge.
As we head into 2025 it does look like we can expect some weakness in markets, although I would not expect a violation of 5,000 support in the S&P. This may give us one more surge in markets before a significant top comes into play. Ideally, to have the S&P play out a sideways move like it did in 2015/2016 , with 5,000 the range support low, would leaves things nicely set.
If 5,000 doesn't hold as support, then a 50% Fib retracement to 3,200s (the 2020 high) would reflect a larger correction that the cross-section chart suggests is coming, but I don't see this happening in 2025 (or 2026).