So far, this has been a fairly entertaining start to the new year! The S&P 500 started off with a bounce to 6050, pushed briefly below our line-in-the-sand level of 5850, and then finished this week with a retest of 6000. While the VIX remains fairly low relative to historical levels, it feels as if our “emotional volatility” remains pretty elevated!

In recent interviews for !

And remember, the point of this exercise is threefold:

1. Consider all four potential future paths for the index, think about what would cause each scenario to unfold in terms of the macro drivers, and review what signals/patterns/indicators would confirm the scenario.
2. Decide which scenario you feel is most likely, and why you think that’s the case. Don’t forget to drop me a comment and let me know your vote!
3. Think about how each of the four scenarios would impact your current portfolio. How would you manage risk in each case? How and when would you take action to adapt to this new reality?

Let’s start with the most optimistic scenario, with the QQQ achieving a new all-time high over the next six to eight weeks.

Option 1: The Very Bullish Scenario

What if the S&P 500 resumes the uptrend phase from September through November of 2024? The very bullish scenario would mean the SPX pushes above the previous all-time high at 6100 and does not look back. Trump takes off and, instead of shocking the market with fears of inflation, his new policy decisions represent a more measured approach to tariffs. The Magnificent 7 names resume their leadership role, earnings season is a blowout blast of bullishness, and the S&P 500 hits 6500 before February 1st.

Dave’s Vote: 10%

Option 2: The Mildly Bullish Scenario

Perhaps the Magnificent 7 stocks don’t return to new all-time highs, but continue to remain rangebound over the next month. Value sectors like financials and industrials take on a leadership role, and small caps finally begin to outperform their large cap cousins. Trump’s early policy decisions still feel inflationary, and as a result, investors are hesitant to take on more risk until we get more clarity.

Dave’s vote: 30%

Option 3: The Mildly Bearish Scenario

What if last week was a countertrend move higher, often known as a “dead cat bounce”, and over the next few weeks we see another down leg for the S&P 500? There are notable breakouts in the value sectors, but the mega-cap growth trade still doesn’t take off. Inflation fears increase as the new president takes office, and investors hang on every economic release for signs of optimism. The mildly bearish scenario would mean a retest of the January swing low around 5800, and we begin the month of March wondering whether 5800 will hold this time around.

Dave’s vote: 50%

Option 4: The Super Bearish Scenario

We always have to consider the doomsday scenario, where conditions deteriorate much more quickly than expected. Earnings season is a bust, Trump’s new administration lights up tariffs, and inflationary fears lead to low confidence in the Fed’s ability to take decisive action. The S&P 500 pushes down to the 200-day moving average, and after a brief bounce, drops down to around 5500 by the end of February.

Dave’s vote: 10%

What probabilities would you assign to each of these four scenarios? Check out the video below, and then drop a comment with which scenario you select and why!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Research LLC

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

Mid-caps show leadership and were the first to trigger a breadth thrust. Stocks surged this week with mid-caps showing the highest participation rate. Chartists can quantify the participation rate and identify breadth thrusts using the percentage of stocks above their 20-day SMAs. We will analyze these indicators for six broad indexes and show the breadth thrust for the S&P MidCap 400.

Chart Link

The CandleGlance charts above show the percentage of stocks above their 20-day SMAs for the S&P 500, S&P 100, Nasdaq 100, S&P MidCap 400, S&P SmallCap 600 and S&P 1500. We can identify the leaders and the laggards by comparing values. Mid-caps are leading as S&P MidCap 400 Percent Above 20-day SMA ($MIDA20R) surged to 76 percent (blue circle), the highest of the six. This means 76 percent of its component stocks are above their 20-day SMAs. This is a big change because this number was below 10% in mid December. Small-caps are lagging as $SMLA20R finished at 64.17 percent (pink circle). Everything else is in between.

Chart Link

The chart above shows S&P MidCap 400 Percent Above 20-day SMA ($MIDA20R) in the top window with the oversold line at 10 percent (pink) and the thrust line at 70 percent (blue). This indicator formed a bullish divergence and then triggered a breadth thrust on Thursday. A move below 10 percent marks a downside extreme that signals an oversold condition (pink shading). Stocks, however, can become oversold, and remain oversold. Therefore, we need to wait for an upside catalyst. A subsequent move above 70% (blue dashed lines) shows a participation thrust, which means the vast majority of component stocks participated in this advance. Broad participation is bullish. $MIDA20R was the first of the six to cross above 70 percent.

At TrendInvestorPro, we pointed out oversold breadth in December and featured the divergence in Tuesday’s report. A divergence forms when the underlying index ETF (MDY) forges lower lows and the indicator forms higher lows (blue lines). MDY fell from mid December to mid January (lower lows), but fewer stocks within the index moved below their 20-day SMAs during this timeframe. Put another way, more stocks held above their 20-day SMAs. Divergences in March and October 2023 also preceded breadth thrusts.

This week at TrendInvestorPro we covered six Market Regime charts on Wednesday and highlighted seven leading ETFs om Friday’s report/video. Leadership is coming from the middle of the market, and specifically from three sectors. Click here to take a trial and get immediate access.

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Energy Replaces Technology

At the end of this week, 1/17/2024, the Technology sector dropped out of the top 5 and will be replaced by Energy. The ranking in the top 5 has also changed. XLY is still number one but XLF raised to the #2 spot, pushing XLC down to #3.

XLI rose to #4 and, as said, XLK dropped out of the top 5 to #6 while XLE moved up to the #5 spot entering the portfolio.

1. XLY – Consumer Discretionary
2. XLF – Financials
3. XLC – Communication Services
4. XLI – Industrials
5. XLE – Energy
6. XLK – Technology
7. XLU – Utilities
8. XLRE – Real Estate
9. XLP – Consumer Staples
10. XLV – Health Care
11. XLB – Materials

I started adding the ranking for all sectors so it will be easier for us to monitor which sector or sectors are picking up and make a chance to enter the top 5.

Weekly RRG

On the weekly RRG, XLY, XLC, and XLF remain firmly on the right-hand side of the graph despite their loss of relative momentum, which is causing the tails to roll over.

XLI has now crossed over into the lagging quadrant while XLE has started to hook back to the right on the edge of the lagging and the improving quadrants. The Technology sector remains inside the improving quadrant but is not able to make a real push for leading.

Daily RRG

The bigger shifts become visible on the daily RRG. XLE shoots into the leading quadrant while Technology moves opposite and enters the lagging quadrant. Combining these moves with the weekly RRG has caused the switch of positions for these two sectors.

The improvement of Industrials and Financials has pushed them up in the ranking while the weakness of Communication Services led to a drop, while still inside the top 5.

The strength of Consumer Discretionary remains, mainly from its strong position on the weekly RRG. The curling up of the daily tail will only help the sector remain inside the top 5.

Consumer Discretionary

The strong move higher this week could well establish a higher low and confirm the existing uptrend. Despite a small loss of relative momentum, with the green JdK RS-Momentum line dipping, the RRG lines remain firmly above 100, keeping the sector inside the leading quadrant.

Financials

This week’s strong move higher took XLF back above the rising support line which it threatened the last few weeks. The higher low is now in place and the raw RS-Line got a push in the back and bottomed out around the breakout level from the sideways range.

Communication Services

This sector held up well but is still back inside the boundaries of the rising channel. I am not the biggest fan of such moves but stepping aside and looking with a fresh eye this may well evolve into a flag-like pattern. Following the RRGv1 strategy, this is still one of the stronger sectors.

Industrials

Price bottomed out exactly against the rising support line after completing a small bottom formation. It now has plenty of upside room within the rising channel, and the RS line has put in a higher low, albeit shallow.

Energy

The Energy sector is the new kid on the block. On the price chart, XLE jumped from the lower boundary and is now underway to horizontal resistance around 98.50.

The raw RS-Line remains within the boundaries of its declining channel, keeping the weekly tail on the left-hand side of the RRG plot. The recent strength in the sector pushed the daily tail deep into the leading quadrant, far ahead of all other sectors. The combination of weekly and daily tail positions pushed XLE above XLK, entering the top 5 portfolio.

Performance

The performance of the best 5 sectors at the end of last week was 2.73% vs. SPY 2.21% (measured against the start of this experiment), hence a 0.52% outperformance. I will update the portfolio, adding XLE and removing XLK, against the opening prices of next week (which will be Tuesday!!!).

A note on weights

So far I have used equal-weight positions for this portfolio of the best 5 sectors. But while doing more research and running more tests I realized that that is not the correct way to do it.

Don’t get me wrong, the strategy works and the outcomes using equal-weight positions are historically positive, but there is a flaw.

This is best explained using the technology sector as an example. At the moment XLK makes up 31.6% of SPY.

So when I add XLK to the portfolio at 20% I am still UNDERWEIGHT 10% against the benchmark. In other words, when XLK is in the top 5, meaning it is one of the best 5 sectors, in the portfolio I am still 10% behind the benchmark and XLK is not able to contribute to the performance as much as it should.

On the other end of the spectrum is XLRE at 2.1% of the benchmark. So when I add that sector at 20% I am almost 10x overweight.

Compare that to the 10% underweight for XLK, and it’s not hard to understand that such a weighting scheme causes all kinds of shifts in this strategy’s risk-reward profile.

For now, I’ll continue with the equal weight scheme while working on a more dynamic weighting scheme based on the benchmark weights of the sectors that made it into the top 5.

Have a great weekend and #StayAlert. This week’s article is coming from Tampa, FL where I attended the CMTA mid-winter retreat. Next week I will be working from the Stockcharts.com office in Redmond, WA –Julius

When I look back at leading industry groups for the past day, week, month, 3-month, 6-month, and 1-year periods, only one industry group has been among the Top 20 industry groups for each of those 6 different periods. It’s a group that I liked heading into 2024 and it’s a group that I still like in 2025.

Banks ($DJUSBK).

If you take a look at how banks have kicked off earnings season, then it probably makes a lot of sense why they’re so in favor. Let’s look at the bigger banks that reported quarterly earnings since Wednesday:

• JP Morgan Chase (JPM): 4.81 vs. 4.03 (actual vs. estimate)
• Wells Fargo (WFC): 1.42 vs. 1.34
• Citigroup (C): 1.34 vs. 1.25
• Bank of America (BAC): .82 vs. .77
• PNC Financial (PNC): 3.77 vs. 3.30
• US Bancorp (USB): 1.07 vs. 1.06
• M&T Bank (MTB): 3.92 vs. 3.70
• First Horizon (FHN): .43 vs. .38
• Truist Financial (TFC): .91 vs. .87
• Huntington Bancshares (HBAN): .34 vs. .31
• Regions Financial (RF): .59 vs. .55
• Citizens Financial Group (CFG): .85 vs. .83

That’s the 12 largest banks that reported quarterly earnings last week and every single one of them beat EPS expectations, but JPM did so by a MILE! This is what happens when the yield curve uninverts and the net interest margin widens for banks. I’ve said on many occasions that this is the group that will benefit immensely from an improving economy and a lower fed funds rate.

Here are the charts for banks ($DJUSBK) and the bellwether JPM:

Banks:

The most telling part of the story on this chart is told in the bottom 2 panels. Once the long-term yield began to turn higher vs. the short-term yield, banks began to significantly outperform the benchmark S&P 500 in anticipation of the strong earnings that you can see above the chart. And it just makes common sense as the net interest margin for banks can only go up with this type of interest rate environment. That’s the fundamental side, which is certainly important. However, more important are the charts, and this one remains in a very bullish pattern. Currently, we appear to have the right side of a potential cup forming. The PPO is coming off a centerline test and is gaining bullish price momentum. The AD line is back near its 52-week high. I see banks going higher from here, though we do need to see price break out above the high from late November to confirm. Our primary indicator, the combination of price action and volume, suggests trend continuation.

JPM:

This is the PERFECT example of a stock that we like to own. JPM has gained 59.57% over the past year and it’s clearly a leading stock in a leading industry group. This is the key element that powers our portfolios – lining portfolios with leaders. We started our Model Portfolio on November 19, 2018, in the midst of the trade war and a cyclical bear market. 6 months later, we started our Aggressive Portfolio on May 19, 2019. Check out our stellar performance, especially vs. the benchmark S&P 500:

The Model Portfolio’s 289% advance vs. the S&P 500’s 123% advance. That’s crazy and when you consider what we’ve had to navigate these last 6+ years, it’s even crazier! We’ve endured the 2018 trade war and resulting cyclical bear market, the 2020 pandemic and resulting cyclical bear market, and the 2022 cyclical bear market, along with the worst inflation since the 1980s. That’s 3 bear markets, each falling 20% or more, in just over 6 years. No one consistently outperforms the benchmark S&P 500 like this, unless you follow our time-tested portfolio strategies. They don’t outperform every quarter (who does?), but these 6-year results speak for themselves.

Q4 Earnings

Earnings drive our portfolios. A company will never be included in our portfolios UNLESS it beats its latest quarterly revenue and EPS estimates. This isn’t a preference, it’s a MUST.

Earnings last week were, in most cases, WAAAAAY ahead of consensus estimates. Bank stocks have kicked this earnings season off in a very bullish way. But there’s another group, and you won’t believe which group it is, that is setting up to deliver BLOWOUT quarterly results, most likely better than banks. I’ll give you the group and one of its key stocks in our Tuesday EB Digest newsletter. I believe this elite company is set to report revenues and earnings way above current expectations. If you’re not already a FREE EB Digest subscriber, simply CLICK HERE, enter your name and email address, and join the tens of thousands of traders/investors around the globe! Make a difference in your trading in 2025!

Happy trading!

Tom