The 10-Year Treasury Yield has gone up a full percentage point, from a low of 3.6% in September 2024 to a level of 4.6% this week. So what does this rapid rise in interest rates mean for your portfolio? Let’s look at the shape of the yield curve by comparing multiple maturities, review how recent moves on the yield curve relate to previous recessionary periods, and analyze the most important charts to gauge a potential impact.

Higher Rates Mean Bad News for Borrowers

The chart of the 10-Year Treasury Yield ($TNX) has effectively been in a wide trading range since mid-2023. The 10-Year has fluctuated between lows around 3.6-3.8% and highs in the 4.7-5.0% range. As we’re now seeing a 4.7% yield on the 10-Year, we could be setting up for a retest of the 2023 high around 5.0%.

Higher rates can definitely put pressure on industry groups like homebuilders, because this move in the 10-Year means new home buyers can expect much higher mortgage payments. In terms of broad market implications, the shape of the yield curve could have even more significance in the coming months.

The bottom two panels show the spread between the 10-year point on the yield curve compared to two other maturities: the 3-month and 2-year points. In recent years, we have experienced an inverted yield curve, where the short-term yields are higher than long-term yields.  But with the Fed lowering short-term rates, and long-term rates turning back higher, we once again have a normal shaped yield curve.

The Yield Curve Is No Longer Inverted — So What?

Investors love to debate whether a recession is likely, because that confirms that the economy is no longer growing as it usually does. But given the lag in economic data, investors can actually look at the shape of the yield curve to determine if conditions are present that suggest a recessionary period is coming.

Here, we’re taking the 2-year vs. 10-year points on the yield curve and plotting that spread back to 1985. I’ve placed a red vertical line where the yield curve turned back to a normal shape after being inverted, and I’ve also included orange-shaded areas which represent recessionary periods.

You may notice that over the last 40 years, every time we’ve had an inverted yield curve where the spread then turned back positive, we’ve seen a recession soon afterwards. You may also notice that the performance of the S&P 500 (bottom panel) confirms that the yield curve moving back to a normal shape usually happens just before a bear market begins.

While the long-term implications of a normal shaped yield curve are bullish, as they imply optimism about future economic growth, the reality is that the short-term environment for stocks is usually fairly unstable.

Market Trend Is What Matters Most

So what do we do given this bearish headwind for stocks going into 2025? I would argue that now, more than ever, it pays to follow the trend. As long as the medium-term and long-term trends in the S&P 500 remain constructive, then I’ll want to follow that uptrend until proven otherwise.

My Market Trend Model is designed to track the trend in the S&P 500 on three time frames: short-term (a couple days to a couple weeks), medium-term (a couple months), and long-term (over a year).  As of mid-December, the short-term model turned bearish for the S&P 500. The medium-term and long-term models remain bullish through last Friday.

I consider the medium-term trend to be the most important, as it serves as my main “risk on/risk off” measure. When the model is bullish, that tells me to look for long ideas and take on additional risk. When the model is bearish, that tells me to focus more on capital preservation than capital growth.

The short-term model turned negative five times in 2024, but the medium-term model remained bullish in all five cases. This helped me understand that those were brief pullbacks within a longer uptrend phase. If and when the medium-term model turns negative, you’ll hear me take on a much more cautious tone on my market recap show, as I’ll be looking for opportunities to take risk off the table.

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.

S&P 500 earnings are in for 2024 Q3, and here is our valuation analysis.

The following chart shows the normal value range of the S&P 500 Index, indicating where the S&P 500 would have to be in order to have an overvalued P/E of 20 (red line), a fairly valued P/E of 15 (blue line), or an undervalued P/E of 10 (green line). Annotations on the right side of the chart show where the range is projected to be based upon earnings estimates through 2025 Q3.

Historically, price has usually remained below the top of the normal value range (red line); however, since about 1998, it has not been uncommon for price to exceed normal overvalue levels, sometimes by a lot. The market has been mostly overvalued since 1992, and it has not been undervalued since 1984. We could say that this is the “new normal,” except that it isn’t normal by GAAP (Generally Accepted Accounting Principles) standards.

We use GAAP earnings as the basis for our analysis. The table below shows earnings projections through September 2025. Keep in mind that the P/E estimates are calculated based upon the S&P 500 close as of December 31, 2024. They will change daily depending on where the market goes from here. It is notable that the P/E remains outside the normal range.

The following table shows where the bands are projected be, based upon earnings estimates through 2025 Q3.

This DecisionPoint chart keeps track of S&P 500 fundamentals, P/E and yield, and it is updated daily — not that you need to watch it that closely, but it is up-to-date when you need it.

CONCLUSION: The market is still very overvalued and the P/E is still well above the normal range. Earnings have ticked up and are projected to trend higher for the next four quarters. Being overvalued doesn’t require an immediate decline to bring valuation back within the normal range, but high valuation applies negative pressure to the market environment.

Watch the latest episode of DecisionPoint on StockCharts TV’s YouTube channel here!

(c) Copyright 2025 DecisionPoint.com

Technical Analysis is a windsock, not a crystal ball.

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. 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.

DecisionPoint is not a registered investment advisor. Investment and trading decisions are solely your responsibility. DecisionPoint newsletters, blogs or website materials should NOT be interpreted as a recommendation or solicitation to buy or sell any security or to take any specific action.

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Bear Market Rules

S&P 5850 has been the most important “line in the sand” for stocks since the pullback from the 6000 level in November 2024. With the SPX closing below that 5850 level on Friday, we see further corrective pressures with the 200-day moving average as a reasonable downside target. Today, we’ll break down a series of projection techniques that have helped us hone in on this potential area of support.

The Break of 5850 Completes a Head-and-Shoulders Top

One of the most widely-followed patterns in technical analysis, the fabled head-and-shoulders topping pattern, is formed by a major high surrounded by lower highs on each side. After the S&P 500 established a lower high in December, we immediately started looking for confirmation of this bearish pattern.

To confirm a head-and-shoulders top, and initiate downside targets on a chart, the price needs to break through the “neckline” formed by the swing lows between the head and two shoulders. While price pattern purists may advocate for a downward-sloping trendline to capture the intraday lows of the neckline, I’ve been focused on the price level of SPX 5850. As long as the S&P remained above that level of support, then the market could still be considered in a healthy bullish phase. But a close below the 5850 level on Friday tells me that this corrective move may just be getting started.

Let’s consider some ways to identify a potential downside objective, first using the pattern itself.

Calculating a Minimum Downside Objective

As delineated in Edwards and Magee’s classic book on price patterns, you can use the height of the head-and-shoulders pattern to identify an initial downside objective. Basically, take the distance from the top of the head to the neckline, and then subtract that value from the neckline at the breaking point.

Based on my measurements on the S&P 500 chart, this process yields a downside target of right around 5600. It’s worth noting that Edwards and Magee considered this a “minimum downside objective”, implying that there certainly could be further deterioration after that point has been reached.

Now let’s consider some other technical analysis tools that could help us to validate this potential downside target.

A Confluence of Support Confirms Our Measurement

If we create a Fibonacci framework using the August 2024 low and the December 2024 high, we can see a 38.2% retracement around 5725, which lines up fairly well with the swing low from late October. Perhaps this could serve as a short-term support level during the next downward phase?

As I review the chart, however, I’m struck by the fact that the 50% retracement lines up almost perfectly with our price pattern objective. Many early technical analysts, including the infamous W.D. Gann, favored the 50% retracement level as the most meaningful to watch.

You may also notice that the 200-day moving average is gently sloping higher, rapidly approaching our “confluence of support” around 5600. Given the agreement between multiple technical indicators on this price point, we consider it the most likely downside target given this week’s breakdown.

I would also point that while I feel that identifying price targets can be a helpful exercise, as it gives you a framework with which to evaluate further price action, the most important signals usually come from the price itself. How the S&P 500 would move between current levels and 5600 may tell us a great deal about the likelihood of finding support versus a more bearish scenario in the coming weeks.

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.

The markets extended their decline over the past five sessions and ended the week on a negative note. While the week started on a bearish note, the Nifty violated a few key levels on higher and lower time frame charts. Along with the weak undercurrent, the trading range widened again as the Nifty moved in a 745-point range. The volatility spiked up, and India Vix surged 10.16% to 14.91 on a weekly basis. Following a thoroughly bearish undertone, the headline index closed with a net weekly loss of 573.25 points (-2.39%).

The week that has gone by has remained important from a technical perspective. The Nifty started the week by violating the 200-DMA placed at 23940 and has closed significantly below this crucial level. On the weekly charts, the Nifty has breached another critical level of 50-week MA, currently at 23659. In the process, the Nifty has dragged its resistance points lower; any technical rebound will find resistance at this point. It is important to note that the 50-week MA has been violated after three retests, and the breach of this level will have bearish considerations for the markets. Unless the Nifty crosses above this level again, it will stay vulnerable to a prolonged phase of weakness.

Monday is likely to see the Nifty beginning on a soft note; the levels of 23650 and 23880 are likely to act as resistance points. The supports come in at 23300 and 23050 levels.

The weekly RSI is 43.53; it has marked a new 14-period low, which is bearish. The RSI also shows a bearish divergence against the price. The weekly MACD is bearish and stays below the signal line. The widening Histogram hints at accelerated momentum on the downside.

The pattern analysis of the weekly chart shows Nifty completing a painful process of mean reversion by finding support at the 50-week MA in November. Since then, it has retested this level three times and has breached it by closing below this crucial level. The 50-week MA is placed at 23659; so long as the Index stays below this point, it remains vulnerable to an extended period of weakness in the near term.

Over the past week, the technical developments have created a strong resistance zone for the Nifty between 23650-24000 level. So long as the Index stays below this zone, it will likely trade with a weak undercurrent. Given the current technical setup, cutting down on leveraged exposures and keeping them at modest levels is extremely important. While initiating fresh exposures, staying in the stocks with strong or improving Relative Strength will be necessary as that would provide resilience to the investments. While staying highly selective, a highly cautious outlook is recommended for the coming week.

Sector Analysis for the coming week

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

Relative Rotation Graphs (RRG) show that Nifty Bank, Services Sector, Nifty Financial Services, and Nifty IT indices are inside the leading quadrant. Barring the Nifty IT index, all others are seen giving up on their relative momentum. The Nifty Midcap 100 has rolled inside the leading quadrant and may relatively outperform the broader markets.

The Nifty Pharma Index stays inside the weakening quadrant.

The Nifty Metal Index has rolled inside the lagging quadrant. Along with the Media, PSE, Energy, and Commodities, it is likely to underperform the broader markets relatively. The Infrastructure, Auto, FMCG, and Consumption Indices are in the lagging quadrant but are improving their relative momentum against the broader markets.

The Nifty Realty index is well placed inside the improving quadrant. The PSU Bank Index is also inside the improving quadrant, but it is seen paring its relative momentum against the broader markets.

Important Note: RRG charts show the relative strength and momentum of a group of stocks. In the above Chart, they show relative performance against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.  

Milan Vaishnav, CMT, MSTA

Consulting Technical Analyst

www.EquityResearch.asia | www.ChartWizard.ae

The stock market is in pullback mode with the S&P 500 EW ETF down 5.15% over the past month and down 1% year-to-date. This makes it a good time to monitor relative performance and create a relative strength watch list. Stocks and ETFs holding up best during pullbacks often lead when the market regains its footing. Today’s report will show a starter list and analyze the chart for an AI Robotics ETF.

The table below shows 1-month and year-to-date performance for a selection of industry group ETFs. With the S&P 500 EW ETF down on both timeframes, ETFs with gains are holding up well and ETFs with smaller losses show relative strength (less weakness). Five ETFs are up on both timeframes and holding up well in the face of broad market weakness.

Note that this list is simply the first cut. I would make a further cut by insuring that the ETF is in a long-term uptrend. For example, the Clean Energy ETF (PBW) is below its 200-day SMA and would not make the cut. The Medical Devices ETF (IHI) and Robotics AI ETF (ARTY) are in long-term uptrends, and make the cut. Let’s look at ARTY. A recent Chart Trader report/video highlighted the recent breakout in IHI.

The chart below shows ARTY hitting a new high in early December and price above the rising 200-day SMA. ARTY is in a long-term uptrend. There was a big breakout in mid October, an oversold reading in late October and then a 17% run to new highs. ARTY then formed a pennant and broke out with a surge earlier this week, only to fall back the last three days. Overall, I think the pennant breakout is still bullish and this is a throwback to the breakout zone. A break below the pennant lows would negate this pattern and argue for a deeper correction.

Chart Link

The middle window shows the price-relative (ARTY/RSP Ratio) breaking above its 200-day SMA in late November. ARTY shows relative strength and the price-relative hit a new high in early January. The lower window shows %B, which I use to identify oversold conditions within an uptrend. A dip below 0 means the close is below the lower Bollinger Band. This means there was a pullback within the uptrend, which is an opportunity.

I will be following ARTY and other leading ETFs closely in the Chart Trader reports and videos. Our reports warned of the breakout in the 10-yr Treasury Yield in before Christmas (HERE) and we also showed how to distinguish between a robust bounce and a dead cat bounce (HERE).

Click here to take Chart Trader trial and get immediate access.

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To understand what makes the Dow Jones tick, you have to first understand one of the key differences between the Dow Jones and the S&P 500 indices. There are a few, but none more critical than the following:

Index Weighting

The S&P 500 is market-cap weighted, meaning that companies with the highest market capitalization have a stronger hand in moving the S&P 500 index value. Currently, these are the companies that play the largest role in moving this benchmark index, including their weighting:

• AAPL – 7.58%
• NVDA – 6.59%
• MSFT – 6.27%
• AMZN – 4.11%
• GOOGL – 4.02%

These are 5 of the Mag 7 stocks and they carry 28.57% of the entire weighting of the benchmark S&P 500 index. It’s easy to see how the S&P 500 can be swayed easily by the performance of just these 5 stocks.

Well, guess what? We need a cute lil name for the Top 5 price-weighted stocks in the Dow Jones, because their collective weight is 32.43% of the entire Dow Jones Industrial Average. The Dow Jones, by contrast, is a price-weighted index. The highest priced stock carries the most weight, while the lowest priced stock carries the least weight. Market capitalization plays NO role in the weighting. Want to know who the “Fabulous 5” are? Here ya go:

• GS – 8.25%
• UNH – 7.29%
• MSFT – 6.07%
• HD – 5.60%
• CAT – 5.22%

All 5 of these stocks now trade beneath their declining 20-day EMAs and only one (MSFT) still shows a 20-day EMA above its 50-day SMA. In other words, 4 of the 5 have experienced “death crosses”, which are bearish technical developments.

Looking at the RRG

Here’s another way to look at the change that’s taken place within the Fabulous 5, just over the past 5-6 weeks. But before we do that, let’s first pull up the chart of the entire Dow Jones:

Heading into December, there was a solid uptrend on the Dow’s absolute chart and mostly sideways relative action after a very strong relative performance in July. Since early December, even late November, everything has headed south on the Dow Jones.

We can now take a look at an RRG as of early December to show how the Fab 5 were leading at that time:

This shows how each of the Fab 5 were performing relative to the benchmark S&P 500. 4 of the 5 were situated on the right side of the chart in the leading or weakening quadrants. This means they were relative leaders. Now, just a handful of weeks later, check out how these 5 stand relative to the S&P 500:

All 5 are currently residing on the left side of this chart, indicative of relative weakness, not strength. Momentum is building in the majority of the companies, so if that continues, we could begin to see relative outperformance of the Dow Jones again. For now, though, caution is the word.

One last thing. I’ve updated my Dow Jones Components ChartList and have numbered them 1 to 30, in price order, which reflects the highest-weighted to lowest-weighted stocks in the Dow Jones. I’m sorting this ChartList based on 1-month performances (SCTR scores are also reflected):

Of the 7 worst 1-month performers, 5 of them are in the Top 7 in terms of market weight. In other words, many of the worst recent performers in the Dow Jones also happen to be among the most heavily-weighted. Also, it’s important to note that many of the top-weighted Dow Jones stocks are also among the worst relative performers, as measured by SCTR scores (StockCharts Technical Rank, a form of relative strength). This combination is what has been crushing the Dow Jones. Until this changes, the Dow Jones will remain under relative pressure vs. the other major indices.

My Favorite Dow Jones Component

There are a number of ways to rank the potential of the various Dow Jones component stocks for 2025 and, obviously, it depends on your criteria. But I’ll be providing my FAVORITE Dow Jones stock (and why) for 2025 in Monday’s EB Digest, our 100% free newsletter. If you’re not already an EB Digest subscriber, and you’d like to check out my pick for 2025, please CLICK HERE and enter your name and email address. Again, it’s completely free and there’s no credit card required!

Happy trading!

Tom