It’s Time to Get Tactical, Not Scared
Weekly Market Outlook
By Geoff Bysshe
MarketGauge Pro
January 08, 2025
In the doldrums of last week’s holiday trading the market began the new year with a bearish test of some major technical support levels.
Fortunately, the bulls responded with strength.
As you’ll see in Keith’s weekly video below, the technical setup of the market, combined with last week’s conversation regarding the nature of “January”, suggest that the upcoming week could be a big one because…
The upcoming week will have plenty of potential catalysts to excite or worry investors:
- A busy week for employment news
- Release of Fed meeting minutes
- A 30-year bond auction
- The first “back to work” week of the year
- A potential confirmation of a bullish January Trend Trade in many indexes
- One less trading day due to the Day of Mourning holiday
There are two or more stock markets.
Are you in the right one?
I’m referring to the themes that you’ve undoubtedly heard about, but there may be more to this story than you’ve focused on.
The “headlines” are that the Magnificent 7 stocks are driving the market’s performance. This is certainly true. The chart below shows the ETF of the Magnificent 7 stocks (MAGS) vs. the most widely followed market indexes.
More important than just the price action is the justification for the outperformance.
As we pointed out with this chart below and more detail in our December 22nd edition of Market Outlook, the earning growth has been concentrated in these 7 stocks.
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As you can also see by the chart above, it is expected that the other 493 stocks will have a better earnings performance in 2025, while the MAGS’ earnings growth is expected to slow modestly.
Unless you’re trading the SPY, QQQ, or MAGS, (and even if you are) the broadening out of earnings growth is most likely going to be one of the market’s most important hurdles for a healthy continuation of the bull market in 2025.
So, while most market commentators will be focused on the “market breadth” as measured by all the normal technical indicators we provide in Big View, and Keith reviews every Sunday in his weekly market analysis video, investors would be wise to also be focused on the breadth of earnings growth. We’ll continue to follow it here.
The technical breadth of the market will most likely be the leading indicator of a strong market, but improving earnings breadth will enable it to “stick.”
Are You Diversified?
Most investors would consider themselves diversified if they are in the SPY or QQQ, and that belief has served them well for a long time.
Over time however the extent to which the SPY is diversified has changed. As you can see from the chart below the percentage of SPY that is represented by the top 7 stocks has grown to 34%.
Since the price change of the SPY is based on the stocks’ capitalization weighting, it’s possible for these 7 stocks to account for more than half of the gains or losses in the SPY.
That means SPY investors are not as “diversified over 500 stocks” as one may assume.
In the last two years, this has been good for investors. The performance of the SPY and QQQ was impressive this year, but if you measure the performance of the S&P 500 and Nasdaq 100 on and equal weighted basis with ETFs like RSP and QQEW respectively. The performance was half and almost a third as good. See the chart below.
As you can see from the chart below which illustrates the over or under performance of the RSP vs. the SPY, since 2004 11 of the last 21 years have seen the RSP outperform the SPY.
However, the last two years have been very lopsided.
This Under Performance By the Equal Weighted Index Isn’t A Reason To Get Scared, but…
This is a reason to consider being a more tactical investor, being clear about how diversified you really are, and more.
“Tactical” can mean different thing to different people, and it doesn’t have mean sacrificing performance.
Consider this question…
Over the last 3 years, including the bear market of 2022, would you have been better off to have owned XLE which had an outstanding 2022 (the bear market) or owned the bull market’s leading sectors of XLK, XLC, and XLY? The answer may surprise you.
Click the link below to continue reading about:
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- Better returns with tactical investing.
- A review of the sector rotation from the bear market of 2022 until now that sets up the next year.
- The quick January Trend Trade Calendar Range turned bullish.
- The Big View bullets
- Keith’s weekly market analysis video
The market’s price action and news flow can be confusing and intimidating, but investing in this environment doesn’t have to be. If you would like personal guidance and hands-on management of your assets with the assistance of tactical, risk-managed, strategies, please contact me at [email protected] or Keith at [email protected].
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