January 5, 2025
Weekly Market Outlook
By Geoff Bysshe
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:
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.
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.
A Demonstration Of The Tactical Risk Management
The chart below shows the annual performance of the S&P 500 sectors and a few indexes and sector segments over the last three years.
I’ve highlighted XLE in yellow and XLC in blue.
As you can see XLE was the best performer in 2022 while XLC was the worst and then in 2023 and 2024 their positions in the ranks switched.
Now look at a chart of percent performance from the beginning of 2022 below.
As you’ll see, despite two extraordinary bull market years for XLC, it was not able to meet the three year returns of XLE. In fact, XLE beat it by 2x.
The purpose of this exercise is not to advocate for energy vs. tech. This is an example of how important it is to keep drawdowns small.
The chart above also notes the performance of XLK. It had a much lower 2022 drawdown than XLK and has been the second best performer over the three year period.
How To Be Tactical
First and foremost, at MarketGauge, being tactical means managing exposure to potential drawdowns.
However, being tactical isn’t just playing defense. For example…
Tactically Cap Weighted
Above you saw that the in last two years of the bull market, if you’ve not been trading the indexes (SPY and QQQ), keeping up with their performance by trading stocks from the other 493 has a tough job. You’re literally trying to outperform a group of stocks with another group of stocks that are not performing as well.
The markets as defined by the most widely followed benchmarks – SPY and QQQ are capitalization weighted and the process for adding and subtracting members to these benchmarks is based on market capitalization.
As a result, there will always be “two markets” – capitalization weighted benchmarks, and the rest of the market.
This is why we consider our systems that focus on trading the SPY and the QQQ (Profit Navigator and Tactical Core Equity) to be a “core” strategies. There is an edge in focusing on the cap weighted market factor. When this factor is outperforming, we what to be there. Of course, all of our system focus on limiting drawdowns in their respective investment focus area.
Tactically Over Weight Sectors
The reason sector rotation has always been a focus of active professional managers was illustrated above with XLE. Its 3-year outperformance was a result of strong momentum in a bear market. As a result, it had two edges in its favor – inverse correlation in a bear market, and relative momentum.
These are both core trading edges in a good sector rotation strategy. They are also why our sector models outperformed the market in both 2022 and 2023. The model was in energy in 2022 and in technology in 2023 and 2024.
Being Tactical In 2025
As we move into 2025, the conversations of "market breadth" and the “Mag 7 problem” are likely to get louder.
Rather than look at these issues as problems, consider them as different markets, a variety of investment opportunities.
More often not the most important question to be answered is not, “Should I be in the market?” but rather, “Which part of the market should it be in?”
If you’d like help with these questions, contact us:
For retail investor services, contact [email protected], or schedule a demo call here.
If you’re an RIA, or looking for professional money management services, contact Ben at [email protected].
Who Cares About YTD Performance?
The short answer is probably, everybody.
However, not many people actually use it?
Last week’s Market Outlook discussed the concept of the January trend trade and Calendar Ranges. One of the reasons the January Calendar range is so powerful is because market sentiment is focused on YTD performance.
If you’re a long-term investor, be tactical when YTD is red. If you’re a more active discretionary trader, use the YTD condition to identify the new opportunities to enter trends that could have big moves.
Notice in the chart above that the ONLY sector to go up in 2022 was never down YTD. This isn’t unusual.
Last week in our January Trend trade members training we focused on the pattern of markets that trade over the first day of their month. It’s the first step of a quick confirmed bull move for any month and it’s even more powerful in January.
When speaking to the broad public audience, we tend to talk more about the big a January Range because it’s more appropriate for more traders and investors, but since you’re here, familiar with MarketGauge (and hopefully read last week's Market Outlook)…
The first January Range is off to a good start in several indexes – SPY, QQQ, and even QQEW. Watch the indexes and sectors, and of course, your favorite stocks performance relative to the YTD low.
Keith’s video refers to the big range, but highlights several reasons the initial move could get 2025 off to a good start.
The most important "market breadth" number to me over the next 10 days is the YTD #'s on the sectors and indexes.
This simple perspective will tell you what the market is thinking for 2025.
If you’d like to learn more about the January Trend Trade and Calendar Ranges schedule a demo call or click here.
Finally, be sure to watch Keith’s weekly market analysis video below. The market is at big inflection points!
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 Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts.
The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral. The video analysis dives deeper. |
Summary: The market recovery on Friday, led by technology stocks and improving market internals is a good sign if it persists. The upcoming calendar ranges will be a key for picking up the next move in the markets.
Risk On
Neutral
Risk-Off
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