Over the past three months, the market has largely trended sideways, and volatility has increased substantially over the past six weeks. Recent events, such as last week’s DeepSeek-driven selloff and today’s sharp morning decline following new tariffs announced by President Trump, have added to market turbulence and economic uncertainty. However, despite these short-term disruptions, the broader technical picture remains largely bullish.
Under the surface, key indicators continue to support a constructive outlook. Each pullback has resolved higher, maintaining the overall uptrend over the past two years. Risk-on sectors are leading, risk-off sectors are lagging, and high-yield credit markets remain strong—all of which confirm a risk-taking environment that supports the ongoing market rally.
This month’s newsletter will highlight five key charts that provide evidence of the market’s strength. We will examine the S&P 500 and Nasdaq 100, both of which remain in well-defined uptrends. We’ll also look at high-yield credit markets, which continue to advance—a sign that investors remain confident in economic stability. Lastly, we’ll analyze sector relative strength, showing how risk-on sectors are outperforming while defensive sectors are underperforming, confirming the broader bullish thesis.
Let’s start with the S&P 500.
Chart #1: S&P 500 - Still Bullish
The S&P 500 remains in an uptrend, reinforcing the bullish market structure that has been in place for over a year. The upper panel of the chart shows the index continues to trade above its 50-day, 100-day, and 200-day moving averages, all of which are trending higher. This is a key technical sign of strength, as a market in a sustained uptrend typically holds above these levels.
Momentum also supports the bullish outlook. The lower panel of the chart displays the MACD indicator, which is trending higher, confirming positive momentum.
In last month’s newsletter, I noted that the index was sitting on a key support level—previous resistance that had been broken and retested. A strong move below that level would have signaled potential weakness and a possible trend shift. However, the market held firm, and instead of breaking lower, it advanced strongly. The index is now testing resistance at the highs set in early December 2024.
The trend of higher highs and higher lows remains intact. With momentum pointing upward and price structure confirming strength, a breakout above this resistance level would further reinforce the bullish case. If our bullish thesis is correct, we should see the index push through this resistance in the near term.
Chart #2: Nasdaq 100 – Holding Support and Still Bullish
The Nasdaq 100 index, like the S&P 500, has managed to hold the support level we highlighted in last month's newsletter. Despite a sharp drop last Monday triggered by news surrounding DeepSeek, which caused a selloff in AI stocks, the broader trend remains intact. The index is still above that critical support level, and it continues to trend higher, sitting above its 50, 100, and 200-day moving averages, all of which are trending upwards.
In the lower panel, the MACD momentum indicator is pointing upwards, indicating that the momentum remains to the upside. While the recent pullback has caused some short-term volatility, the overall structure of the index continues to reflect a bullish trend. The key support level has held firm, and the index is still positioned to move higher, suggesting that the pullback may simply be a temporary setback within the larger bullish trend.
In summary, despite the short-term volatility, the Nasdaq 100 remains in an uptrend, and we maintain a positive outlook on the index as it holds above support and continues to trend higher with favorable momentum.
Chart #3: High Yield Bonds (HYG) – Confirming a Bullish Market Thesis
The chart of High Yield Bonds (HYG) continues to demonstrate strength, reinforcing our bullish market outlook. In the top panel, you can see that HYG has recently advanced above its December high, hitting a new 52-week high. This marks a significant milestone in the ongoing structural uptrend of the asset class. Additionally, HYG remains well above its 50, 100, and 200-day moving averages, which are all trending higher, confirming the strength of the bullish trend.
In the lower panel, the MACD momentum indicator is pointing higher, further suggesting that the momentum in high-yield bonds remains to the upside. The continued strength in high-yield bonds is particularly notable because if investors were concerned about economic weakness, a recession, or increased default risk, high-yield bonds would typically underperform. Instead, their continued advance signals confidence in the market and supports our overall positive outlook.
In short, the performance of high-yield bonds continues to confirm our bullish market thesis. Their strength aligns with the broader risk-on sentiment and suggests that the market is likely to remain in an uptrend.
Chart #4: Risk-On Sectors Relative Strength – Bullish Signs of Market Sentiment
In this chart, we examine the relative strength of key risk-on sectors compared to the S&P 500, with data going back three years. The top panel displays the S&P 500 index, while the lower panel focuses on sectors that are typically considered risk-on: Technology, Discretionary, Communication, Financials, and Industrials.
During the market correction in 2022, we saw these risk-on sectors underperform the S&P 500, which is typical during periods of market weakness and bearish sentiment. However, as we’ve seen over the past year, these sectors have been showing strength, reflecting a more optimistic market sentiment.
- Technology has been trending sideways, indicating stability in the sector, though without significant outperformance.
- Discretionary has been advancing, suggesting increased consumer spending and optimism about economic growth.
- Communication has been outperforming since early 2023, showing strong momentum in this sector.
- Financials have been outperforming since July 2024, signaling investor confidence in the financial sector.
- Industrials, which had been trending lower since January 2024, have turned upward this year, showing a recovery and renewed strength.
On the whole, the strength in these risk-on sectors is a positive indicator for the market. Their outperformance signals confidence in the economic outlook and suggests that investors are willing to take on more risk, which is consistent with a bullish market environment.
Chart #5: Risk-Off Sectors Relative Strength – Confirming the Bullish Market Sentiment
In this chart, we examine the relative strength of the traditional risk-off sectors – Staples, Utilities, REITs, and Healthcare – compared to the S&P 500. The top panel shows the S&P 500 index, and in the lower panel, we see the relative strength of each of these sectors over a longer time period.
Historically, risk-off sectors tend to perform better during times of market uncertainty, as investors seek safety in defensive assets. As shown in the chart, these sectors have been in long-term downtrends for over two years, indicating relative weakness compared to the S&P 500. This is a positive sign for the broader market, as it reflects investor preference for risk-on sectors, which are more sensitive to economic growth and market optimism.
It’s also important to note how these sectors displayed relative strength during the 2022 market correction. At that time, the market was in a bearish phase, and investors flocked to defensive sectors like Staples, Utilities, REITs, and Healthcare. However, the current downtrends in these sectors are a stark contrast to the previous correction, supporting our thesis that market sentiment is currently more bullish.
The ongoing relative weakness in these risk-off sectors further confirms that investors are more focused on risk-on assets, contributing to the overall bullish market sentiment.
Current Account Update
In both our Conservative and Aggressive models, our current equity allocation is approximately 65% of a fully invested position. The remaining portion of the portfolio is allocated to non-interest rate-sensitive bonds, which offer a degree of stability in the event of market fluctuations.
As the market continues to demonstrate strength, I plan to incrementally increase our equity exposure to align with the prevailing bullish conditions. However, should the market break down and reverse course, I will reduce equity exposure to mitigate risk and protect against potential market weakness.