Overview
The major indexes are retesting key support levels, and while mega-cap stocks remain relatively resilient, many mid-cap and small-cap names have endured sharp declines. The new year has kicked off with a reaction rally following the late-2024 correction, but it’s still too early to tell whether this bounce will hold. Currently, only seven GICS industries are displaying a strong uptrend, emphasizing the market’s narrow leadership.
In this uncertain environment, it’s critical to watch how the market behaves at these support levels—and to be prepared for any breaks below them, which would signal deeper downside risk.
S&P 500 Outlook
The S&P 500, dominated by a handful of mega-cap names, didn’t experience as severe a decline as the broader market. However, watch the 5,800 mark: a decisive move below that level could trigger additional selling and would be a strong red flag for trend-followers. Given these risks, I’ve cut my position sizes to half their usual level. The most important takeaway right now is that it’s not a great time to be trading aggressively.
Charts to Watch:
Weekly S&P 500 Chart: Near-term support around 5,800 and immediate resistance near 6,100.
Daily S&P 500 Chart: Monitor volume spikes on down days for early signs of increased selling pressure.
Broader Market Weakness
While mega-cap stocks have mostly held up, mid-cap, small-cap, and the smaller components of the S&P 500 have suffered more steeply. This divergence suggests capital is rotating toward safer, larger-cap names. For the market to regain broad-based strength, these smaller-cap segments will need to stabilize and participate in any new rally.
Charts to Watch:
S&P 600 (Small-Cap Index) Weekly and Daily: Key levels around 1,200 support; watch for a break below to confirm further downside.
Earnings Season: The First Major Clue of 2025
The first earnings season of the year is approaching, kicking off around January 10 with major banks. These reports will offer insights into consumer and corporate lending trends, which in turn will help gauge the broader economy’s health. Later in the month, the mega-cap tech firms will report—vital bellwethers for market sentiment. If these companies fail to resume the rally that faded in late 2024, it could signal ongoing weakness.
Policy and Geopolitics: Double-Edged Swords
Donald Trump’s second term is underway, bringing bold promises to the forefront:
- Ending the Ukraine conflict “in a day.” If this pledge fails, we could see prolonged geopolitical tension, feeding into market volatility.
- Aggressive trade policies. Increased tariffs or trade disputes may disrupt global supply chains, potentially weighing on corporate earnings.
- Mass deportations. A stricter stance on immigration could affect labor-reliant industries, slowing economic growth if labor shortages intensify.
Despite initial market optimism, any significant shortfall in these promises or policy missteps may lead to increased uncertainty and heightened volatility.
Trading Strategy: Play Defense
Periods of uncertainty call for defensive tactics:
- Stay on the Sidelines: Cash can be a position. Reducing exposure helps minimize risk while the market’s direction is in flux.
- Tighten Stops: Protecting profits and limiting losses is paramount.
- Scale Down Position Sizes: If you choose to trade, consider taking smaller positions to reduce risk.
- Short-Term Focus: In uncertain times, quick in-and-out trades can be less risky than long-term commitments.
Ultimately, the market’s next major move could be foreshadowed by:
- Earnings surprises (positive or negative)
- Any shift in Federal Reserve or government policy
- Breakouts or breakdowns in key technical levels
Until clearer signals emerge, approaching the market with caution and discipline remains the wisest path forward.
Bottom Line
We’re in an environment marked by narrow leadership, heightened geopolitical risks, and mixed economic signals. The end-of-2024 correction has left many stocks vulnerable, and although we’ve started 2025 with a relief rally, the true direction of this market remains uncertain. Stay vigilant, manage risk proactively, and keep an eye on earnings announcements for the next big clues.
