February 7, 2025 – Jim Puplava and Dave Keller (@DKellerCMT) delve into the reasons behind recent market volatility and what is taking place with specific sectors in the market. Is this indicative of an impending correction or simply a market pause? Keller, a technical analyst from Sierra Alpha Research, shares his technical outlook on the US stock market, particularly the vulnerabilities emerging among the "Magnificent Seven" tech giants.
Keller provides nuanced insights into how gold has unexpectedly soared, challenging traditional correlations with rising interest rates and a strengthening dollar. This anomaly prompts a reevaluation of investment safety metrics. They discuss sector performance, pondering which areas may emerge as new leaders in this evolving landscape.
The conversation also touches on traditional market indicators, questioning the implications of a divergence between industrial and transportation sectors under the lens of Dow Theory. With the potential for market corrections looming, what strategic adjustments are advisable? Keller explores general approaches to portfolio management in these uncertain times.
Join this discussion to unpack these market intricacies, gain strategic insights, and refine your understanding of the investment environment ahead.
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Transcript
Jim Puplava:
Well, it was supposed to start with the Santa Claus rally, but it seems like Santa Claus left town early. It continues into the new year where we're seeing more volatility and chop. Is this the beginning of a correction, a pause? Let's find out. Joining us on the program is Dave Keller. He's president and chief investment strategist at Sierra Alpha Research. Dave, why don't we begin with the choppiness that we saw? We saw the markets take off after Trump was elected. Everybody was expecting a really strong finish to the end of the year. But then, you know, the Fed kind of changed things on everybody, and we've been in this chop since then. So what's your view from the top here?
Dave Keller:
I mean, it's, it's very interesting. And Jim, good, good to talk to you again here in the new year. I feel like our cup runneth over with different themes to try to tease out just so far in the first, you know, five weeks of the year. But I mean, the market definitely is changing character. And that's what I feel like as a technical analyst. Part of my main role probably is to identify when there are shifts in leadership, when there are changes of character, when one theme or a set of themes start to evolve. And I think if you look at the markets kind of post that earnings bump, right? I mean, the S&P, the Nasdaq had a nice gap higher day after the elections, you know, sort of a pro-business mentality to where things are going. But if you look at where we're at now, we're really not that much further on than we were after that gap, right? We sort of had that gap higher. The S&P pushed to 6,100 for the first time. And that's literally where we are this week, retesting that kind of same level, that new ceiling in the market. So I would say the benchmarks moved higher really going into elections and really coming out of there, driven in no small part by the Magnificent Seven and the dominance of those mega-cap growth names. And even though some other areas of the market certainly were strong, that's where we saw the lion's share of the gains in 2024 for sure. And now you're seeing in early 2025 what the dynamics look like and how the dynamics of the market can shift if those big mega-cap names with such a concentrated weight in the benchmarks when they start to falter. And now I think you're starting to see kind of a dissipation of the, you know, sort of dominance of the Magnificent Seven; you're seeing some still work but now some showing signs of weakness. This is what the market does: it all of a sudden starts to stall out as markets now actively look for the next leadership to emerge.
Jim Puplava:
Yeah, because if you look at stocks like Microsoft, let me see, it peaked here going back to last summer, but it's been in a chop and actually down for the year.
Dave Keller:
So Microsoft has been struggling. Apple is down, pulling back through the course of 2025. Tesla, of course, is coming down. This week we had the opportunity for earnings from Amazon and Alphabet to sort of renew this confidence in the mega-cap growth names. And we got the absolute opposite, right? Alphabet gapping lower on Wednesday and kind of continuing lower, drifting lower into the weekend. Same for Amazon with disappointing earnings on Thursday. So I think the challenge kind of going out of this week and kind of coming out of this earnings season, earnings season started strong with a bunch of big banks reporting some blowout numbers and giving the impression that earnings were going to be this great sort of catalyst for the next leg higher. And I think as we get through sort of the growthier part of earnings season with a lot of the Magnificent Seven names, for every Meta that had kind of a good, good report, good upside follow-through, there are a lot of Alphabets and Amazons kind of struggling post-earnings. I think that's going to be what we have to grapple with here in the weeks to come.
Jim Puplava:
So, you know, everybody's talking about high valuations, almost at record levels if you take a look at the S&P. But a lot of that is being impacted by the MAG7. But there's the other 493 stocks. So if money is coming or shifting out of, let's say, the Mag 7, do you see any place where it's going? I'm looking at a chart of the financials. The financials are strong, transports are weak, very weak compared. And so, you know, if you get into Dow theory, what does that tell you?
Dave Keller:
So I love the fact, Jim, that in your question you implied what I suggest your listeners do, which is look at the charts and focus on where the funds are flowing. I think price is a great arbiter of sentiment. And if things like Alphabet and Amazon are gapping lower and institutions need exposure to equities, they're going to put that capital somewhere. And so finding which areas of the market start to emerge in a position of strength, I think is the game for a lot of investors here. You mentioned financials and I would say if you look at the charts of JP Morgan or Citigroup or even just the XLF, like a broad, you know, sort of bank-heavy ETF, you'll see that the trends are actually quite strong. JP Morgan, Citigroup making new highs this week. So despite the fact that I think the market is showing some signs of instability, you're seeing big financial institutions doing quite well. And what you have to remember is like what are these conditions, how have they evolved and who could stand to benefit? And one of the big themes that has happened as the Fed has been cutting rates, at least for a period of time, as the longer end of the curve has remained fairly elevated, with the 10-year yield remaining up in that 4, 4.5% range, that means the yield curve has a more normal shape, which tends to be pretty good for financial institutions. So I think one area of the market that could have a good tailwind here going in the months to come, given what the Fed may do and just given the general interest rate environment, could be financials. And that would be an area of the market that's shown relative strength. And it's one of the few areas of the market kind of emerging and showing strong relative trends compared to the weakness you're starting to see in former leadership like technology.
Jim Puplava:
Let's talk about interest rates for a moment because you know, when the Fed began lowering interest rates in September, when we, I think the 10-year was right around 3.6, we got almost all the way up to 5%. So long-term rates went in the opposite direction of what people thought. What about the risk if interest rates get back up to five or over the risk for the market when we start getting to those levels?
Dave Keller:
So this is the challenge with things like rates because I think as you implied, right, investors sort of have an idea in their head of what's going to happen. And then the problem is if something did, let's say rates just continue to go higher. I think that's something that a lot of investors are not particularly positioned for. And that's when we can start to feel the pain. The market moves in the direction that will cause the most pain to the most investors. One of the charts that I have on my wall in my office is a long-term chart of interest rates in the US, and it's meant to have a spot there to remind me of the long-term trajectory in rates. We have to remember that bonds were in an incredible bull market from the early 1980s all the way through the 2000s, 2000 teens, and all of a sudden, that started to change quite a bit. Coming down through that entire period. I think we're now in a secular rising rate environment. And this is an environment that many investors have not experienced. Unless you were investing kind of pre-1980, you really have not seen an environment where rates can actually generally be trending higher. And there will be times when rates come down for sure in the short term, but I think the long-term headwind of higher rates is something that a lot of investors are less equipped for. And I think that's going to be a reality we probably sort of navigate through in 2025.
Jim Puplava:
Well, let's talk about something making the headlines this week. The breakout on gold. On the day you and I are speaking, gold is hitting a new record. It touched over 2900. You've got silver on the move. Let's talk about the precious metals.
Dave Keller:
So gold and silver. I mean, one of the things I love about charts and technical analysis is they don't care what you think is going to happen or what you think will work or what won't work. It's literally showing you the evidence of the right; it tells you what is working. And price doesn't lie. Price is fact. And if you look at the course of 2024, if you had told me ahead of time, you know, stocks are going to be in a primary bull market, the S&P and the NASDAQ are going to have pretty solid years. Would I suggest gold as a great place to be? Probably not. However, gold spent most of 2024 outperforming both the S&P and the Nasdaq. And year to date in 2025, granted, just five weeks in, don't look now, but gold has far outpaced, I mean, any equity average that I've seen. And so, you know, the reality is the precious metal trade is actually working quite well from a technical perspective. This is a chart in a primary uptrend making higher highs, higher lows, above upward sloping moving averages. And in an environment like this where you can see that the S&P and the Nasdaq are kind of stalling out, things like semiconductors, former leadership groups stalling out and in sideways kind of consolidation phases, gold and silver stand out in the reality that they're still in a primary uptrend. What's great about gold, besides the fact that it's generally trending higher, is that it has a low correlation to stocks. And a lot of people, I think, incorrectly think of stocks and gold as having an inverse relationship, right? So if stocks go higher, gold goes lower. If stocks go down, gold goes up. But if you look over time, the relationship between stocks and gold is actually quite fluid. So there are times when they move together, there are times when they don't. And what's good about that is it's a low-correlated asset. So if you're concerned about instability in stocks, something like gold can be a great way to diversify away from the risk of equities, just because you can't guarantee it's going to do something closely related. And that gives you the opportunity to do something different and in this case, participate in a trend that continues to be strong here as we go into the end of the week.
Jim Puplava:
Let me ask you this. Gold has been doing well over the last couple of years in a period where interest rates were rising and the dollar has been strong. That's normally an anomaly.
Dave Keller:
So 100% true. And I would say some of those relationships feel like they've become disconnected recently. Generally speaking, there's that inverse relationship to the dollar, which makes a ton of sense. And I think at the end of the day, again, what I love about looking at charts is it allows you to look at these asset classes independently. And if you look at the performance of gold versus stocks versus like the TLT or bonds or something like that, you can see how these different assets have come in and out of favor at times tied to the price of the dollar. But other times, not as much. You know, I think one of the risks to this market would be the dollar remaining fairly strong, a stronger dollar environment, again, a very different environment than 2022 from a macroeconomic perspective. But I still have sort of the scars from 2022 where the dollar was strong and pretty much everything else was weak. And so I think an excessively strong dollar from here could be a concerning development as we go through the year.
Jim Puplava:
And a strong dollar, if it remains strong or gets stronger, will impact earnings. Because most of the companies in the S&P are international companies, so they get their sales from overseas. You think of companies like, you know, Coca-Cola, if the dollar is stronger, that means their sales overseas, when they get translated back to dollars, are going to be lower.
Dave Keller:
So that could impact earnings spot on, Jim. And that's an issue that hasn't really come up as much, but it is a very real problem, especially for Apple and other multinational companies with so much of the revenues from outside the US. And the way to remember it is just as the dollar strengthens, all those revenues you're making outside the US are just less valuable when you convert them back to dollars. One area of the market that would stand to benefit greatly from that, I would argue, would be small caps. And this is one area of the market that has not done particularly well. But if we, if we try to, I mean, I guess probably wrapping up all these themes we've talked about, if the mega-cap, you know, Magnificent Seven are struggling, if the dollar strengthens, what would push, put additional pressure probably on future earnings growth, small caps actually could benefit from those, from those same issues. And they're much less weighted on those growthy sectors like tech and communications, much bigger weights in sectors like financials which, as we sort of established earlier, are starting to improve. So I wouldn't be surprised if we start to see small caps outperform in a way we really didn't see through most of 2024. But I think the conditions could be right for that here as we go through Q1 of 25.
Jim Puplava:
So as you look at this market we've talked about, some of the traditional relationships aren't playing out like the dollar and gold. And let's talk about another one. One of the oldest technical theories, the Dow theory, you've got the industrials breaking out to a new record, although they're pulling back here a little bit, but the transports are breaking down. So what's your take there?
Dave Keller:
Yeah, so Charles Dow's classic theory, which was looking at the main pillars of the economy, looking at the producers of goods and the distributors of goods and just seeing are the conditions healthy on both sides of that coin. And what he often found was when one part of the economy was working and when the other one was struggling, it's what he called a bearish non-confirmation which basically said one side of this market is doing well, the other half is not. And if you look at sort of modern versions of the indexes that Dow created in the early 1900s, it's the Dow Industrials and Dow Transports. The Dow Industrials again, well down a bit here going into the end of the week, but still kind of near all-time highs around 45,000 that were established just after Thanksgiving last year. You look at the transports, talk about a completely different technical picture, right? Making a new high in late November, now making a much lower peak in January, testing the lower end of the last three-month range. So that really, that divergence between those two is becoming more and more glaring as we go through, as we go through earnings season. I think in the last week or two, it's become more clearly there. Transports are not too far from breaking down, and that would be the real negative signal. If the transports would break down, which would be not too far below current levels, that'd be the Dow Transport Index below around 15,800 would complete that rotation. I think that would be a real negative sign from traditional Dow theory. I also look at a more modern version of that, what I call a newer Dow theory, which looks at an equal-weighted S&P 500 and an equal-weighted NASDAQ 100, sort of looking at the old economy versus the new economy. And I think inspired by what Charles Dow was trying to accomplish when he originally came up with Dow theory, that also is showing a concerning divergence, a lack of breakouts. So while the S&P and the Nasdaq have made new highs, those equal-weighted versions have not. And again, it speaks to some instability and, I guess, lack of upside momentum underneath the hood of the major averages.
Jim Puplava:
So given what you see in the charts right now as an investor, what would you be doing? Would you be raising cash? Would you look for breakouts of sectors like we talked about in finance, the financials? Where would you be putting money right now?
Dave Keller:
Now, I think that's the question, Jim, and I appreciate it. So two general ways I would think about this, right? I mean, number one, if you think about how investors have been positioning with the dominance of the Magnificent Seven at the end of last year, I think part of that is sort of a safety trade, right? When investors get nervous, they kind of go to defensive positioning. And while we traditionally think of defensive positioning as things like staples and utilities and real estate, you know, one of the more defensive places to be in 2025 arguably is big tech, right? So those big, well-established companies that have been dominating so much, when those are starting to struggle, you have to figure out where to go. And so I would think of it in two parts. Number one, I'm a fan of getting, of remaining invested in charts that are working. So as much as I'm concerned about the broader market, as long as a Meta or a Palantir or a Costco or a Walmart continue to make new highs or a JP Morgan, I still want to have exposure to those stocks that are working, especially they stand out in an environment like this where it feels like things are starting to falter, focus on areas of the market continuing to show strength, particularly relative strength. And those are some of the individual names that I think are thriving in this environment. So I would continue to look there. The other thing to remember is corrections are quite common. 10 to 20% corrections, even in a bullish environment, are quite common. And if you look back through market history, you know better than I do, Jim, every correction has been 100% retraced and the market has ended up making new highs afterwards. So if we do get further deterioration than we've seen, the only way that you have the opportunity to buy great companies at a discount is to start raising cash earlier on in that pullback phase. So I think if you do see semiconductors break down, if you do see charts like Alphabet and Amazon break down, that's where I would start to raise cash and have some cash available for some sort of pullback phase that could play out through Q1, only then will we have the opportunity to buy in on weakness and then most likely ride a resilient market back to a new high later in the year.
Jim Puplava:
That's exactly what we're doing. Well, listen, Dave, as we close, how can our listeners find out more about Sierra Alpha?
Dave Keller:
No, I appreciate it, Jim. Thanks so much. It's good to, good to chat with you as always. I hope we can do it again. You can find all the info on what I'm doing at marketmisbehavior.com. I do a live market recap show at the end of every day. Just launched a podcast where I'm doing some interviews. Maybe, Jim, I can convince you to come on that podcast at some point, and we can continue the conversation.
Jim Puplava:
I'd love to do so. Well, listen, Dave, as always, thanks for being on the program. All the best to you, and we'll talk again.
Dave Keller:
Take care, Jim. Thanks again.
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