What Will Make Stocks Favorable in 2025?

The stock market displayed robust performance last week, continuing the upward trend initiated from the lows on November 15. Concerns had surfaced earlier, with some investors worried that the rally fueled by optimism surrounding Trump's election might already be fading due to the sharp pullback from the post-election highs.

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At its peak following the election, the daily advance/decline (A/D) lines were positive and positioned above their moving averages (MAs). However, neither the S&P 500 nor the NYSE A/D lines had managed to achieve new highs at that point. Despite this, the daily A/D lines reflected a clear uptrend by the close of November 15. Moreover, both the weekly and monthly A/D lines maintained a bullish stance throughout most of the year.

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In advance/decline analysis, confirmation of a bearish divergence would only be warranted if the A/D lines dropped below previous lows. Such a scenario would signal the need to tighten stop-loss levels on long positions and potentially explore inverse ETFs as a hedge. However, that situation did not materialize. Instead, the market ended the week on a strong note, setting the stage for the gains recorded in the following week.

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Among the major indices, the Dow Jones Transportation Average ($TRAN) led the charge with a 1.5% gain. It was closely followed by a 1.4% rise in the Dow Jones Industrial Average ($INDU) and a 1.1% increase in the S&P 500. The Dow Jones Utility Average also matched the S&P 500's 1.1% gain.

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Small-cap stocks, represented by the iShares Russell 2000 ETF (IWM), advanced by 1.3%, outperforming the growth-heavy Nasdaq 100 Index, which gained 0.7%. The only notable decliner was the SPDR Gold Trust (GLD), which fell by 1.7%. Despite the weekly drop, gold remained the top-performing asset year-to-date, with a remarkable 28.5% gain, surpassing the S&P 500's 26.5% year-to-date rise.

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For November, the IWM soared by 9.1%, while the $TRAN and $INDU posted monthly gains of 8% and 6.3%, respectively. On the NYSE Composite, 1,932 issues advanced compared to just 916 decliners, contributing to the Composite's 5.37% rise for the month. Looking ahead to December, the monthly starc+ band is projected at 21,033, with a two-month low at 19,196 and strong support from the trending 20-week exponential moving average (EMA) at 17,741.

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The completion of a flag formation, identified by lines a and b, in late 2023, signaled a bullish breakout when the monthly NYSE A/D line surpassed resistance at line c. This milestone, achieved at the end of January 2024, played a key role in countering Wall Street's consensus that February would bring a pullback after January's gains. Defying those predictions, the S&P 500 rose by 5.2% in February 2024.

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Meanwhile, the Invesco QQQ Trust (QQQ) gained 5.35% in November, breaking above its yearly R2 resistance level at $512.48. For December, the monthly starc+ band is positioned at $556.08, while chart support at line a is found at $448.16, and the rising 20-month EMA offers additional support at $428.65. The Nasdaq 100 A/D line has been in a strong uptrend throughout 2024. Unlike the S&P 500 or NYSE, it did not exhibit any negative divergences after the election, marking a sustained bullish momentum.

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Last week’s analysis also highlighted a divergence in the Moving Average Convergence Divergence (MACD) and MACD-Histogram indicators, signaling a potential peak in bond yields. The 10-year Treasury yield fell sharply, closing at 4.178%, down from 4.419% the previous week. The Friday close was near the daily starc- band at 4.145%, suggesting a possible short-term bounce in yields in the coming weeks.

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The MACD-Histogram had peaked on October 10 and turned negative by November 11. Meanwhile, the MACD indicators formed a bearish divergence before crossing into negative territory. Over the past week, both MACD indicators have dropped significantly, implying further downside potential for yields.

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For those looking to initiate new positions, careful attention to risk management is crucial. Sharp one- or two-day pullbacks to support levels could provide attractive risk/reward opportunities. Despite recurring warnings of a major market top, the rally has persisted since October 2022, proving doubters wrong. As always, maintaining a disciplined approach to stop placement and focusing on favorable entry points is essential for navigating the current market landscape.

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