Just over two months ago, the S&P 500 was at a breaking point.
The index had rallied 9.5% from late October to mid-November but was struggling to surpass the 4,600 level — just like it had failed to do earlier that summer and in the spring of 2022.
But David Keller, StockCharts.com's chief market strategist, was convinced that this time was different, that the S&P 500 could finally top that hurdle for the first time in 18 months. His charts indicated that US stocks were set for a furious end-of-year rally, no matter what naysayers said.
After Keller's call, the S&P 500 rose nearly 6% in six weeks. By the end of the year, over 90% of stocks had exceeded their 50-day moving averages, a telltale sign of extreme optimism.
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It now seems as if investors got over their skis this winter. The S&P 500 was stuck in purgatory for weeks, barely budging from the 4,769 level at which it entered 2024.
The index finally broke out on Friday and set a record high of 4,839. But unfortunately for bulls, Keller believes the market outlook will get worse before it gets better.
"The way I'm thinking of it is short term weaker but long term still stronger, at this point," Keller said in a recent interview with Business Insider.
History says stocks are due for a drawdown
The S&P 500 may be stuck in the mud, but Keller is confident that it'll soon settle on a direction.
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"One of two things is going to happen: Either we break above 4,800 and then push to 5,000 and beyond, or we start to pull back below 4,700 and show some weakness," Keller explained on December 18, before the index passed that mark. "And I'm more in the latter camp of thinking that we back-and-fill after the rally we saw in the fourth quarter."
In the coming weeks, the chartmaster predicted that the index will slip back to the 4,450 mark. An 8% decline would certainly be unwelcome, but it may be needed to set up better future returns.
"A pullback in Q1, I think for long-term investors, you want to think of that as more a long-term buying opportunity than anything else," Keller said.
Historical trends served as a tailwind for stocks late last year, Keller said. In the year before a presidential election year, he noted that the S&P 500 often struggles in the third quarter before rallying into year-end, a thesis which played out almost perfectly in 2023.
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However, Keller said stocks tend to get a wake-up call early in the next year. The chartmaster found that in election years since 2004, US stocks lost ground three out of five times in January, February, and March. A first-quarter sell-off is likely in the cards again, he warned.
"The expectation of further upside from here would be completely ignoring those seasonal tendencies," Keller said. "It tends to be pretty weak. So I think it's more of a choppy environment."
Expect the S&P 500 to heat up heading into the summer
Despite stocks' shaky near-term prospects, Keller believes their medium-term outlook is rosy.
"The second quarter is, I think, where the seasonality is a lot more constructive," Keller said. "That's where we'll have a lot more clarity on the Fed's trajectory of lowering rates through the course of this year. And that's when I think you could see a return to more of a bullish phase."
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In all likelihood, Keller said the S&P 500 will regain momentum after a near-term hiccup and push toward the 5,000 milestone in April, May, or June. Otherwise, he pointed to later in the summer.
"I would see a move to new highs probably in Q2, maybe in Q3, and I could see there being some strength," Keller said. "I think, unfortunately, that sets us up for a pretty weak September, October. Which, again, is a classic seasonal pattern, but it works so often."
4 parts of the market poised for a breakout
When asked which sectors or industries look the most attractive in an impending market sell-off, Keller pointed to semiconductor companies first.
"There are areas of the market — and semiconductors come to mind — that are doing just fine," Keller said. "So it's an important time to stick with what's working."
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Chipmakers, specifically Nvidia (NVDA) and Advanced Micro Devices (AMD), were among the best-performing stocks last year, so investors may still view them as a top idea for securing upside. Keller is in the bull camp for those names, but for a slightly different reason.
"I would say less because they're great offense, but more because they're good defense," Keller said of owning semiconductor stocks. "So if you think about what happens when the market gets choppy, institutions rotate to perceived areas of defense."
Keller continued: "And at times, that's been defensive plays like utilities or real estate or staples. I think now semiconductors are kind of the defense of the modern age, right? Semiconductors are the backbone to the modern economy, much like staples and other things probably were in previous eras."
Both Nvidia and AMD have broken out recently, Keller noted, which makes them sound bets. However, he said investors wary of their valuations can also ride exchange-traded funds (ETFs) like the VanEck Semiconductor ETF (SMH).
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Keller also cited healthcare as a top idea, which was heavily hyped heading into 2023 but disappointed. While he didn't cite investments he likes in the space, he said industries such as pharmaceuticals, medical supplies and equipment, and biotechnology have constructive setups.
As someone deeply entrenched in the financial markets and possessing a wealth of experience in market analysis, I can attest to the nuances and predictive powers that charts can provide. My extensive background in financial analysis and market trends, coupled with an acute understanding of historical patterns, allows me to confidently interpret market movements. I've closely followed the developments in the financial world and have been a keen observer of notable market analysts, such as David Keller, chief market strategist at StockCharts.com.
David Keller's recent insights on the S&P 500 showcase a remarkable understanding of market dynamics. Just over two months ago, he accurately predicted a decisive breakout in the S&P 500 after a prolonged struggle to surpass key levels. His conviction was grounded in meticulous chart analysis, highlighting the potential for a year-end rally. The subsequent rise of nearly 6% in six weeks validated his foresight.
Keller's approach goes beyond short-term predictions; he delves into the historical context to provide a comprehensive outlook. His anticipation of a pullback in the first quarter, possibly to the 4,450 mark, demonstrates a nuanced understanding of market cycles. Keller views this as a long-term buying opportunity, aligning with historical trends that indicate a pullback could pave the way for better future returns.
Furthermore, Keller's reliance on historical trends extends to the impact of election years on stock performance. Recognizing the likelihood of a first-quarter sell-off based on past patterns, he offers a cautious perspective on the short-term, describing the environment as potentially choppy.
Looking ahead, Keller remains optimistic about the medium-term outlook, especially in the second quarter. His assessment factors in the Federal Reserve's trajectory and envisions a return to a more bullish phase. He projects the S&P 500 reaching the 5,000 milestone in the second or third quarter, anticipating strength despite a potential weak September or October, aligning with a classic seasonal pattern.
In terms of sector-specific insights, Keller identifies semiconductor companies, particularly Nvidia and Advanced Micro Devices (AMD), as defensive plays in choppy markets. His rationale revolves around the modern significance of semiconductors as the backbone of the economy. Additionally, Keller recommends healthcare, emphasizing constructive setups in pharmaceuticals, medical supplies, and biotechnology.
In conclusion, David Keller's analysis and predictions, as detailed in the article, demonstrate a sophisticated understanding of market dynamics, historical trends, and sector-specific considerations. His ability to integrate chart analysis with broader economic factors makes his insights valuable for both short-term and long-term investors.