We kicked off the brand new yr of 2024 with an overheated inventory market, excessively bullish breadth indicators, and euphoric sentiment ranges. Whereas the primary week in January felt like a “wake-up name” pullback for awestruck bulls, this final week noticed the S&P 500 push proper again as much as all-time highs.

On that word, main development names like META are making new all-time highs. However will the S&P 500 and Nasdaq 100 observe go well with, or is that this the final gasp larger in a double prime sample for the foremost market averages?

As we speak, we’ll revisit an idea known as “probabilistic evaluation”, the place we lay out 4 totally different potential eventualities for the S&P 500. There are three issues I hope you’re taking away from this train.

1. It is necessary to have a thesis as to what you assume will come subsequent for shares. This needs to be based mostly on a significant mixture of 4 key pillars: elementary, technical, macroeconomic, and behavioral. And your portfolio needs to be positioned to mirror what you see because the most certainly end result.
2. It is also necessary to think about various eventualities. What if the market is far more bearish than you’d count on? What if some five-standard-deviation occasion pops up, and shares all of a sudden shoot larger? One of the simplest ways to interrupt out of your predetermined biases is to actively think about various factors of view. This train forces you to just do that.
3. It is extremely necessary to consider how you’d adapt to a kind of alternate eventualities. How would your portfolio carry out in a risk-off atmosphere within the coming months? Are you ready for a sudden spike in danger belongings, and at what level would you have to change your positions to match this new actuality? By pondering via these potential outcomes now, you may be a lot better outfitted to take care of what really performs out.

I’ve discovered that probably the most profitable buyers do not know all of the solutions, however they ask the most effective questions. So let’s broaden our horizons a bit, and think about 4 potential future paths for the S&P 500 over the following six to eight weeks. However first, we’ll spotlight some key ranges to observe within the coming weeks.

After a robust rally off the October 2023 low, the SPX has now settled right into a short-term vary between 4700 and 4800. Any time a market settles into a spread like this, we all know two issues. First, a breakout is probably going occurring pretty quickly. Second, whichever method the worth breaks, there’ll most certainly be some additional transfer in that very same course.

If the S&P pushes out of this vary to the upside, then we can have damaged to a brand new all-time excessive, and that “huge spherical quantity” of 5000 will lastly be inside our grasp. What’s placing a couple of bullish situation right here is that the S&P has adopted the seasonal patterns extremely nicely over the past 18 months. Additional energy right here would completely go in opposition to regular seasonal weak spot in Q1 of an election yr.

Creator’s word: I did certainly promise to play the trumpet on my present, The Closing Bar, if and when the S&P 500 breaks above 5000. I’ll uphold that promise — and have already pulled out the horn to shine it up a bit.

If the market turns decrease within the coming weeks, then I would be watching two key ranges under short-term assist round 4700. 4600 was the market peak in July 2023, and I might not be stunned if that market follows the technical evaluation idea known as “polarity”, the place earlier resistance turns into assist. Beneath that, we have now an necessary worth hole round 4450. To me, this represents the “line within the sand” for bulls, and if the S&P 500 would fail to carry that stage (see the Tremendous Bearish situation under), then we could also be in for loads of ache into Q2.

Let’s get to the 4 potential eventualities, and bear in mind, the purpose of this train is threefold:

1. Think about all 4 potential future paths for the index, take into consideration what would trigger every situation to unfold when it comes to the macro drivers, and assessment what alerts/patterns/indicators would affirm the situation.
2. Resolve which situation you’re feeling is most certainly, and why you assume that is the case. Do not forget to drop me a remark and let me know your vote!
3. Take into consideration every of the 4 eventualities would impression your present portfolio. How would you handle danger in every case? How and when would you’re taking motion to adapt to this new actuality?

Let’s begin with probably the most optimistic situation, involving new all-time highs as quickly as subsequent week.

State of affairs #1: The Very Bullish State of affairs

On this first potential end result, the pullback in early January was only a temporary reset. Shopping for energy that we noticed this week continues, main names like META and NVDA push onward and ever upward, and it is risk-on throughout the board.

The Fed assembly later this month, on this situation, in all probability leaves buyers with a dovish sense of consolation, because the goldilocks situation championed by the Fed is priced in with a broad and highly effective advance nicely above the 5000 stage.

State of affairs #2: The Mildly Bullish State of affairs

Maybe a break to new all-time highs is somewhat a lot for buyers to digest, given the sky-high valuations we’re already experiencing and the extreme bullish breadth and sentiment readings we have noticed.

The second situation, then, implies that any break above 4800 is short-lived, the uptrend fails to observe via as momentum wanes, and the SPX ends February between 4600 and 4800. This might additionally imply that the fairness markets expertise extra of a time correction than a worth correction, not shedding a lot floor however retrenching within the present vary.

State of affairs #3: The Mildly Bearish State of affairs

The bearish eventualities contain a push under that 4600 stage we talked about earlier, and the third situation would imply we do not lose way more than that. This is able to be extra of a worth correction than situation #2, however the SPX would importantly stay above that worth hole round 4450.

It is price noting that the regular seasonal playbook for an election yr suggests weak spot via March, with a possible market low in March offering a launching pad into a robust Q2. State of affairs #3 would imply we observe that playbook fairly intently.

State of affairs #4: The Tremendous Bearish State of affairs

Here is the place issues get actually fascinating. The final situation is the “doomsday situation,” that means the market takes on a big-time change of character. Breadth circumstances start to show down rapidly, and the VIX spikes method above 20 as anxiousness spreads amongst buyers.

Maybe the Fed assembly and press convention find yourself focusing extra on persistent inflationary pressures. Possibly this earnings season finally ends up being far more damaging than buyers count on. The US Greenback may push larger and resume its former function as a “wrecking ball for danger belongings.” By late February, we’re discussing a retest of the October 2022 low round 4100.

Have you ever determined which of those 4 potential eventualities is most certainly based mostly by yourself evaluation? Head over to my YouTube channel and drop a remark together with your vote and why you see that because the most certainly end result.

Additionally, we did an analogous evaluation on the S&P 500 again in September 2023. The “mildly bearish” situation ended up matching the market motion fairly intently. Which situation did you vote for?

Solely by increasing our pondering via probabilistic evaluation can we be finest ready for regardless of the future might maintain!

RR#6,

Dave

P.S. Able to improve your funding course of? Try my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.

The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any method symbolize the views or opinions of some other particular person or entity.