60%+ returns in 2025: Here’s how AI-powered stock investing has changed the game
I shall open with this post by J.C. Parets, who offers a more bullish outlook for markets based on Dow Theory. I would be more cautious, as while buyers have controlled markets over the past four days, all that has done is push indices back into prior trading ranges. We are also in the Thanksgiving period, where volumes fall, and junior traders control the desks. The real business returns on Monday.
In the case of Dow Theory, the context of the improvement looks to be tied to the relative relationship between the Dow Transports and the Dow Industrials and a potential dead-cat bounce off the test of the 2020 low. A rise in this relationship should be bullish for markets, but this relationship has been in freefall since 2023 as Transports struggled to match the gains of the Dow Industral average.
I’m not sure we have a confirmed breakout in the Transports, and momentum (red circle) has remained in the bearish camp despite the rally in Transports. A confirmed breakout in the Transports would mean something, but it really needs to clear the range it has been stuck in since 2021 (pushing beyond 18K).
If we look at market breadth metrics, such as those of the Nasdaq, we see an index caught in a bit of a no-man’s land. Where we have the green arrows, we have good buying opportunities, but we are not there yet. Likewise, the Nasdaq is a long way from overbought territory.
The oddity in the metrics is that the rally from 2022 has been driven by fewer than 50% of Nasdaq stocks above their 200-day MA. With gains concentrated in just a few stocks, the risk is that if these fail, it will result in carnage for the index.
On the flip side, if this 50% resistance level can break, then there is potential for a broad swathe of stocks to keep the rally going. The good news is that these stocks - when they break - will likely break from trading ranges; so there won’t be a case of missing out, but an opportunity for money to rotate out of AI runaways into new sectors.
As for the indices, the Russell 2000 (IWM) has been making the most positive noise as it cleared declining resistance marked by the November highs, but buying volume has been light and while technicals are net positive, there is only a weak ’buy’ signal in the MACD trigger.
Aggressive traders can look to potential short trades at resistance for the S&P 500 and Nasdaq. What would negate such a position is if trading action remains tight at trendline resistance.
The caveat for Friday is that it’s a half-day trading, trading volume will be light, and my memory of it is that often you see decent percentage gains before Monday’s hangover kicks in. It’s anecdotal (I haven’t bothered to look at the stats), but it might be one reason just to stay away until Monday. Happy Thanksgiving.