The S&P 500 is finally bouncing.
After suffering its largest drawdown since 2022, we’re seeing signs of relief.
But this comes after the index broke down below all of its key moving averages, like before the 2022 bear market.
In fact, we saw the same pattern in 2007.
The S&P 500 broke below its key moving averages right at the start of a 60% decline in US stocks.
In 2022 and 2007, the stock market bounced, but was unable to recover above the moving averages, and price ultimately headed lower.
With the S&P 500 bouncing today, now is more important than ever to ask:
Will this bounce last and take the market back above the moving averages toward all-time highs?
Or should we be using this as an opportunity to get defensive, reduce our exposure to US stocks, and prepare for additional market volatility?
The Secret Formula: Homebuilding Stocks
There’s one thing that all major stock market recoveries have in common.
In each successful recovery, homebuilding stocks were performing well.
Now you might be wondering why we’re talking about homebuilding stocks.
This is one of the few secret formulas that exist in financial markets.
Homebuilding companies are closely tied to activity in the housing market.
This is a part of the economy that is extremely sensitive to the economic cycle and can be a reliable predictor of future economic conditions.
If homebuilding activity is declining, it suggests there is less demand for homes.
Buying a home is one of the most important spending decisions of people’s lives.
If there is reduced demand for homes, it increases the odds that people are pulling back on spending elsewhere.
So let’s look at several major market recoveries, both successful and failed, to see how homebuilding stocks help anticipate whether a recovery will succeed or fail.
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Analyzing Successful Market Recoveries
Let’s look at the recovery from November 2023.
After the S&P 500 broke below all key moving averages, the index snapped back above them, leading to a massive bull run over the next 12 months.
Homebuilding stocks were outperforming during that recovery, confirming underlying economic strength and suggesting the market would continue higher.
The same pattern appeared in early 2023.
After multiple failed attempts to break above moving averages, a successful breakout led to a huge bull market over the following year.
Again, homebuilding stocks were outperforming, confirming the rally’s strength.
Rewinding further, the big S&P 500 moves in 2019 and 2020 above key moving averages were both confirmed by outperforming homebuilding stocks.
And the recoveries in 2011, 2012, and 2016 all showed the exact same pattern as well – homebuilders outperforming during successful rallies.
Failed Recoveries Tell the Same Story
In contrast, the failed rally in 2015 saw the S&P 500 attempt to break back above moving averages, trend around them for a couple months, then plunge for another 15% correction.
During that entire period, homebuilding stocks were significantly underperforming, suggesting underlying economic weakness.
The same happened with the failed recovery attempts in October and November 2018.
Both tried to break back above moving averages but failed and headed lower.
During both bounces, the homebuilding sector was underperforming.
In 2022, after breaking below all key moving averages, the S&P 500 made two attempts to regain its uptrend.
Both failed, with stocks declining significantly afterward.
During both rallies, homebuilding stocks were significantly underperforming.
What’s Happening Now?
So what are homebuilding stocks doing right now?
Unfortunately, homebuilding stocks have been underperforming, at least for now.
In fact, they’ve been underperforming since about September 2024, warning this entire time of economic weakness.
Now, some of you might be confused by our recent optimism that a recession is likely getting pushed out to 2026, which could mean strong stock market performance throughout 2025.
And we’re actually getting more data points supporting that view.
Recent data shows a considerable jump in the percentage of small businesses saying it’s a good time to expand operations.
Historically, heading into recessions, you typically see fewer businesses looking to expand.
This makes sense, as this leads to layoffs and potential recession.
Today, the outlook for expansion is improving from very low levels, which is typically something you see outside of economic recessions.
Our Current Strategy
The current market breakdown is primarily due to uncertainty around economic policy, not necessarily by recession concerns or real economic weakness.
Once that uncertainty dissipates, it could lead to an exceptional market rally.
But for now, we don’t have strong evidence that short-term market volatility has ended.
For that, we’ll be closely watching what Homebuilders are doing in the coming weeks.
Ready to Profit From This Market?
At Bravos Research, we’ve navigated these markets with remarkable success in the past year:
- 129 total trades completed
- 85 winning positions
- 44 losing trades, with controlled risk
- Diverse portfolio spanning multiple assets
We recently booked a 31.2% profit on our $AEM Gold Miner position.
You can view our entire track record for free here.
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