On December 9th, 2024, we posted a video warning about a potential market pullback.

Since then, the S&P 500 has dropped several percentage points, while the equal-weighted RSP has fallen about 7%.

Now the crucial question: Is it time to turn bullish again, or is there more pain ahead?

Understanding the Recent Market Decline

2 key factors have driven recent market weakness.

First, portfolio rebalancing played a major role.

In early December, fund managers had reached a stunning 99% exposure to U.S. stocks.

While high exposure doesn’t guarantee corrections, historical data shows it significantly increases their likelihood.

Looking at past instances, high exposure readings have quite consistently preceded market pullbacks.

However, there’s encouraging news – fund manager exposure has declined considerably during this correction, suggesting this healthy consolidation phase is doing its job.

Current exposure levels match those seen in August, April, and January 2024 – all excellent buying opportunities that preceded significant rallies.

The Interest Rate Factor

The second driver has been spiking U.S. interest rates.

The 10-year government bond yield has moved up significantly in recent months, sparking market volatility.

This pattern isn’t new – many corrections over the past 2 years were triggered by similar rate spikes.

When interest rates on U.S. Treasury bonds rise, investors often reallocate capital from stocks to bonds, attracted by higher yields.

However, historically, these rate-driven corrections end when the 10-year yield peaks, and are typically followed by powerful market rallies.

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How High Can 10-Year Treasury Yield Go?

Long-term interest rates typically follow GDP growth, which measures total U.S. economic expansion.

Currently, U.S. GDP growth hovers around 5%, matching the 10-year yield level.

With GDP growth gradually trending lower, we expect rates to stabilize around current levels, possibly reaching 5-5.2% before reversing.

There’s no evidence suggesting an imminent pickup in GDP growth that could drive rates significantly higher from here, setting up a potential peak in yields.

Bullish Fundamentals and Technicals Remain

Despite recent volatility, S&P 500 earnings estimates continue climbing at a consistent pace, comparable to the late 1990s bull market.

This robust earnings growth, combined with more normal market exposure levels for fund managers, suggests that the uptrend that began in late 2022 remains intact and has room to run higher.

Unlike major market tops, like in 2022, when moving averages were curling downward and price broke below them, today’s technical structure remains more constructive.

The S&P 500’s moving averages continue pointing upward with price above it, supporting the broader uptrend.

Our Near-Term Outlook

While we’re more constructive on stocks now than in December 2024.

We’re still not ruling out one final leg down if interest rates continue rising though.

Our maximum drawdown target for the S&P 500 sits at 5,600 points.

In the short-term, our higher confident trade is gold currently.

This commodity began a new bull market in 2024 after breaking out of a long-term basing pattern.

Recent consolidation has brought prices to its rising channel support, creating an attractive entry point.

We’ve recently initiated positions in select gold mining stocks that could significantly outperform if the precious metals bull market continues.

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