To The Moon

$NASDAQ(.IXIC)$

As we enter 2025, Last week, I updated that, suggesting that maybe the big crash I had anticipated might not be happening after all. Instead, it could be a short-term pullback that’s near its end. Now, I feel it's my responsibility to update you on everything that's happened since then. We’ll look at multiple factors—charts, data, and various points—to determine whether this is the beginning of a major bear market, with a potential drop of 20-25%, or if it's just a short-term correction after some over-exuberance and speculation. It’s possible that after this, we could return to an uptrend and make new all-time highs. I’m going to cover it all, and I hope you find it valuable.

Looking at the NASDAQ, it's down almost 6% year-to-date, and the S&P 500 is down about 2%. However, many growth stocks—like Quantum AI, SoundHound, and others—are down 20-60% from their all-time highs. It's been a tough year for growth stocks, but this is a normal part of market cycles. Over the past two years, companies like Apple, Amazon, and even Tesla were outperforming more stable, dividend-paying stocks like Verizon, McDonald's, and Pepsi. This year, those dividend stocks, like McDonald's, are up 10% year-to-date, while many tech stocks are underperforming. This rotation is perfectly normal. Not every year will see returns of 20-30%, and it's important to adjust expectations accordingly. The average return for the S&P 500 is about 8-10%, so while last year’s 54% gain wasn’t sustainable, it's a reminder that long-term market growth tends to average out.

I know many of you are feeling down this year. If you were in growth stocks, you might have seen 18-20% gains early on, only to now be down 10-20%. I was also up 18% year-to-date but am now flat, having lost those gains. But that’s still better than the NASDAQ’s 6% drop, and considering I was up 54% last year, I’m still doing well. These situations can present good buying opportunities, and when the market rebounds, you’ll profit even more. That’s the mindset you need to adopt.

Back in 2022, I showed a chart during the market crash that highlighted how most crashes tend to follow a similar pattern. I studied crashes dating back to 1929, looking for trends in charts and investor sentiment that might indicate trouble ahead. And it worked. I positioned myself well, made a 27% gain, and avoided the heavy losses that others experienced. By staying open-minded and acting on these patterns, I was able to navigate the downturn successfully. If you dismiss these trends, you might miss valuable insights. It’s important to remain open to these possibilities.

Right now, we're seeing a similar breakdown to what happened in 2022. The S&P was trending upward, but now it’s moving downward, resembling previous crash patterns. We’re also seeing a large involvement of retail investors in the market, which mirrors past major tops and crashes. For instance, in 2021, Robinhood saw massive growth, with 4 million members at the time. Now, they have over 25 million users. With a US adult population of around 220 million, that means about 10% of adults are trading on Robinhood. This is insane, and it correlates with a sharp rise in transaction volume—up 200% in Q4—just before we saw peaks in many growth stocks. These patterns are striking and should not be ignored.

Looking at the trading volume, only 61 million was invested in equities and long-term assets, while 222 million was in options trading and 358 million in cryptocurrencies. I’d bet that much of that crypto volume wasn’t Bitcoin, but rather Dogecoin or other meme coins. A lot of people were chasing quick riches, trying to make a fast profit. Whenever you see this kind of exuberance and speculative behavior, it usually happens near market peaks, not bottoms. This is one of the first signs to consider.

Another indicator I like to follow is margin debt. It's my favorite because, as we approach a market peak, people experience the "fear of missing out" (FOMO) and start borrowing on margin to invest more, thinking they’ll keep making profits. This type of behavior, fueled by greed, is typical at major market tops. We saw this in 2021 when margin debt surpassed 0.4, a level that historically marks a peak in investor sentiment. We’ve seen similar situations before, like in 2018, 2006-2007, and 1999, all of which preceded significant market corrections or crashes. Right now, we’re again above 0.4, which suggests that we’re in a similar situation. That doesn’t necessarily mean a crash is imminent—markets could still go higher, like they did in 1999—but it does indicate that there’s potential for something much more significant than a minor 2% drop in the S&P 500.

Next, let’s look at the forward P/E ratio of the S&P 500, which has reached the same levels as the peak of 2021. We’re currently at 21 times earnings, which doesn’t guarantee a crash but does indicate that many S&P stocks are highly sensitive to market shifts because they are priced to perfection. Not all stocks are overpriced, though—companies like Google, at 18 times earnings, and Amazon, at 19 times operating cash flow, are still solid bargains. But stocks like Microsoft, trading at 34 times earnings, and Tesla, which was previously expensive, are now undergoing valuation corrections. This suggests we may be nearing a peak in terms of valuations. While we might not return to the historical average of 15 times earnings, since companies today have better profit margins, stronger balance sheets, and aggressive buybacks, the S&P is still sensitive to price fluctuations given its current high P/E ratio.

Another factor to consider is the 10-year minus 3-month yield curve, an indicator often used to predict recessions and market crashes. Historically, it’s been nearly 100% accurate. For instance, back in 2006, it turned negative, and about six months to a year later, the market crashed. Similar patterns appeared in the late 1990s and before the COVID crisis. Right now, the yield curve is flat or slightly negative, which could be signaling a market downturn or recession in the near future.

That said, I don’t want you to panic. There are still positive signs. For example, there’s a chart circulating on X (formerly Twitter) comparing the Trump tariffs of 1.0 and 2.0, which seems to follow patterns seen in previous cycles.

When Trump was president, we saw a strong start to the year, followed by some weakness in March. However, after that, market sentiment picked up, the S&P 500 recovered, and we didn't experience a crash or recession—just a small pullback where some excesses got corrected. Everything eventually returned to normal. I'm leaning heavily toward a similar scenario now. I believe there’s a high likelihood that we’re not facing a major crash, but rather a healthy correction. After this correction, sentiment will likely improve, and the market should bounce back. If we do experience a crash, it's likely to happen later on, not right now.

One technical indicator supporting this is the S&P 500 breaking its trend. While that’s not ideal for algorithms and isn’t great in general, the NASDAQ is still holding within its trend. It’s rebounded perfectly at this trend, just as it did in August, October, and November of 2023. This gives me hope that we’re just going through a sentiment shift and market rotation, which is long overdue. We might be nearing the bottom, and after that, we could start climbing again, just like we saw during Trump’s first tariff phase. This is the scenario I’m leaning toward, but I can’t be certain because timing the market is impossible. However, based on all the data, I believe this is likely a minor correction, and we’ll likely see new highs in the near future. If a crash does happen, it’s more likely to occur later, not immediately.

In terms of my portfolio, I’ve followed a rule that once the S&P 500 breaks trend, I reduce risk in my portfolio. For example, I sometimes have 1-2% of my portfolio in speculative stocks or slightly unprofitable companies, but when the trend breaks, I sell those and raise cash. I’ll sell options, remove speculative positions, and then average down into quality stocks like Amazon, Uber, and other growth stocks that are down 30-50% from their highs. I’ve been doing this slowly, telling my group that once the trend breaks, it’s time to have around 20% cash and then slowly average in. If the market returns to an uptrend, I’ll have been right about this just being a pullback, and everything will be fine. But if it continues to go lower, then maybe we’re facing a crash, and having cash on hand will give us the flexibility to buy in gradually. I don’t buy every dip—only when it makes sense. Managing these situations requires being open-minded, paying attention, and not dismissing them as mere noise. If you don’t have cash, it’s wise to have some set aside for these kinds of moments.

So, for now, I believe this is just a pullback that’s nearing its end. We’ll have to watch and see how things unfold.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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