Two Reasons Stocks May Have Just Bottomed

January 15, 2025

Two Reasons Stocks May Have Just Bottomed

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

If the bottom isn’t in, it’s near…
Dollar bulls are late to the party…
What history says about a rough-and-tumble 2025 start…
Let the Seasonal Edge guide your way forward…

The bottom is close…

Looking at today’s (Tuesday’s) price action, it may already be in.

Here’s what I’m seeing on the chart of the S&P 500 ETF (SPY), where I’ve included a 14-day Relative Strength Index (RSI) and also a 14-day Rate of Change (ROC) indicator.

I’ve also drawn some longer-term trend lines that have acted as both support and resistance, as well as the TradeStops Yellow Zone and Red Zone:

I think you can make a pretty strong case that stocks have found their local bottom. For one, the price of SPY has made a series of lower lows while the RSI has made a series of slightly higher highs. This is a positive divergence, albeit a weak one.

The RSI also shows us that stocks aren’t even really oversold. As we’ve contended since the start of 2025, this is a healthy and necessary cooling-off period to work off the post-election euphoria.

Finally, we can see that the ROC indicator is trending up too. ROC measures how much a price has changed over a given period, either up or down. Over the last seven days of rolling 14-day price action, we can see that the selling pressure has lightened up.

If SPY is going to fall further from here, potentially due to a too-hot Consumer Price Index number today, it’s likely to find strong support at around $575. That level acted as stiff resistance last summer when stocks experienced a similar cooling-off period… and as strong support in the months between that summer lull and the election.

But there’s another reason to think stocks have bottomed…

Speculators are as bullish on the safe-haven dollar as they have been in almost six years. Here’s the word from Bloomberg:

Speculative traders – including hedge funds and asset managers – are the most bullish on the greenback since 2019, increasing aggregate bullish bets on the dollar to some $33.7 billion, according to Commodity Futures Trading Commission data compiled by Bloomberg for the week ended Jan. 7.

Pay very close attention to these dollar positions and where stocks were at the time:

The 2019 surge of net dollar bulls came just after the 2018 holiday volatility and just before stocks set their lows for the year.
We saw dollar shorts surge after the pandemic, as liquidity expansion weakened the dollar and lit a fire under stocks.
Dollar longs took back over during the 2022 bear market and the preceding late 2021 volatility.
And they evaporated once again in 2023, with another surge coinciding with the April and July corrections in 2024.

What I’m getting at here is that dollar traders tend to get really bullish on the buck around market bottoms, and very short the buck during bear markets and the tail ends of strong bull trends.

The latest surge in the dollar also has much to do with the policy promises President-elect Donald Trump is making as he prepares to take office. And while some of that may be warranted, we should remember that this positioning is highly speculative. We don’t know how many of Trump’s promises will be enacted, or how quickly. And we won’t know until at least the start of next week. (For more on that, stay tuned this weekend for my interview with a highly skilled and seasoned trader in our network, Jeff Clark.)

Mark my words: In the coming months, speculator dollar positioning will be lower. And that will coincide with a pile-on into stocks that’s probably beginning right about now.

We could end it there with a gut-feeling kind of impulse.

But that’s not how we do things at TradeSmith.

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You might be sitting there thinking to yourself that the market action of the past few weeks feels unusual. You’re right.

From the 14 trading days since the start of the traditional “Santa Claus” rally on Dec. 23, the S&P 500 has fallen more than 1%.

That doesn’t happen often. In fact, it’s only happened six times since 1990… or just over a sixth of the time.

A lot of folks like to put too much stock into things like “the Santa Claus rally” and “the first five trading days” or “the January effect” – all essentially saying “so goes the early game, so goes the long game.”

I decided to test that. I wanted to see what happened in those six years since 1990 when the S&P 500 fell more than 1% in the previous 14 days, starting on the eighth trading day of the year and through to year-end.

As it turns out, stocks have a pretty good chance of being higher.

In 4 of those 6 years, stocks were positive by the end of the year for an average gain (counting wins and losses) of 7.1%.
The average winning trade was substantially higher than long-term averages, at 18.8%.
The average loser, though, was also pretty painful, at -16.1%. (The two down years were really one down year. In 2008, stocks fell by about 32%, and in 2015, stocks fell 0.1%.)

The short term looks even better:

In the 21 trading days after this signal, stocks were higher 5 out of 6 times (again, 2008 was the exception – Bear Stearns was mid-collapse) and were on average higher by 3.8%.
The average winning trade was 5.1%, and the average loser was -2.9%.

Think about what this means. If this played out like the average result, we’d be close to all-time highs by mid-February.

If we reached the average winning result, we’d be setting new highs.

Using history as a guide will give you a big boost in 2025…

You know what’s funny to me?

The very first seasonal window in our Seasonal Edge strategy is already beating the market since that window opened on Jan. 10.

Seriously, look for yourself.

The stock (red, and obscured out of respect for our Trade Cycles subscribers) is up about 1.8% while the S&P 500 (blue) is down 0.3%:

And there’s much more in store… with the seasonality chart showing the peak of the seasonal return coming mid-February:

On average, this stock has been 80% higher through this window over the last 15 years, for an average return of 8.6%. (I’ll do the math for you… That’s just four trading days longer than the short-term SPY window we talked about earlier, and more than twice the historical gains.)

And holding through the whole window, lasting until April 9, would historically net you 86.6% odds of a positive result and a 5.56% average return.

Now, this is no guarantee that either thing will happen.

But I can’t ignore the fact that this little-known stock is higher while the rest of the market struggles.

And the fact that this trade was confirmed by our other, proprietary trigger-pulling factors makes me even more confident.

That’s what we mean when we call this thing the Seasonal Edge…

As I said, I can’t give its ticker here out of respect for our paying subscribers – 1,900 of whom just joined specifically to receive our Seasonal Edge trades.

But you can do so now, too, at that link above, which includes a replay of TradeSmith CEO Keith Kaplan’s free webinar on the strategy last week.

Be aware, though, that Keith shares one specific stock to buy now… and another stock to avoid… based on these seasonality signals.

Those are timely opportunities – and the charter membership offer comes down after today. So, be sure to check it out now while it’s still available.

And once you’re signed up for Seasonal Edge, you’ll get full access to its portfolio of upcoming trades. In fact, we’ll be alerting subscribers TODAY if our additional (momentum) criteria confirm the seasonal pattern that’s opening now for one of the stocks.

Watch now to find out exactly why all of us at TradeSmith (and so many of our readers) consider this such a huge breakthrough – and get access to these trades.

To your health and wealth,

Michael Salvatore signature