Risk Is Back on (for Now)

March 17, 2025

Risk Is Back on (for Now)

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Will Friday’s broad-based “risk rally” last?
Why it’s still time to party like it’s 1995…
Even though mid-cap indices just flashed a new bear signal…
The best Quantum Edge stocks to trade this bounce…
A new quantum paradigm to watch for this Thursday…

Finally, some relief…

As we showed you on Friday, the recent market sell-off was one of the fastest declines in quite some time. And history shows that, going forward, stocks tend to bounce back from drops like this.

We got a big taste of that bounce in Friday’s session. As I write, the SPDR S&P 500 ETF (SPY) is climbing out of oversold conditions, and its Relative Strength Index (RSI) is crossing its moving average, a broad buy signal:

The short-term momentum shifted on Friday. Not only did the major benchmarks climb, the moves in defensive sectors like Staples (XLP) and Health Care (XLV) were muted. Meanwhile Technology (XLK) was up 2.6%, along with Discretionary (XLY) and Financials (XLF) posting the biggest sector gains.

The last RSI moving-average cross in February (red circle above) coincided with the first big drop out of all-time highs and a negative divergence on the indicator itself. Today, we’re seeing a cross above with a slight positive divergence.

But we do need to see some confirmation of Friday’s rally. If the S&P 500 follows through today, especially if that follow-through clears that black dashed resistance line around $565, that would be a great sign of the near-term direction.

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It’s a new risk-on attitude…

But how long it lasts depends on who you ask.

One crowd thinks it’s the first such bounce to set a lower high – leading us ultimately to a new bear market.

Another crowd thinks the aftermath of this first bounce will instead set a higher low, paving the way for a trip back to all-time highs in risk assets.

I’m of the latter camp… And here’s just one reason why.

Some weeks ago, we showed you this chart of M2 compared to the annual rate of Core CPI. M2 is the amount of money in the financial system. The Federal Reserve printed lots of new money immediately after the pandemic to try to float the economy… And it worked. But the cost was inflation, which in late 2022 was the highest rate of Core CPI since the 1990 recession. The Fed began shrinking the money supply in late 2022.

Let’s now refresh our view:

At one point, the money supply was shrinking at a rate of -5% year over year.

Now, though, we see M2 starting to rise again. And in fact, it’s rising faster than Core CPI for the first time since 1995.

This, among other factors, leads me to believe that the bull market is not over… And that despite this volatility, we’re very likely still in a melt-up that could last through the rest of this decade.

That’s why it’s still time to party like it’s 1995. Liquidity is expanding into slowly moderating disinflation. This is the perfect type of environment to encourage the kind of risk-on appetite we saw in 2023. Really, it’s just a continuation of that environment.

But we can’t ignore this caveat…

We got a new “bearseye” signal as of Thursday’s close. There’d already been one Monday in the small-cap S&P 600.

Now, mid-caps are getting the bearseye treatment, too:

As a reminder, bearseye signals trigger when a benchmark’s components suffer along with the benchmark itself. Right now, more than half of the stocks in the S&P MidCap 400 (MID) are in our volatility-based Red Zone – no place for good money. So is the benchmark itself.

To put it bluntly, small- and mid-cap stocks are dead money right now. Like small caps, mid-cap stocks are lower today than they were during the 2021 peak. That’s three years and change with no gains, through one of the highest inflationary periods in recent memory.

But that doesn’t mean every stock in this group is un-investable.

Because not every mid-cap stock is under fire. In fact, the chart above shows us that more than a fifth of them are still in a healthy state.

And with the simple fact in mind that mid-caps provide the best long-run returns of any market cap class, it’s clear we need to spend some time looking for the best ones.

Our small-cap investing specialist and Wall Street whisperer knows where to find them…

I hope you caught last Thursday’s dispatch from Jason Bodner, all about how he uses money flows to get a sense of where the market’s heading.

Using the same technique he demonstrated last week, Jason called the bottom of the 2020 pandemic crash to the exact day it bottomed.

In short, Jason sees a couple more weeks of chop before we see the true bottom of this trend.

And so over these next two weeks, you want to be scooping up the rare, high-quality small- and mid-cap stocks that are best positioned to buck from the broader trend in the benchmarks.

Every week, Jason shares a list of the best stocks in this class to his Quantum Edge Pro subscribers. Last week’s list is below, and the newest names will be out to subscribers this afternoon:

A few repeat names jump out at me here. We see small-cap biotech Catalyst Pharmaceuticals (CPRX) hitting the top of the list, joined by a big jump in precious metals miner Agnico Eagle Mines (AEM). With precious metals prices on the rise, any high-quality miner is set to benefit from expanding profit margins – exactly the kind of factor that lands stocks at the top of this group.

We also can’t ignore the continued presence of insurers Brown & Brown (BRO) and Progressive (PGR). This is one of those tariff-proof businesses that investors are flocking to right now.

The bottom of the list is rife with lower-quality biopharmas, low-cost online furniture retailer Wayfair (W), and highly volatile semiconductor company Cohu (COHU)… which I’ll admit I’ve never heard of despite being public since 1985.

If you want to get access to the Quantum Edge Hotlist, along with Jason’s curated recommendations for the best-of-the-best small- and mid-cap stocks, check out Quantum Edge Pro right here.

Are you ready for another new tech breakthrough?

If you’re still reeling from the impact of AI on markets and daily life, you’ll want to stay strapped in.

Because this Thursday, the world’s second largest company is set to deliver the biggest shake-up to computing since the first days of the internet.

In some ways, what’s coming is simultaneously bigger than AI – and a crucial part of the AI story.

It’s about unlocking an exponential increase in computational power… and an associated exponential profit potential for investors holding the right stocks.

My good friend Louis Navellier thinks he’s found one of those stocks… and expects it to be the “next NVDA.” That means a lot more coming from the guy who’s been on record as an NVDA bull since it, too, was much more obscure, back in the 2000s.

Louis believes a 50X return is on the line for his new technology pick, especially for those who get positioned ahead of this Thursday’s event.

I urge you to check out Louis’ presentation here ahead of the big announcement set for this Thursday. If the market is at or close to a bottom, and risk-on appetite does return, there’s no better place to be than the companies benefiting from such a massive tech breakthrough.

Full details right here.

To your health and wealth,

Michael Salvatore signature