Market Leadership Has Completely Reversed

BY KEITH KAPLAN
CEO, TRADESMITH

Three months ago, on April 2, 2025, I shared my thoughts on the first quarter of 2025. In the very first line, I described it as “one to remember.”

If that was true of Q1, then Q2 will be “one for the record books.”

That very day was Liberation Day. President Trump announced a sweeping tariff policy that went far beyond even the most extreme expectations.

The following four trading sessions saw the S&P 500 crater another 12.1%, hit bottom, and spend the next several months reversing higher in volatile fashion.

Despite this drop – and in many ways, because of it – the S&P 500 wound up returning 10.6% in Q2.

It was a stunning, V-shaped recovery the likes of which we haven’t seen since the COVID crash.

And now, as I write today, all the large-cap and mid-cap indexes are back in the Green Zone. The S&P 500 and Nasdaq 100 are even at new highs, with only the Russell 2000 small caps still lingering in the Red Zone.

Q2 taught us some key lessons about the market this year.

But the biggest thing it taught us is that volatility is the spirit of change.

And since change has been the beating heart of this new era of leadership, we should learn to love volatility.

We cannot and should not count on the market staying too comfortable with either direction as this highly consequential administration continues. There will be opportunities to make money as stocks rise, and just as many opportunities to profit as they fall.

Here at TradeSmith, this has been our guiding light all year long. We correctly interpreted the election as a moment that would rewrite the investing rulebook. That’s why we immediately set to work creating strategies and systems that are designed for this kind of action.

So today, just as we did last quarter, we’ll look at what’s trending in markets now… and a few ideas from our software that can help you navigate the weeks and months to come.

The Aftermath of Q2 2025

After such an extremely volatile quarter, most of which was marked by a huge recovery rally, it’s worth taking a close look at which sectors are leading right now.

Technology is leading, and it’s hardly even close. Industrials. Communications, and Cyclicals are trailing in a group. And the worst sectors are Energy, Healthcare, and Real Estate:

For context, here is the sector leadership from exactly three months ago. It’s close to a mirror opposite:

Clearly, where the market was risk-off in Q1, it’s gone risk-on in Q2.

Last quarter we also looked at the Invesco S&P 500 Equal Weight ETF (RSP), showing that it’d been in a downtrend from the previous November. That was driven by the lagging performance in tech at the time.

Today, we can see that while the S&P 500 (red line below) is at new highs, the equal-weight S&P (blue line) is still below its November highs and even still below its February highs:

So, we have a volatile market that’s led by risk-on assets. We’re seeing certain sectors like energy and healthcare chop around quite a lot. But through it all, tech is still where investors are placing most of their chips – with major themes like AI and semiconductors making room for other risk-on themes like biotech, crypto, and electric vertical takeoff and landing (eVTOL) companies.

So, now let’s take a look at a few of the tools we’ve launched in the last quarter and see what kind of opportunities arise from them.

Q2’s Big TradeSmith Releases and What They’re Saying

Last quarter in TradeSmith, we launched two new AI-powered software tools and one new strategy.

Predictive Alpha Prime and Predictive Alpha Options both got major software upgrades. Instead of the standard Large Language Model (LLM) that we’re used to with the most popular AIs like ChatGPT, they’re now using what you might call a Large Number Model (LNM). It’s far better suited for a “quant” strategy like ours, creating smarter stock price projections – then determining the best type of options trade to use on them.

If tech stocks have such strong momentum right now, then it’s only natural that we should look for some tech stocks to trade on the new Predictive Alpha suite.

Let’s set up a quick screen to find some ideas. Here I searched for S&P 500 and Nasdaq 100 stocks with a Prime projection ending sometime in the next 21 days, with a historical accuracy rating of more than 75%, and with an expected move of more than 5%.

Importantly, we also want trades we consider “Correlated” (for reasons I’ll get into shortly).

Out of hundreds of names, 11 come back as checking all these boxes:

I didn’t search solely for tech stocks so as not to overly limit the results. There are plenty of companies that straddle the line – like Coinbase (COIN), which falls into Financial Services, and Netflix (NFLX), which falls into Cyclicals.

And Coinbase happens to be one of the best trades available. The Prime projection for COIN shows it has a historical accuracy of 76.6% – meaning it’s hit the projected price more than 3/4ths of the time in our testing period.

Not only that, the Predictive Alpha algorithm is forecasting a move of nearly 14% by July 28.

So, we could go and buy COIN stock with the goal of selling it for a quick swing gain in the next four weeks. But let’s also check the Predictive Alpha Options screen:

Here we take a trade on COIN to the next level, and we can talk about why I wanted to only show Correlated trades.

Correlated signals occur when a stock’s Trend signal – made up of a combination of short, mid, and long-term price trends – and Prime Projection are moving in the same direction. That’s what we have here with COIN.

We also have a VolScore of 9, indicating relatively inexpensive premiums to trade options with.

Take all these factors together, and you have a great setup for buying call options on COIN.

Now, let’s talk about a different kind of signal uncovered by TradeSmith analyst Jeff Clark.

For years, Jeff has followed a system of various moving average lines. When these moving averages converge, it indicates a lot of pent-up energy in a stock that’s waiting to be unleashed to the upside.

We systematized Jeff’s system and backtested it. What we found was that the bullish version of this moving average setup boasted a 10-year win rate of 72%, while the bearish setups won 61.9% of the time. Over the last year, 21-trading-day forward returns across both strategies averaged 5.5%. Do that a couple times, and you’ve made a year’s worth of stock gains in two months.

Here’s a fresh signal, active right now on healthcare/tech stock Intuitive Surgical (ISRG). You can see that ISRG is trading above the three dotted lines below. This is Jeff’s coiled moving average signal that has historically led to strong short-term performance:

If you’re worried about chasing stocks into these new highs, these kinds of setups are exactly what you want to watch and trade. Especially if you can find them in stocks with relatively high Volatility Quotients (VQ%), which tend to move faster.

Speaking of which, the new all-time highs in Robinhood (HOOD) sure show us exactly how fast a high VQ% stock can go.

And according to our Predictive Alpha Prime projection, it’s far from done:

I’ll keep you posted on my X account about the most exciting charts I’m seeing each day – plus bullish seasonal patterns about to kick off. Follow me @KeithTradeSmith… it’s free and always will be.

Market Leadership Has Completely Reversed