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It has been a very happy new trading year despite starting in a bit of a downbeat mood, as it ended Friday with the S&P 500 and the associated SPY finally achieving a new all-time high.

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For those of you who follow me on X or have watched some of my webinars and recent interviews, you will know that I have been saying that the index has been stretching toward that all-time high since the reversal seen in October 2023 -- unlike its sister index, the Nasdaq 100, and by extension the QQQ, which achieved this milestone in December.

The drive higher in both indices has been primarily due to Tech and Communication Services, plus, to some extent, the Consumer Cyclical sector. But once we understand how these indices (and their respective ETFs) are constructed, we can see why markets appear so strong.

As explained in previous posts and covered in our stock trading program, both the S&P 500 & Nasdaq 100 as market cap indices are dominated by the biggest companies. To the extent that in the S&P 500, the top 6 carry a 25% weight, while in the Nasdaq 100, the top 6 companies constitute a 30% weight.

The net effect is that these companies will drive momentum into the index in good times, while in more difficult times, they will at least cushion any severe correction. We saw this in the 2022 selloff and the subsequent recovery in 2023, which was driven by AI technology.

Friday's weekly close for the S&P 500 was interesting, as the only sectors to end higher on the week were Tech and Communication Services; all the others were either flat or in the red. So, what does this tell us about the markets?

First, index performance is often distorted, and any bullish moves are restricted to a small number of mega-cap companies. Second, the feel-good headlines generated by these two indices at their respective all-time highs feed into a narrative that all is well with the US economy, when that might not be exactly true. Third, we must consider other indices, such as the Russell 2000, for a broader sentiment view.

Again, those of you who follow me will likely know I like to watch the IWM (the ETF for the Russell 2000), which recently broke out of a long congestion phase but has recently retraced back. The consensus view (as well as my own) is that a strong economic recovery has to include the more speculative small-cap stocks.

As a trader, it matters not because all we are looking for is a trading opportunity, but this can be extremely tricky for investors, particularly if they did not buy into the AI bull move early in 2023.

Against the current backdrop, we must also factor in this year’s Presidential election. From a cyclical perspective, stocks do tend to be positive in the run-up to the election, although more volatile, and it’s also a matter of watching both the US Treasury, in terms of bond issuance to finance spending, and what the Fed is doing in terms of interest rates.

At the moment, there does seem to be a very cozy relationship between the two, with some commentators suggesting it is too ‘cozy.’ So, some interesting times certainly lie ahead.

Finally, whatever happens, as VPA (volume price analysis) traders and investors, the truth is in the charts.

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