This article is a continuation of our free newsletter from May 27, Historic Market Uncertainty Meets $7 Trillion Debt Wall: What Comes Next for the S&P 500.
For our Premium Advanced Members, we discuss the following:
- The specific game plan for how the I/O Fund plans to navigate the remainder of 2025 including the must-watch levels
- The signals we are watching to gauge when the broad market tops and the exact levels where we will resume buying stocks.
- Please keep an eye out for dial-in instructions for a 1-hour webinar on Thursday where I/O Fund Portfolio Manager, Knox Ridley, will discuss live the I/O Fund’s game plan for 2025. If you went into this sell-off fully invested without any risk management plan, we encourage our Advanced Members to attend our upcoming weekly webinar for premium members held this Thursday, May 29th at 4:30 ET.
Broad Market Analysis:
It is easy to draw on one’s emotional bias and therefore build a believable case for what the market will do next. We think this is a mistake for investors positioning for the remainder of 2025. Instead, we will continue to let the markets tell us what is to come.
While there is mounting evidence that the current bounce off the April lows could continue to new all-time highs, the unique risks being revealed in this market warrant caution. Furthermore, the larger pattern that has developed from the 2022 low is telling us that even if we do see a move to new highs, it will likely not be a prolonged trend higher before volatility picks back up.
I first posted this chart in our April 10th report titled, "The FED Can’t Save This One: Why Bonds May Break The Stock Market in 2025." During this report, the S&P 500 was trading around 5200 and we stated that
“The next move will be a corrective rally that makes a lower high. The targets for this bounce are between 5600 – 6050.”
We further stated that once we see our first larger correction from this region, how the market corrects from there will likely determine the remainder of the year.
The below analysis outlines our specific game plan for how we plan to navigate the remainder of 2025…
As of now, the market has topped at 5968 and has the potential for one more small push higher. Regardless, we are in a topping pattern for the expected correction into the summer.
The I/O Fund’s S&P 500 outlook and game plan depending on how the next correction pans out. Source: I/O Fund
- Red: In this scenario, we have are completing a rally that should make a lower high. This will set us up for a drop to new lows. The initial drop from the February 19th high was the A-wave. We are completing the lower high, B-wave, which will set us up for a 5-wave drop to new lows in the C wave. C-waves are always 5-wave patterns, so how we drop will be crucial for determining if this count is in play.
- Green: This count would have us completing a larger correction within a bigger uptrend. If the coming drop is a messy and overlapping move that resembles a 3-wave pattern, it will likely make a higher low in an on-going bull market to new highs. This correction will target the 5600 region, first. As long as it holds 5100, we can maintain a setup to new highs around 6300 – 6500 in the coming months.
If we see a more direct drop that takes the shape of a 5-wave pattern, then the market is telling us the risks described in this report are likely greater than the market believes, as we set up for a drop below the April lows.
If on the other hand, we see a messy/overlapping 3-wave retrace that finds support in the 5600 – 5100 region, then it is the market telling us to look past these risks for now. This would be the set up for new all-time highs in the coming months.
I do want to state that even if we do see the scenario where we push to new all-time highs later in the year, the larger pattern in play suggests this will be the final 5th wave in the bull market that started at the 2022 lows. It should be accompanied by numerous key markets and stocks making higher lows. In other words, this would be a rally that we would likely sell into, as we set up for a more prolonged period of volatility.
Conclusion
The market breadth, Q1 earnings beats, and the size of this rally suggest that new all-time highs are likely to follow; however, one cannot underestimate the unique risks within the backdrop of markets. We have never seen more uncertainty in geo-political dynamics, which is forcing companies to withhold guidance as many of the Q1 beats are due to tariff pull forwards.
Furthermore, with nearly half of the U.S. government debt needing to be refinanced this year and next, the bond market continues to move lower in the face of market volatility and uncertainty. This is a trend we have not seen in over 30 years and could be signaling a sea change in how global markets interact moving forward.
If we see an aggressive 5 wave drop, we will position defensively for a move below the April low. If we see an overlapping, 3-wave move that holds over 5100, we will position for the 2nd best buying opportunity of 2025.
Join me Thursday, May 29th at 4:30 pm EST as I discuss this in further detail in a live webinar. The recorded version will be released later in the evening on the 29th.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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