Stocks Rally Back Near The Highs

The speaker discusses the S&P 500, noting a recent 10% drop followed by a rally back near all-time highs, with a potential for new highs. This current market behavior is explored as a process of "topping" rather than a quick event, contrasting with "bottoming" which is typically a rapid occurrence. To illustrate this, the speaker draws parallels with Bitcoin's market cycles. In Bitcoin's bull markets, the structure remained intact as long as pullbacks did not go below previous highs. For instance, a drop in April 2025 came close to breaking the bull market structure, but Bitcoin stayed above its 2024 high, leading to a new all-time high. However, this new high was part of a "distribution phase" that lasted several months before a significant sell-off and a breach of the bull market structure, setting a lower low. Applying this to the S&P 500, the speaker suggests a similar argument. The S&P 500 has seen drops that did not take out prior highs, followed by rallies to new highs. This pattern has occurred multiple times. The speaker operates under the assumption that the current market rally, even to higher prices, could be a distribution phase. This is based on Bitcoin's behavior, where it rallied to new all-time highs, remained in distribution for months, and then declined. The speaker compares the current S&P 500 situation to previous end-of-business-cycle scenarios, such as 2007-2008 and 2000, rather than 2022, arguing that the current market is later in the business cycle. Metrics like the liquidity risk metric and the ITC business cycle chart suggest a late business cycle environment. Historically, late business cycles feature tops with drops, rallies to slightly new all-time highs, and then further drops, which in hindsight are clearly distribution phases. In 2007, the stock market experienced a 12% drop, rallied to new all-time highs, swept the highs, and then entered a recession. This scenario, if it were to repeat, would be "a lot easier to navigate" as it would allow the business cycle to reset this year, potentially setting up a bullish pre-halving year for Bitcoin. However, the speaker cautions that "sweeps" of highs can be more prolonged than a quick touch. Using Bitcoin as an example, a supposed "sweep" in May 2025 actually continued for several months before a significant downturn. This extended distribution phase, where the market repeatedly sweeps highs for months before a true downturn, is a more difficult scenario to navigate. The speaker hopes for a quicker resolution but acknowledges that history suggests a longer distribution phase is possible, similar to the dot-com era or the 1960s/1970s. The speaker also references 2018, a midterm year, where the stock market found an initial top early in the year, a higher high in September, followed by a deeper drop. Similarly, in 2007, a high was followed by a drop, a sweep of the high in October, and then a larger drop. A recurring "fractal" pattern is discussed, where every correction follows a similar pattern despite widespread awareness. The speaker predicted a 10% drop that happened despite skepticism, just as Bitcoin topped in October as predicted by the four-year cycle. In the dot-com era, after a 10% drop, the stock market rallied and then entered a distribution phase for months. Overlaying this fractal, the stock market topped in September/October during that period, which is the reverse of the current expected pattern where lows are in March/April and highs could be in September/October. If this reverse pattern plays out, the next two years could be challenging. The speaker emphasizes that "topping is a process" and hopes for a quick sweep of the high, a retest of the April low, and then a continuation. However, if the market remains in a prolonged distribution phase with repeated new all-time highs and subsequent drops, a "difficult conversation" will be needed later in the year. Regarding investments, the speaker notes that personal short-term views on Bitcoin are unchanged. The speaker came into the year bullish on energy, manufacturing, and metals stocks, all of which have significantly outperformed Bitcoin and domestic stocks. For example, Bitcoin is down 32% against energy stocks, 24% against gold, 50% against Dow, 32% against Exxon, and 24% against silver this year. The speaker highlights that energy stocks tend to top out later than the S&P 500. In 2007, the S&P 500 topped in October, but the XLE (energy sector ETF) didn't top until almost a year later. Similarly, in 2000, the S&P 500 topped in March, and XLE topped over a year later. This suggests opportunities can still exist even if the broader market is in a distribution phase. The speaker also observes that the stock market against gold has not durably recovered the point where it broke down, repeatedly getting rejected by that level and the bear market resistance band. Given the complexity and emotional challenges of timing the market, the speaker advises that for most people, buying low-expense ratio index funds and forgetting about it is a better strategy, a sentiment shared by many wealthy investors. Even when corrections and rallies are anticipated, navigating them remains difficult due to the need to wait for patterns to fully play out.