With the year coming to a close, I want to share what I believe is the most important chart to consider as we head into 2025.
When it comes to the most critical stocks, it's all about tech. This has been the case for at least the last decade and a half.
Mega-cap tech not only dominates U.S. indexes, but these stocks also play a major role in most investors' portfolios.
The same is true for semiconductors, which serve as both a benchmark for the technology sector and a barometer for the broader market. They are also the posterchild of the ongoing AI revolution.
By evaluating relative trends, we gain insight into leadership and can also assess the market's overall health.
Take a look at the long-term view of Technology $XLK and Semiconductors $SOX relative to the S&P 500 $SPX.
Both ratios are sitting just below their dot-com bubble highs.
The last time we were here, technology entered a prolonged period of underperformance.
If these ratios begin to decline from here, it's a clear signal to adopt a more cautious approach and reduce exposure to risk assets.
You simply do not want to lose these key offensive groups. I don’t think the bull market is in good health without them.
However, if these ratios break out above their previous highs, it would indicate strong confirmation that the bull market has room to run.
That is the higher probability outcome, and I think a resolution will happen next year.
I don't foresee these relationships continuing sideways for much longer. That’s already been the case for most of the last year.
