Is It 2020? Or 2018?

Is It 2020? Or 2018?

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By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

There’s nothing better than the start of a new month…

New months mean new monthly candles. And new monthly candles help us get a better look at the very-long-term trend.

Let’s start on that. And let’s also do some speculating on where stocks could go based on two key timeframes and associated major macro-scale events…

First off, some groundwork for the comparison to 2020.

The monthly view of the S&P 500 shows us something fascinating. From a technical perspective, the tariff crash recovery is quite similar to the pandemic crash recovery:

In 2020, the S&P 500 fell by a third in the span of three months, peak to trough, before getting bought up aggressively and sent to new highs over the following five months.

This year, the S&P 500 fell by a fifth in the span of three months, peak to trough, before getting bought up aggressively and sent to new highs over the following two months.

So 2025 saw both a shallower drawdown and a faster recovery than 2020. That makes sense. The pandemic was a vastly greater disruption to the world economy than President Donald Trump’s tariffs. As was the Federal Reserve’s tremendous intervention back then.

One should expect the market to be more resilient now, especially those clued in to Trump’s “Art of the Deal” style of negotiation.

Nevertheless, the market just experienced a shock event and a rapid recovery. That means we should look to 2020 as some kind of analog for what’s happening now.

The blue bars in the upper right are a copy of the monthly candlestick data from June 2020 – two months after the pandemic bottom. In the 12 months to follow, the S&P 500 tacked on 20% gains.

That doesn’t seem likely this time. Interest rates are still “moderately restrictive” as Fed Chair Jerome Powell puts it. Liquidity is rising, but nowhere near the rate we saw in 2020.

On the other hand, 2020 is still fresh in investors’ memories. They recall what happened the last time stocks made such a rapid recovery. And one could argue that if we pulled this off this time around without massive monetary support, and we’re about to enter a lower-rate environment, the case is just as strong for another big move in the next 12 months.

If that happened, the S&P 500 would trade well north of 7500 by this time next year.

Now, let’s talk about the less-fun black bars…

I selected that span of time based on when Trump passed his initial tax cuts in December 2017. For the next 12 months, stocks shed about 5% of their value.

As you’re likely well aware, Congress is angling to make those tax cuts permanent through the One Big Beautiful Bill Act.

Along with other parts of the budget reconciliation, the whole bill is estimated to cost the U.S. government $3.1 trillion (according to the Congressional Budget Office) if the House passes what the Senate agreed upon . For context, the Tax Cuts and Jobs Act was estimated at the time to cost about $1.5 trillion.

So, we’re about to pass legislation that’s anticipated to cost the government a lot of money, and also disrupt some key industries: renewable energy and public health insurance. That could all throw some wrenches in the works.

But 2017 was quite different from now in one other key way. Back then, the Fed was on a rate hiking campaign that was meant to simply get rates back to normal after a decade at zero. That weighed on stocks as they adjusted to the new rate environment.

Today, we have a Fed that’s tentatively playing with the idea of slowly cutting interest rates at about the same pace it rose them in 2018.

Once again, I don’t think the next 12 months will look exactly like 2020 or exactly like 2018. Taking all these factors together, we might anticipate a “split the difference” result of about 7.5%. That would put the S&P 500 up near 6700 by this time next year.

But let’s zoom in and look at some seasonals…

Last month, I warned that over the last 20 years June, not May, was actually one of the weakest months of the year. I wrote:

If you’re looking for a month to sell in right now, you could do a lot better in June. SPY is up 56% of the time in June for an average return of -0.1%. When June is negative, SPY falls -3.5% on average.

There is a distinct seasonal summertime trend. It just doesn’t start in May.

It starts now. And we should expect headwinds for stocks over the next few weeks.

Stocks decidedly did not fall in June. The S&P 500 was up 4.83% from May 30 to June 30 and notched a new high.

I was wrong, but I’ll call that a good problem to have.

Where I wasn’t wrong, however, was in the seasonal sector study. In that same article, I looked at which sectors had the best shot of outperforming in June. I said:

Looking ahead, here are the seasonal returns by sector for the month of June:

It’s not the prettiest sight.

Only 6 of the 11 SPDR sector ETFs have a track record of trading positive in June. And the top two best win rates are in relatively new ETFs, XLRE and XLC, so the data is less consistent.

For me, the best bet for June seems to be tech – at least from a momentum perspective.

And, well, let’s look at the leaderboard for June. Tech takes it home, along with Communications and Energy – both of which are among the top brass in terms of win rates and returns. Even Healthcare and Real Estate managed to trade positive:

A few of the individual stock ideas from that issue worked well, and others didn’t. Nvidia (NVDA), Broadcom (AVGO), and Netflix (NFLX) have all led the market, while Palantir (PLTR), ServiceNow ( NOW), and Accenture (ACN) have all trailed it:

Most notable is NVDA’s return. I showed at the time that when NVDA is positive, it tends to make a big move of about 12%. That’s close to what happened this time around, too.

It’s a good time to remember that seasonality is not foolproof. It can help tilt you in the right direction, but we shouldn’t treat it as gospel.

As for the next batch of seasonal trade ideas, look forward to Monday’s Digest…

In the meantime, a huge divergence is emerging now…

If there’s one guy who’s not too worried about trading through the beautification of the federal budget, it’s Jonathan Rose of Masters in Trading.

It’s not the first time that he’s had to keep trading when the old rulebook’s getting thrown out.

When he first started on the Nasdaq trading floors, everything was switching over from open-outcry trading (think classic Wall Street: zealous traders scrambling in a pit) to digital trading.

But because Jonathan saw that he could arbitrage the difference in prices happening on each side, he was able to survive, thrive, and rise in the ranks of his proprietary trading firm.

Jonathan’s been a die-hard divergence trader ever since. The setups he goes after today are not unlike those first wins.

In this case, he looks for two stocks or ETFs that normally trade together, but have gotten out of whack – bound to snap back into place very soon.

So, yes, things are crazy now. But the good news is, it’s creating what Jonathan sees as the Trade of the Decade in the gold market.

I can see why Jonathan’s so focused on gold right now. From what I’m seeing, there’s a huge divergence setting up between gold and silver.

Take a look at this chart:

This is a ratio chart between gold and silver. When the chart goes up, gold is outperforming silver – and vice versa.

You can see that this ratio tends to see big spikes higher to mark major changes in trend. Back in 1991, a major run of gold outperformance came before a yearslong run of silver outperformance that took the ratio down -60%.

Later in ‘97, a huge spike in silver outperformance reversed the trend again, leading to gold outperforming by nearly double over the next several years.

Fast-forward to 2025. Gold has gained about 58% against silver… and just marked a major reversal a few months ago.

With gold at its highest price against silver since the 2020 pandemic, and before that 1990… a level rarely seen… The potential for silver to play catch-up to gold is enormous.

As for how to trade this setup, click here to watch Jonathan’s free briefing and get ready to pounce when post-holiday trading resumes.

To building wealth beyond measure,

Michael Salvatore
Editor, TradeSmith Daily

P.S. I want to wish you and yours a happy Independence Day. Our offices are closed, and the TradeSmith team is enjoying the three-day weekend. We’ll be back with you bright and early on Monday.

(Michael Salvatore held a position in NVDA, AVGO, and NFLX at time of writing.)