The chartmaster who predicted the robust year-end rally shares when the S&P 500 will break through the 5,000 milestone — and outlines a 4-part investing blueprint for a disappointing pullback (2024)

But David Keller, StockCharts.com's chief market strategist, was convinced that this time was different, that the S&P 500 could finally top that hurdle for the first time in 18 months. His charts indicated that US stocks were set for a furious end-of-year rally, no matter what naysayers said.

After Keller's call, the S&P 500 rose nearly 6% in six weeks. By the end of the year, over 90% of stocks had exceeded their 50-day moving averages, a telltale sign of extreme optimism.

It now seems as if investors got over their skis this winter. The S&P 500 was stuck in purgatory for weeks, barely budging from the 4,769 level at which it entered 2024.

The index finally broke out on Friday and set a record high of 4,839. But unfortunately for bulls, Keller believes the market outlook will get worse before it gets better.

"The way I'm thinking of it is short term weaker but long term still stronger, at this point," Keller said in a recent interview with Business Insider.

History says stocks are due for a drawdown

The S&P 500 may be stuck in the mud, but Keller is confident that it'll soon settle on a direction.

"One of two things is going to happen: Either we break above 4,800 and then push to 5,000 and beyond, or we start to pull back below 4,700 and show some weakness," Keller explained on December 18, before the index passed that mark. "And I'm more in the latter camp of thinking that we back-and-fill after the rally we saw in the fourth quarter."

In the coming weeks, the chartmaster predicted that the index will slip back to the 4,450 mark. An 8% decline would certainly be unwelcome, but it may be needed to set up better future returns.

"A pullback in Q1, I think for long-term investors, you want to think of that as more a long-term buying opportunity than anything else," Keller said.

Historical trends served as a tailwind for stocks late last year, Keller said. In the year before a presidential election year, he noted that the S&P 500 often struggles in the third quarter before rallying into year-end, a thesis which played out almost perfectly in 2023.

However, Keller said stocks tend to get a wake-up call early in the next year. The chartmaster found that in election years since 2004, US stocks lost ground three out of five times in January, February, and March. A first-quarter sell-off is likely in the cards again, he warned.

"The expectation of further upside from here would be completely ignoring those seasonal tendencies," Keller said. "It tends to be pretty weak. So I think it's more of a choppy environment."

Expect the S&P 500 to heat up heading into the summer

Despite stocks' shaky near-term prospects, Keller believes their medium-term outlook is rosy.

"The second quarter is, I think, where the seasonality is a lot more constructive," Keller said. "That's where we'll have a lot more clarity on the Fed's trajectory of lowering rates through the course of this year. And that's when I think you could see a return to more of a bullish phase."

In all likelihood, Keller said the S&P 500 will regain momentum after a near-term hiccup and push toward the 5,000 milestone in April, May, or June. Otherwise, he pointed to later in the summer.

"I would see a move to new highs probably in Q2, maybe in Q3, and I could see there being some strength," Keller said. "I think, unfortunately, that sets us up for a pretty weak September, October. Which, again, is a classic seasonal pattern, but it works so often."

4 parts of the market poised for a breakout

When asked which sectors or industries look the most attractive in an impending market sell-off, Keller pointed to semiconductor companies first.

"There are areas of the market — and semiconductors come to mind — that are doing just fine," Keller said. "So it's an important time to stick with what's working."

Chipmakers, specifically Nvidia (NVDA) and Advanced Micro Devices (AMD), were among the best-performing stocks last year, so investors may still view them as a top idea for securing upside. Keller is in the bull camp for those names, but for a slightly different reason.

"I would say less because they're great offense, but more because they're good defense," Keller said of owning semiconductor stocks. "So if you think about what happens when the market gets choppy, institutions rotate to perceived areas of defense."

Keller continued: "And at times, that's been defensive plays like utilities or real estate or staples. I think now semiconductors are kind of the defense of the modern age, right? Semiconductors are the backbone to the modern economy, much like staples and other things probably were in previous eras."

Both Nvidia and AMD have broken out recently, Keller noted, which makes them sound bets. However, he said investors wary of their valuations can also ride exchange-traded funds (ETFs) like the VanEck Semiconductor ETF (SMH).

Keller also cited healthcare as a top idea, which was heavily hyped heading into 2023 but disappointed. While he didn't cite investments he likes in the space, he said industries such as pharmaceuticals, medical supplies and equipment, and biotechnology have constructive setups.