A chartmaster who called the last market downturn shares why stocks could soar to new record highs by year-end — and lists 4 investments that will build on recent momentum

• The S&P 500 can surge past its record high before January, according to a chartmaster.
• Following months of being cautious about stocks, David Keller is waving the green flag.
• Here are four investments that should perform best in the next month and a half.

Long-time technical strategist David Keller believes the S&P 500 will set a new all-time high before the end of the year, despite months of warnings about market weakness.

Since late October, the index has risen 9.4%, putting it within striking distance of its all-time high. And Keller, the chief market strategist at StockCharts.com, believes it can rise another 7% to 4,800 in the next month and a half if financial conditions remain favorable.

“It depends a lot on interest rates, and if they can stay where they are, I think that’s certainly a possibility,” Keller told Insider recently.

Prepare for a year-end rally, but watch for a better entry point

If US stocks make history in the coming weeks, they will not be without precedent. Keller warned in early August that US stocks frequently struggle in the third quarter of a year preceding a presidential election before regaining momentum with a significant end-of-year rally.

“If you look at this seasonality in a pre-election year, it looks pretty much exactly like this,” he said. “A strong first half of the year, a weaker third quarter, a bottom in October, and then a strong second half of the year.” That’s pretty much what you’d say ahead of time, and it’s been pretty accurate.”

In terms of accuracy, Keller predicted in mid-September that the S&P 500 would fall to 4,100 if it fell below 4,350. The index quickly sliced through that level and bottomed out at 4,117 before rising for eight consecutive sessions on renewed economic optimism.

Investor sentiment has improved significantly since September and October, according to Keller, owing largely to optimism about falling inflation, which will likely result in fewer interest rate hikes.

“Obviously, what’s changed so much are expectations,” Keller went on to say. “As far as I can tell, the CPI number this week all in one announcement convinced all investors, as far as I can tell, that a soft landing is attainable — if not likely, rate hikes are completely off the table, and rate cuts could occur earlier next year than expected.” And all of that accelerated timetable is what is allowing risk assets to rise.”

The most encouraging sign of this rally, according to Keller, is improving breadth, which reflects a healthy market.

He noted that at the end of October, a single-digit percentage of stocks were trading above their 50-day moving average. Even more striking, according to T. Rowe Price, the S&P 500’s 9.2% year-to-date gain was driven by a 53.2% return from the so-called “Magnificent 7” stocks. Stocks would have gained 1.2% if those names were excluded, according to the firm.

“One of the biggest issues — if not the issue — in 2023 has been the gap in performance from the mega-cap leadership and everything else,” he said. “And a lot of S&P stocks are still down on the year, but that seems like it’s starting to change.”

Another encouraging sign for the market, according to the chartmaster, is the recent performance of small stocks. The small-cap-focused Russell 2000 is up only 2.4% in 2023, despite a 10.2% surge since late October. Its relative performance is also lacking, as the S&P 500 is up 17.3% over the same time period. Keller, on the other hand, sees green shoots emerging for the economically vulnerable group.

“The real encouraging thing is the participation in small caps, and that’s been one of the big asterisks on the market in 2023,” he said.

Keller went on to say: “You’re starting to see some of those beaten-down areas of the market starting to do better, and I think that is what creates a sustained rally in 2024.”

Keller, on the other hand, isn’t ready to declare that the market’s momentum will last the entire year. He believes that, while a recession is less likely, the US economy is not yet out of the woods.

“I’m not convinced it’s going to be a completely rosy picture from here going forward,” Keller said in an interview. “I believe there are still a lot of unknowns to work out.” So, I believe ‘choppy’ will continue to be an adjective used to describe the market well into 2024.”

Although the S&P 500 has a strong medium-term outlook, Keller believes that positive sentiment may be overstated in the near term. Don’t be surprised if the index falls back to 4,300 before charging higher, he said, adding that he’d buy stocks on the dip.

“If you look back at other times where we’re overbought, it doesn’t mean the end of the world necessarily, but it does usually mean an actionable pullback,” Keller went on to say. “We’ve run really fast — very high, very fast — and we’re approaching the point where you’d expect a short-term pullback.” But I believe that creates a higher low that is very buyable, if that’s how you want to think about it.”

4 investments to make while stocks rally

Even if the S&P 500 experiences a minor hiccup before finishing the year strongly, Keller believes three stocks and one exchange-traded fund will build on their recent gains.

Keller’s charts below show the S&P 500’s strong technical setups and the four investments he’s particularly bullish on right now. Each investment idea is accompanied by its ticker, market capitalization, and Keller commentary.

1. Adobe

Ticker: ADBE

Market cap: $271B

Commentary: “Right now, a chart like Adobe appeals to me.” And Adobe has risen significantly, but it is one of the more consolidated.”

“And while the markets were falling in August, September, and October, Adobe hung in there and has only recently broken out.” So I’m looking for things that haven’t been as active in the uptrend but are just starting to break higher.”

2. Disney

Ticker: DIS

Market cap: $167.3B

Commentary: “More of a bottom-fishing candidate would be Disney.” Disney has been falling for a long time, but it is now bouncing off the lows and really rotating higher along with other things.”

“So I think areas of the market we’ve probably been avoiding because they’ve been underperforming, I think now — given more of a bullish environment — I think it’s an opportunity for a lot of these to have some catch-up returns here in the fourth quarter.”

3. Microsoft

Ticker: MSFT

Market cap: $2,750B

Commentary: “If I had to pick one of the megacaps, it would probably be Microsoft.” In terms of the first half of the year, this has been the clear leader. It fell along with the rest of the market, but it has since made new highs, whereas most stocks have not.”

“If you look back in time, Microsoft has often done well in bull and bear markets.” When the market has retreated, Microsoft has usually held up fairly well on a relative basis. Having something like that in your portfolio, I believe, makes a lot of sense. Because that is, in some ways, a defensive play if the market pulls back a little bit because it is fairly stable and will probably hold up OK. However, it has also been a good offense here recently.”

4. Invesco QQQ Trust Series 1

Ticker: QQQ

Market cap: $150.6B

Commentary: “A classic technical configuration is a large run followed by a downtrend channel, parallel channel of lower highs and lower lows.” And so, literally, you draw the first trend line, a perfectly parallel line that matches the data exceptionally well.”

“The breakout, which occurred on the QQQ two weeks ago, is a really bullish rotation, and you call this a bull flag pattern. So you have a big run, a consolidation period, and then a breakout.”

“The way that we were taught as technical analysts to identify an upside objective is you take the length of the run going into the pattern, and then you have a parallel run coming after, which would mean the Qs going up to $500-ish would be the way that that measures.”

“Now, I think that’s an outrageously aggressive target right now, but it does demonstrate the significance of the rally we’re seeing in November.” It certainly suggests more power from here. And $400 on the Qs is the level, and I believe a break above there will really round out this rotation. That’s what I’d be looking for here in November and December to see if we can get above that level, which I believe we will.”