Technical analysis master makes a bold prediction: U.S. stocks may soon reach their peak!

Tom DeMark, a well-known Wall Street trader, is a highly respected market technical analyst who has consulted for investors such as Paul Tudor Jones, Leon Cooperman, and Steven A. Cohen. He stated that the market may be about to peak.

DeMark focuses on the timing of market trend exhaustion and is the creator of the stock market turning point indicator. His creed is that the market peaks when it encounters good news and bottoms out when it encounters bad news.

DeMark's trading system includes hundreds of indicators, among which the most widely used is the TD Sequence. This indicator uses a price comparison process that includes "Preparation" and "Countdown" components to identify potential turning points in market trends or consolidation processes. The application method is shown in Figure 1.

Figure 1

The other part of the TD Countdown consists of 13 trading time periods, which can start counting down from the 9th day of the buying preparation, requiring that the closing price on that day is less than or equal to the lowest price two days prior. These 13 days do not need to occur consecutively, and the application method is shown in Figure 2.

Figure 2

In an email to MarketWatch, DeMark stated that the Dow Jones Industrial Average rose 624% from its low in December 1914 to its high in September 1929, and it has risen 587% from the low in 2009 to this week's high. He pointed out that the daily, weekly, and monthly price trends of the Dow are similar to historical patterns.

According to his analysis, the optimistic upward target for the Dow is 47,045.

He also compared the current situation of the Dow to a recent round of rebounds. He mentioned that the index's rise over several months starting from the end of 2022 has a similar upward forecast to the surge from 2020 to early 2022.

As for the S&P 500 index, he noted that the monthly model countdown of the TD Sequence is currently at 12 or 13, and the reference upward target is 6,118 points DeMark also stated that on the daily chart, the Dow Jones Industrial Average's TD countdown is at 11, and the S&P 500 index is also at 11, so basically two new historical highs are needed to trigger a sell signal. This could lead to a standard 5% to 10% pullback, or what he referred to as a complete collapse.

“The rally over the past two weeks has been quite unstable, and a sudden pause in buying— even without selling pressure—could weaken the rally and shift it into a seller's market. Admittedly, good news is unlikely to extend to Trump's inauguration, but any interruption in buying interest should lead to a brief rebound,” DeMark said.

Additionally, he is cautious about Nvidia, the key chip manufacturer driving the AI revolution, which will announce its earnings report this week.

He pointed out that Nvidia's TD countdown is currently at 12, and a new closing high would complete its rebound. He said, the stock's potential upside target is $154.50, while the downside risk “could be significant.”

Bank of America: Three Risks That Could Disrupt the "Trump Rally"

In fact, from a fundamental perspective, the U.S. stock market may also be overestimating the benefits brought by Trump 2.0, thus facing the risk of a high-level pullback.

Since Trump won the presidential election, the stock market has been soaring. One of the main drivers has been investors' strong expectations for future profit growth, seen as a direct benefit from Trump's plans to lower corporate tax rates and ease regulations.

Although Bank of America's year-end target for the S&P 500 index is slightly above current levels, the company's equity strategy team has outlined three developments that could disrupt the current "earnings per share growth cycle" driving the stock market up.

First, an economic recession could severely weaken profit growth, leading to a 10% to 20% decline in S&P 500 earnings per share.

Although a U.S. economic recession is not Bank of America's base case, the bank stated that under the incoming President Trump's leadership, the risk of a recession is real.

Analysts wrote in another report that it will depend on which policies the Trump administration prioritizes. If Trump pushes for large-scale immigration restrictions and protectionist trade policies under minimal fiscal easing, the economy will fall into recession.

In a recession, it is typical for profits to decline 20% from peak to trough. In this scenario, next year's S&P 500 earnings per share would drop to $195-220.

Certainly, if the elected president no longer emphasizes trade and immigration restrictions, but instead supports tax cuts and deregulation, Bank of America also sees the opportunity for explosive economic growth. In this case, GDP growth in 2025 could even exceed 3% Secondly, if Trump's trade plan is implemented, retaliatory tariffs could hit S&P 500 earnings per share by 10%.

During the campaign, the elected president promised to impose a 10% tariff on all foreign goods imported into the United States and a 60% tariff on imports from China.

If Trump keeps his promise, Bank of America expects that as other parts of the world establish their own retaliatory tariffs, U.S. overseas sales will be impacted by 3% to 4%.

The bank stated that in the increasingly fierce trade war, industrial and semiconductor stocks will face the greatest risks.

Thirdly, a significant rise in bond yields could further decrease earnings per share by 10%.

In Bank of America's most pessimistic scenario, the yield on 10-year U.S. Treasuries skyrockets to 7%. This could happen if Trump's tariffs and immigration restrictions trigger inflation shocks.

If this occurs, the surge in U.S. Treasury yields means that the manufacturing Purchasing Managers' Index (PMI) will reach 43 by the end of 2024.

This indicator monitors the health of U.S. manufacturing, with a reading below 50 indicating a contraction in manufacturing activity. As of October, the U.S. manufacturing PMI was 46.5.

Bank of America pointed out that once the yield on 10-year U.S. Treasuries rises above 5%, the stock market may face greater pressure.

Since Trump's victory, U.S. Treasury yields have been climbing as investors worry about the increasing uncertainty of the Federal Reserve continuing to cut rates during Trump's second term