2025 stock market survival guide and S&P 500 inclusion

A difficult six weeks might be just the start of a rough year

One of things I spend a lot of time thinking about is what trend in the market is happening now that will look obvious in 6/12/18 months? What does the economy look like at those points? What will benefit from the economy looking the way it does in the future, and what will suffer? How can I position to reap the rewards of these possible changes while limiting my downside.

I’m not perfect at this exercise. Few are. But I think that looking out to 2026 one thing has become increasingly clear since the beginning of the year, I think 2025 will go down as the hardest trading year for US equities in the last decade. In the last decade we’ve only had one full year of bearish price action, 2022.

That year wasn’t exactly hard unless you were willingly blind. Covid winners like Zoom and Peloton got cut in half from end of October 2021 - January 1st 2022. Carvana went from 280 to 220~ in about three weeks, without an earnings release. There were other signs that the market was acting irrationally, FiveNine shareholders terminated a buyout agreement by Zoom for Zoom shares because they didn’t want to close at a 14x SALES valuation. Saying it was too cheap. This was a real thing that happened at the end of October. The shareholders wanted 20x sales. The stock traded down from 166 to under 130 on the vote failure. Good for those waiting for 20x sales. It’s not 40 a share.

Meanwhile Energy, utilities, Materials and stuff that hadn’t fully recovered from the March 2020 collapse was right there for the taking. Yes the Russian/Ukraine war exacerbated the need for commodities, pushing these sectors higher, but entering 2022 XOM was a $55~ stock, with a forward earning growth expectation of more than 40%, and EPS estimates of $8 - $9 at the low end and $10 at the high end. They finished the year doing $13 and had growth of 50%, and again some of that was related to the war, but still even the street saw this trading at 6x earnings with substantial revision to the mean growth estimates. Every energy name and most materials names were like this.

Then once the washout happened in the April earnings period everything was on sale. Deck, Lulu, AEO, Hermes, ANF, GAP and other consumer disc names were all at low multiples because ‘we were about to go into a recession’. Once we had the summer rollercoaster up and down, tech and banks got cheap into October. Even if you go beyond the Mega caps, Chase was under $100, multiple mid sized banks were at TBV, and some of the juniors like Twilio were trading at 15x the interest that their cash pile was generating. ZTS was at 120. It was shooting fish in a barrel if your time line was longer than next quarter.

2022 wasn’t hard, you just had to have a cool head.

Before 2022, Q1 2020 was pretty difficult. Rich valuations, everything screaming at you that you wanted to be short, because something weird was happening in China. Yet the market kept grinding higher. Without stopping. Then it ended painfully for longs during March.

Even that, starting in mid January through lets say end of May, didn’t even last six months.

Q4 2018 was another rough quarter because the market quite literally never bounced. It just went down and down and down and down eventually ending the pain on Christmas eve. Everyone kept trying to position for a bounce and none came. Again painful for most market participants, but again, lasted roughly a quarter.

Before 2018 we had the normal election instability before November 2016, but that’s normal, and then there was the China currency debasement in Q1 of 2014. None of that stuff lasted very long.

In the last decade none of the hard times lasted long and the sideways chop was muted and also didn’t last long. It also helped that even in the worst of the chop you could just long Apple and Microsoft, plus some other mega caps, and be fine. Probably even outperform if we’re being honest.

By every metric retail buying is at a frenzy pitch. Margins buying percentages and total dollars spent on getting longer has never been higher. In the last two months three of the ten largest retail BTD days have happened. With something approaching 80% of those buys being done in the Mag7 and an even larger percentage of pure tech and momentum names.

This is opposite of what the pros have been doing, which is attempting to rotate somewhat or fully out of tech and broadly selling the index on every day that ends in Y. They’re doing that because by any metric this market is the most overvalued since the peak of the nifty 50. Not exactly the best comparison to put large amounts of money to work in this market.

That doesn’t mean pros are fully out, just they’d rather be long….other stuff that isn’t tech or mag7.

The retail buying, and fury at which it has come it is suspending the market. Keeping it higher than most people thought possible. This is just example A of why 2025 is a hard market. Valuation, earnings quality decreasing, the higher weighted names in the index all looking like dead money all point to being short is where the money will be made. Or if not short, staying on the sidelines is safe. Except retail keeps holding the market up.

If retail buyers are able to push it higher or hold it up near term without any technical damage, the funds short will start to cover in fear of getting smoked, and the cash on the sidelines will come in. This would be max pain for many fund managers. As retail is already running somewhat on fumes with their buys, margin balances clearly point that out. So the expectation is that short funds buy back in → fund cash chases up a bit higher than short covering → no more buyers look out below.

This is a real possibility. Much like into spring the 2021 mini crash we had to ring out the shorts a few times because we didn’t go down right away even with a lot of the crap names squeezing. Then the moment they were all in, and seemingly no one was short, and boom, that was the top for the meme frenzy.

This would be max pain for funds.

It would also likely lead to max pain for retail traders as well. As they’ll all talk about how you have to get long the S&P 500 for a melt up to 7,000 on a break out of the December FOMC range. How the mag7 and the QQQs are going to have another 15 - 20% year and how omg how you can ever think of not being 180% long, and then boom. Failed break out, likely top in for the year, and that 180% long position becomes a 100% long position worth 80% as much as it did a few weeks earlier on a 10% move lower.

This year is going to chew up and spit people out. So after this extended intro today’s post is going to be about two things. A survival guide for 2025 and then what names I like for S&P 500 inclusion.

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The goal of 2025 needs to be asset preservation. I’m a firm believer that you always need to be net long, even in a bear market, and draw downs are part of life. But that doesn’t mean you need to press. Either on new positions or adding to older ones. One of the easiest ways to survive unstable markets (or bear markets if this turns into one) is smaller position size.

For example, I’m trying to build a position in shopify (SHOP) before earnings. Given its price, my normal position size for this name might be 400 - 500 shares. Normally I would build that position over one - six different buys, sizing anywhere from 100 shares to 150 shares per buy until I reach my target number. The more immediate upside I see the faster the position gets put on.

As seen by Thursday after hour reporting stocks, this market has low liquidity and is moving violently in both directions. You beat like Affirm, DOCS, and Take Two? Stock up 15 - 20% immediately. You miss like BILL? Down 20%, there’s no saving you.

This trend will continue. So trying to rip into a position like Shopify that’s reporting this week might be suicide. Why risk a 20% loss on what might be positioning risk. No, instead I started with 50 shares a little more than a week ago and my adds have been almost daily of 10 - 15 shares. I’m currently at 155 shares. I might be up to 170 - 180 going into the print on Tuesday. What happens if the stock goes up similarly to Affirm? Well then I miss out, I still make money, just less.

But what if it misses. What if the stock gets smoked down to the 90 gap fill from their last earning? Then I’m taking anywhere from 50% to 66% less of a loss than I would’ve if I carry a full position into the print.

My point is even if you think something is a grand slam, its not worth swinging for the fences this year. That goes for shorts as well. Everyone who followed me on the hedges were protected nicely into the last two Monday mornings. Did I lose money? yes. If I had sized up the puts could I have instead made money on days the market was down more than 1%? Also yes. But what if the market moved up because of the retail pressure mentioned above instead? I look smart in hindsight, but putting on hedges for 2, 3, 4%+ of the portfolio would’ve given you painful under performance if those end up going to zero in an up market.

Instability works in both ways, and it moves the market fast. Small size, even on winners will allow you to stay in positions longer and insulate you from any broad market pain that might be caused by Apple and Nvidia moving down closer to fair market value.

Again, the goal is survival. Given how high dispersion is this year, its not going to be impossible to beat the index. There’s no need to be a hero chasing massive wins every day, when this year will attempt to grind you down. You don’t want to wake up and find a position down 20% because a major fund needs to sell it. Even if its a good company. And it will happen if we enter a bear market. Ask Meta owners who were buying the stock at 210, 200, 190, 180, 170, 160, 150, 140, 130, 120, and either had to derisk or got margin called at 90 what life feels like right now. Every one of their buys back in 2022 was a good buy. That was obvious in 2022 that they were going to be good buys. It didn’t stop the market from pushing Meta down another 50% before finding a bottom. Same thing happened to Netflix, just at a much faster speed.

The same thing can happen to Shopify, which I think is a solid long. So again, enter positions slowly, and size smaller than you would in a bull market. This isn’t the time for excess risk taking.

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Before we get into the S&P 500 inclusion additions, I wanted to talk about Honeywell.

HON is a great example of what I’m talking about w/r/t instability in this market. Earnings for Q4 were good. Guidance was sandbagged as usual and they announced their going to IPO their quantum business and then split the company into three small companies. Elliott group thinks there is 75%~ appreciation over the next two years once the market starts to see the value unlock from these three smaller companies. Elliott group said that at 220. They’re 205~ now. It didn’t matter about longer term returns- ones I fully agree with Elliott that they will be good. No, the market sold it off. This is what I was talking about with small size. I am long shares, and options out to March and June. The march ones are zeroes. The shares are now down since my purchase late last year, and the june calls are riding on a prayer. I’m not hopeful.

But Honeywell’s report was fine, their future returns might not be 75% in the next two years but even 40% is an IRR of 20% plus the dividend. That’s solid. Doesn’t matter the print was mid and the market sold it. If were heavy into the print it was painful. Especially if you didn’t have Peloton to offset it. Using the SHOP example above, if you only had a third of your normal sized position on you would have some money to buy more lower, and get a higher return than you thought going into the print. With less losses.

Personally I will be adding to Honeywell at some point in March or early April. Just want some of the post earnings sentiment to disappear.

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Okay onto the S&P 500 inclusion.

This quarter is going to be a weird one. The committee only took two companies, APO and WDAY last quarter. Applovin was the name everyone thought was going to get in, and was positioned that way as well. With it falling 20% in two days when it didn’t get in. If the committee starts paying attention to valuation its over for a lot of out of the index momo names. And means we need to focus on different criteria. That’s what makes this quarter’s inclusion announcement on March 7th important to watch. There’s a few names that aren’t expensive that the index could target if its trying to pivot away from being exit liquidity. Whereas if they’re still chasing the hot trends, we got some of those names as well. A few that do both.